Retail Traffic

Chicago Roundtable DISCUSSION

The "Magnificent Mile" that stretches along Michigan Avenue has helped earn Chicago international prominence as a destination stop for shoppers the world over. But a closer look at this behemoth of a retail market - which boasts 72.2 million sq. ft. in community and neighborhood centers alone - reveals that all of Chicagoland is equally as dynamic and forever evolving. To gain more insight into some of the emerging local trends, Editor Matt Valley traveled to the Windy City on Aug. 20 to moderate a panel discussion among five industry experts. What follows is an edited transcript of that roundtable meeting.SCW: Paul, grocery-anchored projects represent 80% of all planned retail projects in the greater Chicago area for 1998, according to CB Commercial. Why are we seeing so many grocery-anchored projects coming on line at this time?

Paul Dunn: People have to eat. Seriously, I think the Jewel and Dominick's rivalry partly accounts for that. There is a drive for market share. Certainly, the grocery operators are very focused on market share. The other entry into that equation is going to be the supervalue Cub Foods. They haven't rolled out their new program yet, but they are talking actively with a lot of people about making a larger splash in this market.

One of the reasons we focus on grocery-anchored strip centers is the repeat traffic the grocers generate. Frankly, the grocers do an incredible amount of research prior to establishing a new store. When they make a commitment to open up a new store, you are pretty well assured their sales volume is such that it will be a successful location. Once you get the grocery anchor in place, then there is a variety of other retailers that typically follow, including the drugstore, the video store, the dry cleaners, all the ancillary shops.

SCW: What is the significance of the merger between Albertson's and Jewel?

Dunn: For the Chicago market, the good news about that merger is that Albertson's did not have a presence here. You're not going to see an overlap with X number of stores closing. Albertson's would be well served to keep the Jewel name. I think they will because Jewel has such a strong identity in this market.

Adam Metz: How does it break out in terms of market share between Jewel and Dominick's?

Todd Cabanban: Jewel has more stores.

Dunn: And a larger market share.

SCW: Is Dominick's ahead of the game when it comes to the prepared foods component, the Fresh Store concept?

Dunn: There is a new Jewel store on Green Bay Road in Wilmette. Great architecture, great layout, it's luxurious. They had to do that to compete with the Dominick's that's right down the street. By the time this magazine comes out, you might very well see a new owner for Dominick's. They have hired an investment banker. The parent company of Dominick's is known to want to leverage up the company. They took it public. They are likely to entertain buyout opportunities.

SCW: Paul, how is your stock performing compared with what you had benchmarked?

Dunn: We have to compare ourselves to our peer group in the REIT industry. The retail sector, year-to-date from January to current, is down about 12%. Our stock year-to-date is up a fraction. While we would like our stock price to be higher, if we are performing 12% better than our peer group we are relatively happy.

SCW: Adam, let's talk about the peer group. Why isn't the peer group excelling to the degree that the industry would like it to?

Metz: One, there was some legislation running through Congress that was going to potentially change the way the REITs worked. That scared off a lot of investors. As it turned out, the legislation is only going to affect the paired-share REITs, really the hotel REITs: Patriot, Starwood Lodging, those kinds of guys.

There is a perception that if you go back two or three years, the real estate world was in a very strong recovery mode. People now believe, especially in some sectors like apartments, that we are in an equilibrium market. So, if you see some construction on the horizon, and people believe that there is not going to be the same upside three or four years from now, the earnings growth is going to start to slow down.

Also, the Dow Jones Average started the year at 7900. Then, all of a sudden, the next thing you knew it hit 9000. So, a lot of people who were investing in REITs as a safe haven all of a sudden realized that the growth train of the S&P and the Dow was leaving the station. If you wanted to have a good relative performance against the broader equities, then you couldn't stay in the REIT market, which wasn't moving. A lot of what they call momentum investors, who were not dedicated real estate investors, started selling shares and getting out.

SCW: Adam, what is Urban's long-term strategy?

Metz: We are very strong believers that if you are not doing a superior job with what you already own, you shouldn't be building or buying new things. Internal growth, on an unleveraged basis of our portfolio, has been about 6% a year since we've gone public. We think that's a very important core competency that you have got to have. We've developed a new project every year for two years since we have gone public. We would like to continue to do that where it makes sense.

There is a lot of consolidation going on in our business. There are a lot of acquisition opportunities. If they are priced right, and they fit with our strategy of owning high-quality, high-volume assets in good demographic areas, then we are going to look at buying.

