By  on July 17, 2008

When it comes to the state of retail in Chicago, there’s some good news and some bad news.

The good news is upscale retailers continue to seek, lease and launch locations in the affluent Gold Coast area. Among the most notable are Marc Jacobs leasing space for a Marc Jacobs Collection boutique at the corner of Rush and Walton Streets in the Elysian Hotel, and Michael Kors launching two shops at 900 North Michigan Avenue — a first-floor Michael Kors Lifestyle space in the 900 Shops and a street-level Collections store eventually replacing Stuart Weitzman there.

Meanwhile, North Damen Avenue in the city’s edgier Bucktown neighborhood continues its rapid retail transformation, going from a hip haven populated with locally owned boutiques to a landing pad for more national and international brands. In the past few weeks, Bebe and LeSportsac opened stores, with Lululemon and Club Monaco poised to launch locations on Damen on Friday. Joe’s Jeans and Jill Stuart plan to follow suit in the next few months.

The bad news? The sliding economy is catching up with the Windy City. Demand for retail space fell 16 percent from last year, vacancy rates are at a 16-year high along Michigan Avenue — and then there’s Chicago’s increased sales tax, which, at 10.25 percent, is among the highest in the U.S.

North Michigan Avenue, known as Chicago’s Magnificent Mile, saw retail vacancy rates edge higher, to 6.3 percent from the 4 percent rate of the past four years, according to an annual survey by real estate firm CB Richard Ellis Inc.

Jeff Kuchman, author of the 2008 Chicagoland Retail Demand Study, found major retailers are scouting for 66 million square feet of space in the Chicago area, 16 percent less than last year. But Kuchman, a principal with Mid-American Real Estate Corp., who surveyed retailers, developers and retail brokers, said conditions aren’t all doom and gloom: “Metropolitan Chicago will continue to be bolstered by the fact that most retailers still view this area as critical to an overall Midwest expansion strategy.”

The transition, however, is palpable.

“You don’t see the huge [retail] growth we’ve seen in the past few years,” said Melissa Gamble, the city’s director for fashion arts and events. “There’s no question it’s a tough market, but I think we’re holding our own.”

“There’s definitely a slowdown,” echoed Lorraine Adney, a broker and local vice president with McDevitt Co.

Although Adney notes Chicago’s Gold Coast neighborhood, home to Hermès, Graff, Tod’s and Prada, continues to attract interest from luxury retailers, she predicts a backlash to Chicago’s high sales tax, which this month rose to 10.25 percent from 9.25 percent. By comparison, New Yorkers pay just under 8.4 percent and Los Angeles shoppers pay 8.25 percent.

At Blake, one of Chicago’s most upscale boutiques featuring finds from Dries Van Noten, 6267 and Marni, co-owner Marilyn Blaszka said some customers are complaining about the tax hike, but it hasn’t stopped them from buying. She does wonder whether more affluent customers will ship items to their second and third homes to bypass the city’s hefty tax. Tax rates in the suburbs vary, depending on the area, but all are lower than the city’s tax, ranging from 10 percent to under 7 percent.

Jim Wetzel, an owner of the Jake men’s and women’s specialty store with two shops in Chicago and another in suburban Winnetka, has encountered just that dynamic.

Although Chicago’s higher sales tax has not yet put a dent in overall business, Wetzel said, “We have certainly seen a rise in city clients asking to have bigger-ticket items transferred to our Winnetka location or requests for items to be sent out of state to people’s lake or vacation homes.”

“It starts to register little by little,” Adney said. “At first, it’s pennies more, but it’s going to build up over time. It doesn’t inspire people to come into the city to shop. It’s cheaper to shop in New York.”

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