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CHICAGO-Retail occupancy slid to its lowest level in a decade in the beginning of this year, with experts predicting vacancy will continue to edge up through the remainder of 2009. Occupancy reached a 10-year low around 89%, and asking lease rates dropped lower both year-over-year and from year-end 2008 to $16.40, according to a Q1 retail market report by CB Richard Ellis. As the unlucky retailers face downsizing or closures and the lucky ones put off leasing decisions indefinitely, the research also shows year-to-date rents dropping in 11 of the 12 submarkets CBRE follows.

“The next six months are going to be very slow form a leasing perspective, as most retailers are cutting capital expenditures, new store expansions, and forward commitments on new development,” says Andy Hochberg, founder and managing principal with Chicago-based Next Realty. “If you have the right location and the right tenant needs it, you’re still going to be able to make some deals, but if it’s not a perfect fit on both sides and you don’t have liquidity, it’s going to be very difficult to get a deal done.”

Hochberg says his firm continues to see activity and complete leases, and has not seen an increase in vacancy in its roughly 750,000-square-foot retail portfolio, but that many other commercial owners have not been so lucky. He puts a new spin on the old “location, location, location” adage to increase its relevance in current market conditions.

“Now it’s location, liquidity and luck, and that’s how I’m sizing up the real estate world right now,” Hochberg says. “If you have a good location that’s been established for a long time, you’re getting tenant interest. It may not be at the rents or terms you want, but you’re getting interest.”

Lack of liquidity is also a principal challenge that can make or break owners of commercial real estate in this market. “If you have the liquidity to keep going, your loan isn’t due, and you have money for tenant improvements and marketing, you’re doing OK. But if you don’t have liquidity, you have real challenges,” Hochberg says.

He says the luck comes in related to what tenants retail owners had in their properties going into the recession, given the recent closure of so many big box retailers. “Luck is luck: does your center have Circuit City of Best Buy in it, and years ago, owners would take one or the other, and it wasn’t so clear, but now it’s obvious which business lasted,” he says. “With those three factors – location, liquidity and luck – people are having to work harder to lease space. It’s difficult, but if you have the right things and the right looks and tenants, you can still make deals.”

Construction has almost completed halted, and yet, experts say it will still be years before the existing supply is absorbed. According to CBRE’s spring 2009 Chicago retail anchor report released last week, the amount of anchor space currently available is 70% higher than it was five years ago, with 40% of this year’s available anchor space attributable to the widespread closures of Circuit City, Value City, Linens N Things, Wickes Furniture, Expo Design Center and Steve & Barry’s. The research says at current absorption levels, it will be five years before all of the available anchor space is filled, assuming that no new vacancies come onto the market.

“We have too much retail space in general, and too much big box retail space in particular, in some locations,” Hochberg says. “The pace of the deceleration has surprised me, but I’ve been bearish for some period of time on the sector of big box retail. I looked at it years ago and said to myself that there wouldn’t be enough new demand for the current supply, and this is a very different retail environment in which we fundamentally have too much retail space.”

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