SCW: Is the velocity of acquisitions increasing, or is that just the perception?

Metz: In the old days, a lot of the major pension funds, which were major real estate investors in general, used to buy real estate and just hire people to run it for them. For the most part, the pension funds, which owned a lot of retail real estate - malls in particular - don't want to do that anymore. The new model they want is to joint venture with what they believe to be an experienced operator. People like Simon, Taubman or Rouse.

What's happening in our business is a transformation where pension funds, insurance companies and those kinds of investors are getting out of either commingled funds or separate account investments in which they hire someone to run it for them on a fee basis to a kind of new model where they are going to be joint-venture partners with owners/operators.

Michael LaRue: There is another dynamic though, too. The whole country has been moving for the last five or 10 years toward more and more consolidation: retailers or oil companies or utilities or whatever. Big is better has been the watchword of investment and major business. To some degree we are seeing that on the REIT end, too. I don't think bigger is necessarily better. The market at the moment thinks bigger is better. Six years from now it could just be the reverse.

SCW: Todd, just what are your thoughts on "bigger is better"?

Cabanban: We are a mid-sized company. All of our projects are privately funded. We typically do not sell anything we develop. Now we're getting a lot of offers from a lot of the different REITs on some of our projects. Maybe now is the time to consider that. Companies such as ours might be prime candidates for acquisitions into larger firms.

SCW: Paul, do you subscribe to the theory that public companies are less flexible than private companies?

Dunn: Even though we are growing very quickly, we're trying to maintain the entrepreneurial spirit. We, by choice, have decided to remain very focused on grocery-anchored strip centers in the Midwest. What we want to do is one thing well, and if we do that well enough, our shareholders are going to be rewarded. That's really the ultimate goal, to enhance our earnings so that our stock price increases so that we can increase our dividend and take care of our shareholders.

SCW: Let's switch gears. Fran, you are responsible for the development and implementation of the Retail Chicago program, which works with retailers, brokers and developers to introduce them to the neighborhood retail areas of Chicago, many of which are underserved with regard to their retail needs. Who is underserved and why have they been underserved?

Frances Spencer: We're finding in Chicago itself that the south and the west side are primarily the underserved areas. A lot of that is more or less on a historical basis, where the original flight took off to the suburbs and some of the businesses closed, like your steel mills on the south side, and they lost their employment base. The areas became marginal as far as income and residents and now are underserved.

We took the 1994 sales tax dollars and we plotted where they were appearing, and then we plotted that against the 1990 Census with what income was. They were not getting the sales tax from the area that the income would indicate should have been there. We know they were underserved and conducted actual surveys of the area to see what particular areas they were underserved in.

Metz: One of the things Retail Chicago has set up is a point person, whereby if you are a developer or a retailer and you want to build, instead of having to trudge all over the place and go through the process, you can work through this point person. In that way, the city is encouraging development.

Cabanban: And it works. The Dominick's shopping center that we built on Roosevelt Road and Canal was done in less than a year. It was a huge structure.A lot of our success was due to the help of the city.

LaRue: It is not easy to develop in the city. The efforts that Retail Chicago have made has made it easier, but it is still very difficult. And why isn't it easy? There are no greenfield sites.

SCW: Fran, at one time you were on the other side of the coin as a property manager. Looking now from the inside out, if you will, do you recognize developers' concerns that issues sometimes become mired down?

Spencer: In a city the size of Chicago,you are going to have a certain amount of things that are going to get mired down, but the city staff across the board under the junior Mayor Daley has changed quite a bit. The level of professionalism in some of these departments is much higher than you might anticipate. I would say that of the 225 members we have on the planning department staff, 60% of them have a master's degree. That helps expedite matters.

We also have brownfield funding available. But we are caught between a rock and a hard place in that Chicago has such a diverse economy. Because we are growing in every way, some of the industrial areas that have sat fallow for years have now got a lot of light industrial, computer and high-technology-type people wanting to come in and look at those areas, too.

When you look in the city to put a Kmart or a Target, you are talking about buying up three or four city blocks. If you drive down three or four city blocks in Chicago, you are talking about the displacement of a lot of people other than areas like the near west side or the south side.

I was raised on the south side of Chicago, and there are areas there now where they are putting in townhouses that run from $150,000 to $250,000 that I never in my life thought I'd see. They are not putting in one, they're putting in 100 of them. Everything is happening in the south Loop.

Cabanban: It is the highest opportunity for growth.

