COVER STORY, FEBRUARY 2008

NO ROOM FOR DOOM & GLOOM
The Midwest retail market looks stable, as retailers take stock and continue patient, intelligent expansion.
Kevin Jeselnik

L.L. Bean is currently exploring opportunities for its expanding retail store concept in Illinois, Michigan, Minnesota and Ohio.

How does one tighten the belt and manage to expand at the same time? That is the question for retailers in 2008. With the struggles in the residential sector and capital markets, real estate will surely be affected, but the extent to which the credit crunch impacts the industry is largely an unknown quantity at this time. What we do know is that right now, the retail market continues to move forward with development, and retailers continue to seek out expansion opportunities. Heartland Real Estate Business has spoken with a collection of Midwest retail leasing professionals to discover which retailers are expanding in the region.

According to Donna Low Harwood, vice president of Marengo, Illinois-based Gallant Construction, the fourth quarter of 2007 was “strangely quiet” on the retail front, but she expects things to be back to normal by the end of this month.

“There isn’t a lot of acitivity from regular shopping center tenants right now,” she says. “Grocers such as Albertsons, Aldi and Dominick’s are filling in outlying markets in Chicago.”

Paul Bryant, principal of the urban retail market at Mid-America Real Estate Group, echoes the sentiment that grocers are at the front of the pack for current retail growth in Chicago.

“We are seeing some of the higher end grocery concepts expand throughout Chicago,” Bryant says. “Roundy’s of Milwaukee is bringing a new 40,000- to 60,000-square-foot concept to the market on multiple sites, and others such as The Fresh Market and Garden Fresh are rolling out stores.”

Another trend in Chicago finds a number of national and international apparel retailers expanding, from Zara, which is entering the market for the first time, to H&M and Forever 21, which are increasing their presence in the city.

“These retailers may not be new to the market, but they are exploring in-town neighborhoods that are new to them,” Bryant explains.

Retailers have discovered that there is enough room in Chicago for multiple sites, and that  the myriad neighborhoods have the density and demographics to support a lot of retail. This has opened up countless opportunities in untapped areas.

One project that is opening up an entire section of the city for new retail growth is Centrum Properties’ Roosevelt Collection on Roosevelt Road on the southern end of the downtown area. The project, which is set for a fall 2009 opening, features 400,000 square feet of lifestyle-oriented retail and entertainment space.

“The closest retail district is State Street, which is a wholly separate market,” Bryant says. “It is a great market in the South Loop that is grossly underserved, and it will probably reach a much broader market when you consider Hyde Park, South Shore and other South Side neighborhoods that lack retail.”

Elsewhere in the Chicago market, healthclubs continue to expand in the urban and suburban markets, led by LA Fitness, XSport Fitness and David Barton Gym. Cosmetics retailer Ulta continues to open new stores all over the Midwest, and MAC Cosmetics has opened new stores in the Chicago area.

Restaurants such as Chick-Fil-A and Jason’s Deli are also pushing into the Chicago market, and the expansion of numerous retail banks continues, with Bank of America and Fifth Third Bank opening up new stores across Chicagoland.

Outside of Chicago, there are numerous lifestyle centers under construction in markets such as South Barrington, Oak Brook and Naperville. Retailers such as L.L. Bean are exploring opportunities in the market (see sidebar on previous page), and lifestyle tenants such as J.Crew, Sephora, True Religion and Arhaus Furniture are looking to open new stores. Arhaus recently opened a new location in the city on North Clybourn Avenue, and has existing stores in Lincoln Park and Oak Brook.

The luxury movie theater concept is receiving a push in the market, with Kerasotes Theatres opening a 16-screen cinema at Roosevelt Collection and Austrialia-based Village Roadshow Gold Class Cinema opening an 8-screen theater at The Arboretum of South Barrington.

Though many retailers are reducing the number of store openings planned for this year, the incredible amount of new quality developments in and around Chicago offer too many opportunities to pass up.

“There is so much in the pipeline that you really can’t stop it,” says Harwood. “The market is healthy right now; we’ll go quarter by quarter in 2008. It should be an average year.”

Major big box players Target and The Home Depot are scaling back and pausing their expansion efforts in Chicago. A number of retailers are taking a break to take stock of the situation and redouble their efforts on the prime sites in the best possible markets. The rapid-fire rollouts of years past have been bottled up, and replaced with intelligent growth. Retailers are looking for established markets and grade-A locations.

