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Metamorphosisof the Midwest

A close look at virtually every retail sector throughout the Midwest shows the same thing - growth and more growth. Retailer expansion ranging from home repair to movie theaters is driving much of the activity in the Midwest. In Iowa, grocery giant Albertson's is scoping out 10 new locations, while unique concepts such as golf superstores have taken Minneapolis by storm with four new openings.

Retailers are vamping up their own expansion efforts, and in turn fueling new development and redevelopment projects across the board. That retailer confidence stems from a healthy economy and strong sales figures.

Total 1998 sales in the Midwest through May average $101 per sq. ft., a 4.6% increase over the same period in 1997. Those Midwestern sales are on pace with the brisk sales seen throughout the country. The U.S. average is $106 per sq. foot, which is up 3.6% over that of the previous year, according to data supplied by the International Council of Shopping Centers.

Overall, the Midwest retail market is healthier than it has been in years. Vacancies are down, rents are up and development is moving at a steady pace.

"The Midwest market is very strong. I think you can attribute that to the economy and the current low unemployment," says Mark Schnuck, president of The DESCO Group, St. Louis. Unemployment rates are approaching record lows, and several Midwest cities are seeing unemployment drop below 4%.

"Anytime you've got a scenario with strong employment, obviously that helps retail sales and ultimately the retail market," Schnuck says.

While some industry observers are cautious about their enthusiasm, the general consensus is that the retail sector has a positive outlook. "The Midwest retail market is very stable, and vacancies are at a manageable level for the most part," says Todd Caruso, managing director of Midwest retail brokerage services at CB Richard Ellis in Lincolnshire, Ill.

"The markets seem to correlate with the Midwest's reputation of not experiencing the highs and lows of the East and West coasts, and as a result are relatively stable," Caruso says. One of the only concerns has been the ongoing fallout among some of the big-box users. However, those existing big-box vacancies continue to be absorbed at a good clip, and the tide of closings apears to be ebbing.

Investment activity The most active sector is the investment arena. Retail sales are booming, and there are no signs of a slowdown. Strong consumer spending and a low risk of overbuilding are fueling investment sales. Demand for community and neighborhood shopping centers with grocery and/or drugstore anchors continues to be the strongest category. However, properties across the board from power centers to regional malls are changing hands.

"Investment activity is really hot, and cap rates are coming down," says Linda Zelm, a senior retail broker with United Properties in Bloomington, Minn., and president of the Minnesota Shopping Center Association. Cap rates range from 8% to 10% depending on a property's quality. Despite the volume of property that has already changed hands in the past 18 months, there are a significant number of properties still available, Zelm says. Many owners are finding it an attractive time to cash in on their investments. The ownership group of the 2.4 million sq. ft. Mall of America in Bloomington, for example, hung out a "For Sale" sign this summer. Three Twin Cities regional malls have sold within the past year.

The surge in shopping center sales that Chicago experienced last year is already being topped by 1998 sales. Forty centers larger than 50,000 sq. ft. changed hands in 1997, while 30 were sold during the first half of this year alone.

"We have not seen any slowdown in the amount of properties coming on the market," says George Good, a senior vice president in the investment properties group at CB Richard Ellis in Chicago. The booming investment market is due primarily to the availability and low cost of financing, and that access to capital has prompted some favorable prices for sellers.

"There's a lot of talk about prices topping out, but I think we've seen the reverse. Prices are becoming more and more aggressive," Good says.

The acquisition activity encompasses both individual properties and major portfolios. Cleveland-based First Union Real Estate Investments recently announced its intention to sell its 22-property portfolio, which includes properties in the Midwest, West and Southwest. That sales activity is reaching all corners of the Midwest. One recent sale saw Chicago-based Landau & Heyman acquire five shopping malls in rural Iowa from The Rouse Co., Columbia, Md., and Teachers Insurance and Annuity Association of New York.

It's difficult to generalize on cap rates across such a broad market. However, it is safe to say that cap rates have fallen a minimum of 50 basis points this year on properties across the board, Good says. Grocery-anchored neighborhood centers are still the most sought-after property type. Those centers have seen cap rates drop below 9%. "How much below is really just a function of how much perceived potential there is to grow rents in the future," he says.

Big-box war still rages Category-killers are aggressively expanding in the Midwest. Target Stores, a division of Dayton Hudson Corp., and Atlanta-based Home Depot have been pursuing new stores in several markets.

In Kansas City, Target has opened two Super Target Stores within the past year, and three additional stores are planned. Home Depot entered the Kansas City market with four stores, and more are on the way. In St. Louis, Lowe's recently opened two stores, while newcomer Home Depot continues to expand in the area. Kohl's also has announced that it is pursuing locations in the St. Louis area. Auto parts and accessories retailer Pep Boys plans to open its first three Twin Cities locations this fall.

