The impending departure of upscale retailer Neiman Marcus from downtown Minneapolis will leave a void in what is already a challenged retail environment at the city's core.

The Dallas-based luxury department store chain -- which rarely shutters stores -- said Monday it will close its sole Minnesota outlet by next July after operating at Gaviidae Common for more than 21 years.

The store was not meeting "long-term operational goals," a spokeswoman said. She did not elaborate on those goals.

"It's a setback for downtown, there's no doubt about it," said Dick Grones, a local retail expert and principal of Edina-based Cambridge Commercial Realty. "This is not good."

Urban retail has long presented unique challenges to shoppers and merchants alike, especially in a tough economy. Several large-scale developments in Minneapolis, including City Center and Block E, have struggled over the years, particularly after the Mall of America opened in 1992. While City Center has attracted new retailers such as Len Druskin and Brooks Brothers in recent years, the core of Block E is now largely dark.

"There are positive trends going on downtown," said David Sternberg, senior vice president for Brookfield Properties, which owns Gaviidae Common II, where Neiman's is located. "But we've also experienced some challenges."

The closing of Neiman Marcus once again raises the long-standing question of whether Twin Cities residents truly support luxury retail, especially after the Bloomingdale's store closed at the Mall of America earlier this year.

Minneapolis-based retail expert Jim McComb says Minnesotans do shop upscale, and he points to Edina's Galleria as an example. However, "the Twin Cities is an extremely casual marketplace. ... Neiman Marcus is not strong on casual merchandise. It's a mismatch of lifestyle and merchandise.

"You have a luxury store anchoring downtown along with a Target store, a Macy's and a Saks outlet, what does that tell you?" asked McComb, referring to the middle-market sensibilities of most downtown shoppers.

The news comes as development of office and residential space has boomed on the otherwise-sleepy northern stretch of Nicollet Mall, the city's retail spine. Developers are investing millions in projects that will result in hundreds of upscale apartments in the vicinity of the Neiman Marcus store in coming years.

With an influx of new, and presumably well-heeled, residents, Gaviidae's owners will try to assess "what the demands are for the space," Sternberg said. That could be another retailer, a mix of retail and office space, or something else entirely. "At this point we're exploring all alternatives for the space," he said.

Neiman Marcus' CEO, Karen Katz, said in a statement, "As it is so rare that we close a store, the difficult decision was based on a great deal of thought and a careful study of the market as we very much value the relationships we have established in this market."

More than 100 sales associates will be given the option to transfer to another Neiman Marcus store -- the nearest are three in Chicago -- or take an unspecified severance.

As the news spread Monday, city and downtown officials offered steely responses.

"It's a sad, but expected, turn of events," said Minneapolis Mayor R.T. Rybak. He said the store was imperiled several years ago when store officials tentatively planned to move to Southdale. But a short-term lease extension was negotiated in 2008, a pact that expires next year.

"The downtown market has dramatically more full-time residents than it did when Neiman Marcus first came here," Rybak said. "Downtown retail needs to evolve into more niche offerings like Hubert White," he said, referring to the locally based men's clothier further south on Nicollet Mall.

In the past two years, several upscale apartment projects have been announced in the store's vicinity. About 250 apartments are slated for the historic Soo Line Building at 5th Street and Marquette Avenue. Minnetonka-based Opus Development Corp. plans a $100 million, 33-story apartment tower just across 5th Street from Neiman Marcus. A few blocks away on East Hennepin Avenue and 2nd Street, Ryan Companies U.S. is building a $70 million apartment building that will be anchored by a Whole Foods grocery store. And Xcel Energy Inc. said last month it will expand its downtown headquarters with a second building on Nicollet Mall between 4th and 5th Streets.

"We're really sad to see [Neiman Marcus] go, but high-end retail is a tough business," said Downtown Council President Mark Stenglein. "We loved having it here, but we'll need to reprogram that space for something else."

Already, speculation has begun as to what would work best in the four-story space.

"I really think the mall should be more boutique-y, like Galleria," said Tara Pellett, manager of the R.F. Moeller jewelry store just outside Neiman's skyway entrance. Pellett didn't think the closing would hurt Moeller's sales, but she'd still like to see the space remain as a retail store.

Janet Moore • 612-673-7752