Like a lot of suburban retail, The Arboretum of South Barrington is a financially troubled property that may finally be on its way back to recovery.
Although New York-based lender Union Bank filed for foreclosure on the 480K SF lifestyle center in September 2020, Houston-based Star Cinema Grill just signed a 15-year lease for a 38K SF standalone building there that previously housed iPic Theaters. The deal does more than fill a hole in the property’s tenant lineup. It could also bring back a flood of customers lost when iPic shuttered its cineplex.
“It’s going to be a huge traffic generator,” Peak Properties Managing Partner Mike Zucker said. “It’s a huge win for the community and a huge win for the center because it shows there’s confidence in the market.”
Courtesy of Peak Properties
The Arboretum of South Barrington
Confidence in this kind of suburban retail isn’t misplaced, at least over the long term, according to Richard Spinell, managing broker of Chicago-based Mid-America Real Estate Group. Retail took a double hit in the past few years, first from the rise of e-commerce and then from pandemic-related shutdowns, and many lifestyle centers such as The Arboretum are going through hard times. But suburban retail also saw a flood of new leases in 2021, and Chicagoland’s lifestyle centers are likely to pick up the many customers that once shopped at now-shuttered regional malls.
“They will get stronger as time goes on,” Spinell said.
Even so, The Arboretum of South Barrington, located at 100 West Higgins Road in northwest suburban South Barrington, near the intersection of Routes 72 and 59, still has a long struggle ahead before it is fully recovered.
A division of Starwood Capital Group bought the property for $93M in 2015. The purchase was part of a mall-buying binge that made Starwood the nation’s fifth-largest mall owner, according to Bloomberg. But the firm began selling off malls as the pandemic strangled retail outlets. And after Union Bank filed for foreclosure on its $66M loan, Zucker’s Peak Properties was brought on as receiver, and JLL was hired to sell off the debt.
The note was just sold, according to Zucker, and he expects a judge will soon approve the deal, although it is possible the note could get sold again. The sale is an indicator that investors are interested in suburban retail, he added, although the note was sold at what he called a substantial discount. Peak will stay on as receiver and continue trying to boost occupancy, which now stands at about 80%, with some tenants still paying reduced rents.
“We’re going to get more leases, then the new noteholder will work out with Starwood what they want to do [with the property],” Zucker said.
Peak’s goal is to stabilize the property in about one year, he added. Filling up centers with tenants capable of paying full rent now means finding retailers that have developed a strong online presence and offer innovative entertainment concepts that attract a crowd, as well as other segments such as furniture stores where customers can’t try out the merchandise online.
“I don’t want to be the grim reaper, but it’s tough,” Zucker said.
Star Cinema Grill, which also provides dine-in service to moviegoers, fits in well with the current tenant mix, he added. That mix now includes Cooper’s Hawk Winery & Restaurant, Arhaus Furniture and Pinstripes, an Italian American restaurant that also features bowling, bocce and music.
Kristen Barker of Houston-based Wulfe & Co. represented Star Cinema Grill during negotiations for the deal and said having ready-made space used by iPic made The Arboretum a perfect place to expand.
“It doesn’t require a complete gutting of the space,” she said.
The Texas chain, which also signed another deal to take over an iPic location in southwest suburban Bolingbrook and already runs Hollywood Palms Cinema in Naperville, will still install new recliner seats in the 500-seat South Barrington theater and add privacy walls, among other upgrades, before a slated April reopening.
Barker added that it shouldn’t be too surprising that a theater chain decided to expand. The pandemic hit the business hard, but things are looking up for 2022.
“A lot of the releases that were supposed to come out last year got pushed to this year,” she said.
That should mean growing streams of moviegoers. It also motivated Star Cinema to sign deals to expand its Chicago-area footprint.
“It was kind of bleak, but we’ve seen a big bounce back in our numbers,” Barker said.
Other movie chains are seeing the same trend. AMC Entertainment Holdings was on the verge of bankruptcy in late 2020. Lifted by blockbusters such as Spider-Man: No Way Home, this week it reported Q4 revenue of $1.17B, more than the $1.09B analysts expected and its best performance in two years, according to Bloomberg.
The Arboretum of South Barrington has a history of financial trouble. It opened in 2008, but the Great Recession soured business, and in 2011 it was hit with a foreclosure suit. The 2015 sale to Starwood marked its initial recovery, and Zucker said it can happen again.
South Barrington is an affluent area, with an average household income of more than $184K, according to census data, and upscale retail options are few in the immediate area, he pointed out.
“There is one [upscale] shopping center, and this is it,” Zucker said.
That should serve the center well as it slowly works its way out from under foreclosure, as long as Peak and JLL, which represents the center in lease negotiations, including with Star Cinema, can find the right mix of tenants.
Spinell said he agreed, partly because the overall outlook for retail is brightening. Chicagoland’s vacancy rate, excluding regional malls such as Schaumburg’s Woodfield Mall, went to 14.5% in 2020. By the end of 2021, though, it shrank to about 12%.
And lifestyle centers like The Arboretum should see growing customer bases for decades as more regional malls close for good, he added. The Chicago area now has 22 such malls, down from 35, and Spinell said he expects that number to eventually fall to just 10, with giants like Woodfield staying open and vibrant.
“The lifestyle [mall] is the modern-day version of the regional mall business,” he said.
When it first opened, The Arboretum’s original owner filled it with too many high-fashion stores, outlets that often fell prey to e-commerce, Spinell said. Whoever ends up owning it should do well as long as they keep recruiting restaurants and other entertainment uses.
“Long term, the property is going to be fine,” he said.
Right now, he said, its operators are “resetting and remerchandising the property for the next 20 years.”