Such expansions have helped counteract the big-box closings that have left some dark spaces throughout the Midwest. The Chicago area is recovering from its category-killer fallout where consolidation and Chapter 11 filings had left several dark spaces from retailers such as Handy Andy, Venture Stores Inc. and Builders Square.

"I think that we have plateaued for a period of time, as it relates to any large Chapter 11 filings," Caruso says. Now those spaces are disappearing. For example, Bally's Total Fitness absorbed a former Builders Square in Schaumburg, Ill. Whole Foods moved into a former Venture store in Wheaton, and Cinemark Theaters took over a former Builders Square in Roseville Park.

Kansas City-based Payless Cashways is struggling to emerge from Chapter 11 bankruptcy this year and has closed some area stores. O'Fallon, Mo.-based Venture is out of business, having closed a number of its stores throughout the Midwest, including six in the Kansas City area and more than a dozen in its home market of St. Louis County. However, Kmart has stepped up to absorb a number of the vacant stores. Kohl's is another retailer eying the former Venture locations to accommodate its St. Louis expansion.

"The retailer consolidations have been going on for a long time, and I don't know that it will stop," Zelm says.

In industries where there are three to four major retailers still in business, that number will probably dwindle to two. That consolidation is already starting to appear in the competitive computer market with the recent CompUSA and Computer City merger, and there is speculation that the crowded sports market will be the next area forced to narrow its field. Sports Authority is one likely candidate for a sale, Zelm says.

Redevelopment and repositioning The Midwest's dynamic redevelopment market stems from three factors: lack of available land, access to tax-increment financing (TIF), and the need to give aging properties a competitive boost.

"Any shopping center that is 20 years and older is a candidate for redevelopment," Zelm says. If a project was successful at one time but maybe has become old, tired and outdated, it might just need a little help to become a thriving center again, she says. In some cases, that might call for a cosmetic facelift or new tenant mix, while some older centers are being razed to make way for new projects.

Redevelopment of existing centers may be more costly than building on a vacant piece of land, but in most cases those retail sites have the advantage of an existing customer base and infrastructure. Oftentimes those prime locations also command higher rents, which can help justify the redevelopment costs. In addition, developers are taking advantage of public financing to help offset some of the costs. Redevelopment is the primary driver of new retail construction in the river-locked St. Louis area.

"The name of the game here is TIF," Saunders says.

DESCO is one developer that is utilizing TIF money to assist in the development of Kirkwood Commons, a $56 million, 52-acre, 522,000 sq. ft. retail redevelopment in Kirkwood, Mo. "This is probably one of the best examples of how TIF truly should be used," Schnuck says. "The project will help to rehabilitate a neighborhood that has been on a downward trend for some time."

Wal-Mart and Lowe's have signed on as tenants, and DESCO is currently negotiating with two other large big-box users between 90,000 and 130,000 sq. ft., as well as another smaller, 40,000 sq. ft. user. In addition to creating a needed retail center, part of the TIF money will go toward neighborhood improvements such as new replacement housing for displaced residents, Schnuck says.

Kansas City is seeing some of the most aggressive expansion in the Midwest, with 4 million sq. ft. of space coming on line in 1997 and 1998 - including both redevelopment and new development projects that have followed the boom in population in neighboring Johnson County. One major redevelopment features Centertainment Inc.'s plan for a $450 million project in the heart of downtown Kansas City. The Power & Light District proposal calls for a 30-screen movie theater complex, exclusive shops and restaurants, a park, live theaters, an office building and a 300-room hotel.

"It has just been a very active market. There's a lot of development in the works, and there's no reason that it won't continue for the next 12 months," says David Block, a senior vice president with Block & Co Inc. Realtors in Kansas City.

Grocers and drugstores "Grocer and drugstore expansion are at the root of the majority of new shopping center development throughout the Midwest," says Caruso of CB Richard Ellis. The grocers are anchoring new neighborhood and power center developments. Meijer and Jewel-Osco are rapidly expanding in the Chicago market. In Kansas City, Associated Grocers and Hy-Vee Food Stores are growing their presence. Hy-Vee has taken over all seven of the former Schnucks Markets, four of which Hy-Vee plans to keep open.

Grocers are driving much of the development activity in the Des Moines market. Albertson's recently entered the market and took over four Super One locations, and they continue to look at additional expansion sites.