Spencer: Oh, it's unreal. You take the near west side. You have the Illinois medical district over there, which is one square mile of land. They have all the different bio-med operations over there including Rush Hospital, University of Chicago at Illinois. That never shows up on any retailer's demographics. You've got 80,000 people that come to that area every day, either a student, an employee, a faculty member and it doesn't show up. We are working with retailers who see the opportunity there.

Cabanban: Jewel is building at Roosevelt and Ashland. HSA is doing the leasing for that project. Fran is right. Until you can get these retailers there and drive them around to show them exactly who their market is, they don't understand. The mayor has done an excellent job of getting developers and retailers together on a bus to show them what is going on.

HSA was fortunate enough to be invited to two of these tours: one was through the south shore area and one was through the Austin area. On the South Shore tour, Kmart was there looking for a city site. The mayor was taking them through to show them what can be done. It's fabulous what's happening in the city.

SCW: Any comments regarding the ambitious River East Plaza project being undertaken by MCL Cos. The project will include a hotel and residential component and an overhaul of the retail shops at North Pier.

LaRue: They are changing it (North Pier) from a facility that had a lot of fun merchandise that nobody ever needed to a facility that will provide for the needs of the new residential population of Streeterville and River North.

There are very nearly 100,000 people living, or soon to be living, in Streeterville and River North, plus the tourists. The stores on Michigan Avenue and Oak Street and Walton Street have done a marvelous job of attracting the tourist trade dollars, the high-end spree-in-the-city dollars. What hasn't existed until recently are the daily-needs stores for those 100,000 people. The fact is there isn't enough affordable land anywhere to put a supermarket and a 35,000 sq. ft. pet accessories store and one of the electronics superstores and other things lying flat on the floor. The adjacent R.M. Chin project, Grand Pier Center, is being developed in order to handle those needs.

Some of the retailers, with a lot of prodding and a lot of thinking, are beginning to change their format to address the vertical nature of in-city retailing. Dominick's is doing a store there, which will have a special escalator for shopping carts.

It is expensive to do all of that. The retailers until recently have resisted anything that strays too far from the normal mold, which happens to be the suburban mold. Why? Because in X number of man-hours, they could do 10 stores. It might take four times that number of man-hours to do an urban format store. However, they have run out of most suburban sites, and they are now getting to the point where they are prepared to spend those man-hours.

SCW: Todd, Century Shopping Centre, located at Clark and Diversey, is undergoing a major revitalization project. Tell us about it.

Cabanban: This is a vertical project that really needed some help. HSA saw an opportunity. It was once a theater. The project is about 120,000 sq. ft. in total with a mixture of mall tenants and some regional and local players. We decided that there is a lot of theaters looking for space in some of the denser areas. We have got Landmark Theater taking the top level, and then we are just pushing all of the other retailers in the mall down to fill up some of the vacancy. It's worked out real well and it's going to be a real successful project.

SCW: Adam, in another life you were a lender. When you look at the amount of capital flowing today, are there any nutty deals that you see being done? Is there more being built than can possibly be consumed?

Metz: I travel around the country a bunch. In general, I don't see where there is way too much construction or loose money in terms of major office buildings or malls. In the mall business, there are basically five to 10 people in the country who have the contacts, expertise and capital to build a new shopping mall. Out of a base of like 2,000 regional malls in this country, there are roughly five or 10 that are going to be delivered in any one year. There are also a few of them at the very bottom of the 2,000 that are being demalled and going away.

LaRue: That same dynamic is affecting many, many other areas of retail. I take issue with the underlying premise that there is plenty of retail, why are we building more? There is plenty of retail square feet, but many of those square feet are in the wrong shape, in the wrong place. So, where Jewel may have an existing 32,000 sq. ft. store in downtown Deerfield and a 40,000 sq. ft. store in downtown Highland Park, they are closing both of those stores to replace them with a 65,000 sq. ft. store halfway between the two because that's their current format. Where any given community once had three or four or five 2,500 sq. ft. pet stores, now there is one 15,000 sq. ft. store.

Metz: You are seeing somewhat of a discipline being imposed by the public markets on the REITs. That in itself has a multiplier effect throughout the rest of the real estate industry. If it turns out that the public shareholders, which include a lot of the Fidelities of the world and a lot of very sophisticated investors, believe there is too much development they are going to take their investment dollars and go somewhere else because they think it won't be a good investment anymore. That in itself turns the spigot off for public companies.

SCW: Mike, let's talk a little bit about entertainment retailing. What is it exactly and why are we hearing and writing so much about it?

