Chicago's Water Tower Place, often called the world’s original urban vertical shopping mall, could be headed for major changes as its owner considers converting a few upper floors of retail into medical space or other uses in what could become a test case for similar properties nationwide.
The new owner of the massive Magnificent Mile mall, which opened in 1975, is exploring the redevelopment of the upper floors of the eight-story mall into offices for doctors and dentists, or other uses such as traditional offices or apartments, according to people familiar with the situation.
Repurposing higher levels of the mall, where foot traffic is lighter, could be part of a costly overhaul that could include refreshing floors that remain as retail, according to those people.
A conversion of upper floors would be a rarity among vertical malls. These retail centers typically are found in confined urban spaces and have elevators and escalators linking a higher number of floors than the low-rise, enclosed and outdoor malls in suburban settings. They remain relatively unusual in the United States, with even taller vertical malls springing up throughout Asia after Water Tower Place was built in Chicago.
“It’s a unique property type in a lot of ways,” James Cook, JLL’s Americas director of retail research, told CoStar News. “If this is successful, it will certainly be a case study for others to follow. It’s a time for reinvention.”
The potential redevelopment stands out because it’s on North Michigan Avenue, which despite recent struggles remains one of the country’s best-known shopping avenues. Water Tower Place also holds a place in the history of shopping malls because of its position at the forefront of designs of this kind.
A redevelopment is only under consideration and it could still end up being changed or scrapped.
Higher Vacancy Rate
Vacancy on North Michigan Avenue is near an all-time high after the rise of online shopping, the effects of COVID-19 on retail and other factors. Water Tower Place was hit especially hard, with Macy’s in 2021 shutting down its sprawling department store that took up parts of all eight retail floors and a mezzanine level.
After Macy’s closing and other vacancies, and amid overall struggles on the mile-long retail avenue, longtime Water Tower Place owner Brookfield Property Partners in April said it was handing the mall back to its lender, Metropolitan Life Insurance Co. The insurer previously had extended Brookfield’s maturity date at least twice on a $200 million loan on the property before it matured last year, according to Cook County records.
Since taking ownership of the mall at 845 N. Michigan, MetLife has been evaluating what to do with the property, which has 818,174 square feet of retail at the base of a 74-story tower topped by residential condos and a Ritz-Carlton hotel.
Macy’s leased more than 323,000 square feet of the mall, including storage and selling space. The mall remains open, with tenants including doll store American Girl, the Chicago Sports Museum and Harry Caray’s Restaurant Group.
Potential changes on the upper floors are in preliminary stages, and it’s unclear how they would affect the look and flow of the retail center known for its marble exterior and eight-story atrium.
A MetLife spokesman declined to comment to CoStar News.
Alderman Brian Hopkins, whose 2nd Ward includes the mall, said MetLife has not presented any formal plans to him. “I have no indication what they want to move forward with,” he told CoStar News.
Conversions Elsewhere
Other urban, vertical malls looking at similar conversions include plans to convert a three-story former Neiman Marcus store and other space in New York’s Hudson Yards and a chunk of the former Hollywood & Highland Center mall near Los Angeles — now known as Ovation Hollywood — into offices.
The proposed redevelopments are early examples that changes already happening in suburban malls throughout the country, where former department stores are giving way to apartments and other redevelopments, could be coming to vertical properties in big cities. Several Chicago-area malls already are planning multifamily projects, including the Westfield Old Orchard mall north of the city in Skokie, Illinois.
Residential and hospitality conversions could make the most sense in many areas of cities, while some portions of other vertical malls could even shift to purposes such as last-mile distribution in future years, JLL’s Cook said.
North Michigan Avenue and New York’s Fifth Avenue are among the top-tier avenues undergoing a shift to entertainment and experiences, Cook said, while areas such as Rodeo Drive in Beverly Hills, California, and New York’s SoHo continue to thrive without major changes.
“It’s not an issue with a mall per se,” Cook said. “It’s a downtown issue. It’s a challenging time with office workers not back to the level they were before the pandemic and tourism not back to the level it was in 2019 either.
“There are some urban vertical malls that are in the same situation of trying to figure out: Hey, what is our new highest and best use?’”
On Chicago’s Mag Mile, that typically has been retail, where even on higher floors the rent paid by stores could far eclipse the revenue a landlord could generate from apartments, hotel rooms or any other use, said Chicago-based Cushman & Wakefield broker Greg Kirsch.
Retail rents on upper floors still have the potential to top other uses, but it now has become a question of how long landlords are willing to let them sit vacant and generating no rent as they wait for a broader retail rebound.
“How long can you hang on before you blink?” Kirsch said.
Historic Vacancy
Landlords such as MetLife are only now considering redeveloping some of that space after vacancy on the Mag Mile reached historic highs. The amount of space on the street that is vacant or otherwise available peaked at 30% last year, and is now at 28.4%, Kirsch said.
Availability is highest in the northernmost of three sectors on the street, which includes Water Tower Place, at 38%, he said.
After peaking at about $550 per square foot a half-decade ago, ground-floor asking rents on the street are now around $350, Kirsch said.
Vertical malls including the Shops at North Bridge and the 900 North Michigan Shops also are “in the process of remerchandising after COVID-19,” said Kirsch, who is among the Cushman & Wakefield brokers representing the Shops at North Bridge’s owners in leasing.
That mall is 100% owned by the Alaska Permanent Fund after shopping mall giant Macerich last year gave up its stake in the mall and a nearby development site for a small fraction of its initial 2008 investment.
Further challenging the street are big, multilevel stores that sit vacant. Some of those buildings could be redeveloped into taller residential or hotel towers with a single floor of retail at the base, Kirsch said.
That and some upper-floor mall space being redeveloped are likely to reduce the total supply of Mag Mile retail space to 2.8 million square feet from the current 3.2 million by 2030, he estimates. By then, the avenue will return to pre-2016 levels of vacancy below 5%, Kirsch predicts.
Solid Fundamentals
Shops on the avenue include a five-story Starbucks Reserve Roastery, a glassy Apple flagship along the Chicago River and new shops in the recently redeveloped Tribune Tower.
“You can’t argue with the real estate,” Kirsch said of Michigan Avenue. “The fundamentals are all there: residential density, incomes, hospitality, pedestrian traffic and proximity to other economic drivers like tourism.”
Nearby hospital systems in the Streeterville neighborhood are another economic force in the area north of the Loop business district, which could lead to a redevelopment focus on medical offices — even though those rents would be far below previous retail deals.
Northwestern Memorial HealthCare and the Ann & Robert H. Lurie Children’s Hospital of Chicago have huge real estate footprints in the area already.
Northwestern last year paid more than $67 million for the leasehold interest in the Hyatt Centric Chicago Magnificent Mile hotel, where it wants to convert two floors to medical offices and connect the hotel to its hospital campus with a skybridge.
Several office buildings on and around Michigan Avenue have medical tenants, with the avenue’s largest tower also looking to get in on the action. Chicago-based developer Hearn is marketing a block of office space in the 100-story former John Hancock Center to medical tenants.
The mixed-use skyscraper is just north of Water Tower Place at 875 N. Michigan Ave.
"Even though foot traffic is not as high as people would like it to be, Michigan Avenue is still a globally known tourist destination,” Cook said. “There’s still a lot of value there. It’s just a matter of figuring out what’s the right way to unlock that value.”