“For retailers, there is the question of how much risk they are willing to take to open up a store, and how expensive it is if they make a mistake,” Bryant explains.

Instead of opening up multiple stores in suburban Chicago, the big boxes may take a closer look at in-town locations in the future. According to Mid-America Real Estate Corporation’s annual survey, Target, The Home Depot and Lowe’s Home Improvement are all focused on opening stores in the city of Chicago. This trend is evident in the South Loop, where Whole Foods Market just opened a new store on Roosevelt Road, joining The Home Depot and the in-progress Roosevelt Collection.

“The cost of doing business in an urban location is expensive, but the rewards can be outstanding,” Bryant says. Retailers such as Target and The Home Depot have experienced massive success with in-town locations, but it takes a leap of faith for retailers to break their tried-and-true methods and abandon their prototype for a smaller, more restrictive urban property. But it may be a way for some retailers to continue slow, concentrated growth and have a lot of success.

Service retailers, such as the grocery stores, can do a lot more in times like these than the apparel retailers, which are more dependent on consumer spending habits.

The activity may be coming at a slower pace this year, but the numerous retailers that continue to expand are making intelligent decisions and finding prime sites, which will only benefit the Midwest retail market in the long run.

L.L. Bean Set to Expand Retail Store Presence L.L. Bean expects to open two stores in Chicago this year, and will eventually have four in the Windy City’s metro area. L.L. Bean, the Freeport, Maine-based catalogue and online retail giant, is quietly planting the seeds for its first wave of retail stores in the United States with a gradual rollout. The 95-year-old, $1.5 billion company has never had a retail presence outside of its hometown, where its headquarters and store make up the state’s second-largest tourist attraction. According to Mary Lou Kelley, L.L. Bean’s vice president of real estate, the company began seriously considering expanding its retail presence at the start of the decade. In 2006, the company opened its first three stores, all in the Northeast. In 2007, three more stores were opened — more than 800 customers waited in line for the grand opening of the Albany, New York, store last year. The plan is to open four stores this year, and six to 10 stores a year starting in 2009. “While we may not be rolling out in huge numbers, our prototype store is 30,000 square feet,” Kelley notes. “In the lifestyle centers that we feel are the best fit for the company, we are generally considered an anchor. So, we aren’t expanding in huge numbers, but where we are going, we are establishing a significant presence.” The company took its time becoming acclimated to the opportunities and challenges inherent in the operation of physical retail stores, which are very different than the management of its catalogue and online stores. “I think one of the smart things we did in our expansion was open three stores and then stop and wait 3 or 4 years before opening more,” Kelley says. “We could study [the operation of retail stores] to death, but it is not until you have the stores to service and run that you really learn what you need to do.” L.L. Bean is intent on bringing its brand to life with each new store. Each property is LEED-Silver certified, and utilizes reclaimed wood and recycled steel. “One of the things that we must really be focused on, as we move further from Maine and the Northeast, is bringing our concept to the retail stores that we are opening,” Kelley explains. “All of our stores are designed to bring the feeling of Maine to the local market, and they also reflect our commitment to the outdoors and the environment.” One program L.L. Bean uses to engage customers and expand its identity is its Outdoor Discovery Schools, which provide walk-on lessons to any comers that wish to learn about activities such as fly fishing, kayaking, camping or hiking. “It is really about trying to integrate the brand into the community, and inform customers about the activities that inspire our products,” Kelley says. Expansion plans are currently focused on the northern tier of the country, because of the company’s focus on cold-weather clothing. In the Midwest, the company is actively identifying potential markets and sites for its newest stores. As part of its expansion, L.L. Bean plans to open two stores in Chicago this year. “Chicago is definitely a high priority,” Kelley says. “We eventually would like to have four stores in the Chicago area, with probably one in-town store — we’d love to have an urban location.” The company is also seriously looking into the Twin Cities market, as well as Detroit and markets in Ohio and Wisconsin. “The Midwest holds a lot of promise for us,” she adds. “We have a very strong customer base there and the region is very outdoor-oriented. We just want to make sure we pick the right locations, and make sure it is a very special experience for our customers.” — Kevin Jeselnik

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