"Albertson's has become a large anchor for potential developers in the Midwest," says Kevin Crowley, executive vice president of Des Moines, Iowa-based Crowley Mandelbaum Inc. Albertson's expects to add 10 new stores in Iowa alone.

Hy-Vee Food Stores is another grocer embarking on a major expansion effort in West Des Moines. "We already had a positive growth market, but the grocers are providing the opportunity for additional power strip centers," Crowley says.

In addition, these grocers are not just focusing on quantity, but are looking to grow their store size to provide more services and amenities. Meijer, based in Grand Rapids, Mich., for example, is building massive, 230,000 sq. ft. stores in the Chicago area. Hy-Vee has launched a 70,000 sq. ft. superstore to offer shoppers features such as a sit-down restaurant, a European style bakery, and even fashion. A Des Moines-area men's clothing store opened a satellite location in one new Hy-Vee store. Other services popping up at Midwest supermarkets range from liquor and cigar sales to gasoline pumps.

Drugstore expansions are making it difficult to find pad sites and corners to accommodate the freestanding stores, and as a result land prices are on the rise. The cost of pad sites and hard corners is skyrocketing in St. Louis, with purchase prices as high as $20 per sq. ft. Prices are even on the rise in the St. Louis suburban market, where good corners can be found for $10 to $14 per sq. ft.

Drugstores such as Walgreens have been a major force in the price increase, says Block. Kansas City's pad site prices range from $12 to $20 per sq. ft., depending on the location, he says.

Entertainment Entertainment continues to be a driving force in several new projects, as evidenced by central Ohio. Columbus alone has added nearly 240 new movie screens within the past two years, not to mention a variety of new entertainment-themed restaurants. One project under construction, the 560,000 sq. ft. Easton Town Center, will feature more than 100 retail concepts, restaurants and entertainment venues such as a 30-screen AMC Cineplex and Steven Spielberg's GameWorks Studio, as well as "eatertainment" concepts such as Planet Hollywood and an Official All Star Cafe.

These days, people are looking for more entertainment value in their shopping, whether that is ducking into a theater, stopping for dinner or looking for entertainment in individual stores, says Scott Saunders, a retail broker for Colliers Turley Martin Tucker in St. Louis.

"Malls today have to have some type of entertainment element to be successful, and that is not just for enclosed malls either," Saunders says. "Capturing people today is so important. Even power centers are trying to create more synergy by adding theaters, restaurants and bookstores."

Bookstores such as Borders and Barnes & Noble, for example, have done an excellent job of capturing shoppers by offering coffee and juice bars, as well as a place to sit and read books, Saunders says. Power and community centers are recognizing the impact of those tenants on the overall success of a center.

"There's a lot more cross-shopping going on in power centers than there was before, and developers need to create that synergy for their tenants," Saunders says.

Union Station in downtown St. Louis is an ideal example of how introducing entertainment can be instrumental in maintaining a competitive edge. Union Station was the No. 1 mall in the area during the mid to late 1980s, Saunders says. However, mall owners realized that they needed to make some changes to continue to be a strong draw, Saunders says. The mall has since repositioned itself by adding more entertainment-themed concepts such as a 10-screen theater, a new Hard Rock Cafe, Have a Nice Day Cafe and a '70s themed restaurant, as well as Speed Town, a retailer specializing in racing clothing.

Although the theater craze is reaching the saturation point in some areas of the country, developers are still finding ample opportunities throughout the Midwest. Megaplexes have created 100 new cinema screens in the Kansas City area with theaters such as AMC, Cinemark and Dickinson Theaters all active players. Carmike opened a 24-screen theater in the Urbandale-Johnston area of Iowa, and the company recently announced an even larger theater slated for West Des Moines.

Food concepts go hand in hand with entertainment retailing, and one of the emerging trends in that sector is to create a "master lease" for mall food courts, says Cindy Ciura, a spokeswoman for Schostak Brothers & Co., Southfield, Mich. The company signed Ogden Entertainment to master-lease its food court at Wonderland Mall in Livonia, Mich.

Not only does the master lease provide the mall with more bargaining power to lure sought-after food tenants, it also allows malls to customize their food courts with unique concepts, Ciura says. For example, Ogden is negotiating a deal to bring Stroh's Ice Cream to Wonderland. Stroh's Ice Cream is a regional favorite in the Michigan area.

Although entertainment may not be a necessity for a shopping center's survival, it certainly is "smart" to have it, Ciura says. The time people spend shopping has been on the decline in recent years. A larger percentage of working women and longer hours spent on the job leave less time to juggle family, leisure and shopping. Entertainment is one way to keep people in the mall longer.

Ciura says the bottom line is that "the longer they're in the center, the more money they spend."

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