LaRue: I'm not sure that there is a common definition of it beyond the very broadest that says it is a place that at least has an abundance of offerings to entertain you as well as sell you merchandise. I am concerned that like many other concepts, it's one of these bandwagons that a lot of people are jumping on.

There may be too many movie screens a few years from now in Chicago, but as long as there are credit-worthy theaters vying to open them, as long as the movie studios are prepared to assure them they will have product, developers will keep developing them.

Because people today have myriad leisure time and entertainment opportunities, those who are in the entertainment business have to work harder to attract the time-stressed shopper than ever before. Instead of just going to a movie, now you go to a movie with stadium seating and state-of-the-art digital sound. Instead of going to one of those in a couple of years, you go to a 3D IMAX because it is there, it is the more exciting offering. Instead of going to a 2,000 sq. ft. video game room where you pop quarters in and play a pinball machine, you go to a 25,000 sq. ft. virtual reality palace. Will those things last for 10 or 15 years? I don't know. Technology is driving many of these things.

SCW: Adam, your thoughts?

Metz. We see some people who have poorly performing properties and are looking for a way to fill that vacant space.To them, entertainment is just another tenant. We've tried to do something that is synergistic with what we are trying to achieve in the rest of our malls.

Old Orchard is a very good example of entertainment retail the way we like to see it. We grouped a big Barnes & Noble with the coffee bar, we have a Maggiano's restaurant that does terrifically well. We have a movie theater and a record store. And it's not necessarily high-tech entertainment. It's more the kind of entertainment our shopper likes.We get a lot of people who'll buy the movie tickets and stroll the mall.

SCW: Todd, what's your take on this popular concept of entertainment retailing?

Cabanban: We're finding that there are a lot of concepts, and it's really difficult to screen these concepts to figure out which ones are the ones that are going to make it.

SCW: We didn't talk about the performance of State Street since it was reopened to vehicular traffic. Was it a bad idea to begin with to close it off, or was it right for its time?

LaRue: In most cases, suburban downtowns that created a mall had bad ideas at the time. In almost every case, they have been demalled, whether it's State Street in Chicago, or Rockford, Ill., or Kalamazoo, Mich., or Oak Park, Ill. The fact is there are more things out there to buy than we have time to look at, no less money to buy. So seeing the stores on State Street from your car, which is where we spend our time, is very important.

Why was it a bad idea at the time? They were addressing a symptom, not a cause. The symptom was that suburban malls were getting all the customers. The suburban malls were giving the right offerings to people. State Street has begun giving the right offerings to people and it has cured many of its physical ills. Now it's looking to broaden the offerings.

Spencer: One of the good things about the pedestrian mall concept on State Street was the fact that it didn't work. The amount of money that was put into redoing the sidewalks, narrowing them so that it brought the people closer to the stores, doing the streetscaping, softening up the street with the planters, the trees, designing the very nice subway entrances ... maybe all of that would not have come about if it had just been left as a regular street. But it was so ugly that drastic measures had to be taken.

SCW: When we look back at the 1990s, what are we going to remember most?

Dunn: What people in the real estate industry will reflect on is how bad things were in the early 1990s, where there was no liquidity, no financing available, no opportunities for new development, and in many cases no need for new development because of overcapacity, and how quickly the markets changed and recovered. That's due to the remarkable American economy that we're in today ... sort of the rebirth of the industry, the securitization of the industry, the emergence of Wall Street, which really filled the gap through the REIT entity. If they hadn't taken the lead, I don't think the banks and the S&Ls would have stepped forward.

LaRue: I'm not convinced that the retailers who are seeing the perceived benefits of consolidation are going to run these businesses as well as many of the individual entrepreneurs have run them. Retailing is one of the most entrepreneurial and fastest changing businesses known to man. Very few large entities are capable of fostering the kind of people who can encourage that sort of change and creativity. It does happen from time to time, but it's harder in large entities. We may see a pullback, a dismembering of some of the retail consolidation and look back and wonder why it was quite so consolidated.

* Paul Dunn, executive vice president, Bradley Real Estate, Northbrook, Ill.

* Frances Spencer, director of Retail Chicago, City of Chicago Department of Planning and Development

* Adam Metz, treasurer, CFO, executive vice president and director of acquisitions for Urban Shopping Centers Inc., Chicago

* Todd Cabanban, vice president, retail brokerage division, Hiffman Shaffer Associates Inc., Chicago

* Michael LaRue, principal, Litvin/LaRue/Greenfield, Itasca, Ill.

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