HEARTLAND SNAPSHOT, DECEMBER 2004

Chicago Retail Market

As the retail needs of the rapidly growing suburban communities in Chicago have largely been met, national retailers and developers have increasingly focused on in-fill projects and addressing the urban consumer, according to William Selonick, vice president of Chicago-based Baum Realty Group. At the same time, these same players are envisioning the next wave of suburban development several years down the road, and are busy optioning land west of the suburbs along the logical future retail corridors.

Within the bounds of the current metropolitan area, one particular area of focus is the central urban core. “In the area immediately surrounding Chicago’s central business district, residential development continues at an amazing pace,” Selonick says. During the past 5 years, a combination of high-rise and mid-rise buildings, condominium loft conversions and town homes have added more than 50,000 dwelling units within 2 miles of Chicago’s Loop.

“In most of these close-in markets, the transition from slum to urban pioneer to bohemian to urban professional was so swift that land values raced ahead pricing out many retail uses,” Selonick says. “The result has been a need for developers to devise more dense and complex site assemblages and for retailers to stretch their pro-formas to make materially higher rents work.”

In the dense and ethnically diverse west side city neighborhoods, one old retail center, The Brickyard, has been dramatically redeveloped. In a complicated 5-year effort, Jewel/Osco was expanded and relocated with no down time, an old dysfunctional enclosed mall was demolished and site elevation changes were wrestled with to create room for a new 143,000-square-foot Target and a similarly-sized Lowe’s.

In select suburban submarkets like Oak Brook and the Milwaukee Avenue corridor in Lincolnshire, where retail demand outstrips the supply of developable land, developers employ a variety of strategies to free up land. In Oak Brook, a relatively weak office market is making it feasible to tear down Waste Management’s former headquarters and make way for 190,000 square feet of new open-air shopping center space. In Riverwoods, The Equitable Group has collaborated with the municipality to craft an economic package to support the construction of a 40-acre center on a former landfill site.

In Algonquin, Cincinnati-based Jeffrey R. Anderson Real Estate’s Algonquin Commons is the latest true lifestyle shopping center to open. It will serve several northwest Chicago suburbs, namely Algonquin, Crystal Lake, Huntley and Woodstock. Similar to its 2-year-old sister development Geneva Commons and its predecessor Deer Park Town Center, Algonquin Commons is intended to spare its nearby residential base the need to travel farther to a mall.

One other notable suburban development is underway. IKEA, the renowned furniture store, is underway with its second Chicago store in Bolingbrook. The store will be on the northwest corner of the intersection of Interstate 355 and Boughton Road. Forest City sold IKEA its land, and will be developing a 200,000-square-foot power center contiguous to IKEA, and a larger big-box, lifestyle hybrid center across the street.

“In the city, land values in the close-in neighborhoods have raced ahead, dramatically complicating the efforts of large format retailers to reach their urban consumers,” Selonick says. Wal-Mart has been struggling to establish a meaningful presence in the city, and has only recently had its first location zoned. Target, on the other hand has had more success, recently self-developing and opening a two-level store with parking below in a complex development on the emerging Roosevelt Road retail corridor in the exploding South Loop submarket. Target is also moving slowly forward on the north side at the old Wilson Yards CTA site. “Target is probably the most active anchor throughout Chicago, pursuing half traditional stores and half grocery-formatted Super Target stores in numerous submarkets in the city and suburbs,” he says. Other major retailers actively seeking city locations include Kohl’s and Staples.

Southgate Market, another complex, multi-level development on the Roosevelt Corridor, conceived and developed by JS Interests, is soon breaking ground. The Market will be a five-level structure with more than 300,000 square feet of gross leasable area spanning an entire city block. “The site lies adjacent to one of the major commuter lines running south of the city, and was considered useless for years,” Selonick says. “Finally, with the deluge of incoming residences, it has found its purpose as one of the few parcels able to accommodate large floor plate retailers.” Announced anchors include a 50,000-square-foot Whole Foods Market and Linens ’n Things.

The storied Block 37, opposite Marshall Fields’ flagship store on State Street in downtown Chicago is once again the target of a serious development effort. The mixed-use project is being developed by The Mills Corporation. “If constructed as now designed, there will be three levels of retail with pedestrian pathways running through the site,” Selonick says.

There is no shortage of competent retail developers targeting the Chicago metropolitan area. Minneapolis-based Ryan Companies, developing largely with Target Stores in tow, is probably the current volume leader with five projects totaling more than 1 million square feet either just opened or under construction.

“As a group, the area’s regional mall owners are also busy,” Selonick says. Hawthorne and Yorktown Shopping centers are both planning open-air lifestyle center extensions of their existing properties. Randhurst Mall in Mt. Prospect recently opened a new Costco store and is planning a major renovation. Harlem Irving Plaza has also recently undergone a major transformation, adding a Target and relocating and expanding a Best Buy.

Chicago-based Joseph Freed & Associates, Tucker Development, Mid-America Investment and Development; Jeffrey R. Anderson; and Cleveland-based Forest City Enterprises all have several projects underway.

Steve & Barry’s University Sportswear, a low price point sporting apparel retailer based in Michigan, has opened two units in area regional malls with more on the way. West coast-based super store Fry’s Electronics has opened its first unit in Downer’s Grove. Grocers Market Foods and Marsh are expanding in the area, and Dallas-based Eatzi’s has announced its first Chicago unit at the Century mall at the intersection of Clark and Diversey in Lincoln Park.

“Chicago’s metropolitan-wide retail vacancy rate is in the 8 percent range, with the vast majority of that in older, functionally obsolete product,” Selonick says. “Demand for retail centers on the quickly growing edge of the metropolitan area will be largely met upon the completion of the current development cycle.”

Developers are active even earlier in advance of the next wave of building, with many groups taking positions in land sites along the north-south corridor Route 47, which is likely to be the next “break-out” retail corridor, according to Selonick. “The pace of the break-out will be determined by whether or not residential growth on the edge of the metropolitan area persists at the current levels,” he says. In the near term, however, Milwaukee Avenue-Lincolnshire is the area to watch.

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