Chicago Roundtable Highlights Growth In City and Suburbs
In and around Chicago, retail is an investment class that real estate owners are actively pursuing, and the city remains an active area for retailers to locate new stores.
Roundtable moderated by Jerrold France, Randall Shearin and Chris Thorn

Attendees of this year’s Chicago roundtable gathered at the offices of Sonnenschein, Rosenthal & Nath on the 78th floor of Chicago’s Sears Tower.

SCB: What is the overall retail climate downtown and in the suburbs? Fran [Spencer], representing the city of Chicago, what do you see happening as far as retail in the city?

Frances Spencer, Greg Moyer, Peter Borzak

Spencer: We are getting a lot more interest from a large variety of retailers. We are talking to Kohl’s about some sites in Chicago, and Target has a number of things underway. We are getting some smaller retailers too. Since our roundtable last year, we’ve seen the introduction downtown of H&M, Forever 21, Aldo Shoes and Nordstrom Rack. The Mills Corporation is working on its plan for 108 North State Street. At the south end of the Loop, we have the new University Center, which is opening. It has 1,500 units of residential. That is going to be a big stabilizing factor in the south end. On Roosevelt Road, in the near South Side, there are several developments that are going to equal or rival the Clybourn North corridor, but it has improved access. In other areas of the city, we have projects like The Brickyard redevelopment, and we have a request for proposal (RFP) for some additional retail at O’Hare airport. Some of our communities still need a lot of retail.

Todd Caruso, Stuart Lenhoff

Caruso: The retail climate around Chicago continues to be strong. We continue to post our vacancy statistics on a quarterly basis. I noticed that our [retail] vacancy went up to 8.3 percent. That is on shopping centers that we track greater than 50,000 square feet. We track about 110 million square feet. That is up a little bit, but when you compare 8.3 percent to the national average that is a very healthy, low rate. The Chicago area had 31 shopping centers that sold through May 2004. If you look at the entire Midwest, that represents about half the number of centers that sold in the Midwest. We were involved with four centers that traded this year where the cap rates were all south of 9 percent. One of the centers had a low 7 cap rate. Another unique aspect: our municipalities, like LaGrange, Evanston, Naperville and Hinsdale, have very active retail development programs for their downtowns. Tucker Development Corporation is active in Des Plaines. A group from Texas has secured the former Reynolds Aluminum site in McCook. I hope to see more industrial sites in the suburban areas that can be identified for redevelopment. With regard to tenant activity, I think it is strong. The food retailers are active; the banks are on fire; and Walgreens and CVS/pharmacy continue to do transactions in this market. There are a host of other players — Wal-Mart plans to do Supercenters and Target has its combination food/discount center as well.

SCB: Jerry [Rubin], as a retailer, how do you see the retail climate in and around Chicago?

Josh Joseph, Jerry Rubin

Rubin: We continue to be very pleased with [Walgreens] growth and the sales trends of the established stores. We continue to be aggressive in the market. We continue to look at infill sites, which perhaps means a slightly smaller store to pick up a smaller trade area between two stores. We are also relocating some of our older stores. Our footprint is about 13,000 to 14,000 square feet. We’ve been going into some urban settings at 8,000 to 10,000 square feet.

SCB: Karen [Case], what is the feeling from the banks regarding the retail climate in and around Chicago?

Jerome Ferstman, Karen Case, Dave Bossy

Case: Consistently over the years, retail comprises about 20 percent of our portfolio of about $10 billion. Half of that is in construction and half of it is completed and stabilized properties. We continue to be bullish on retail. We are finding that the national tenants are staying in the markets that we are in, particularly in Chicago. We are working with Tucker Development on its project in Des Plaines. The biggest thing that we are seeing on the finance side is owners wanting to lock in fixed rates today, whether it be on completed projects or getting forward rates on projects under construction. Everyone is pretty sure that rates are going nowhere but up at this point.

SCB: Greg [Moyer], your firm is active on the investment front. How do you see the buyers and sellers looking at Chicago and the suburbs?

Moyer: I have been selling investments for 20 years, and we have had a tremendously active year in retail. We are still seeing tremendous competition on transactions. We have seen a lot on the regional mall trades as well. The cap rates are unprecedented, as low as the 6s. Many of the B and C malls are trading in the low 7s. We sold two grocery-anchored deals in the city of Chicago. Both had a lot of competition, including potential buyers from out of state. Regarding strip centers, I never thought we would see lower cap rates than we saw in 2003, but we have. Buyers are paying $200 to $300 per-square-foot for newly constructed strip centers. We are seeing high 7 cap rates for some of the small strip centers. A lot of investors want out of the apartment business and retail seems to be the investment of choice for their money. Walgreens, CVS and restaurants are doing well. We are trading Walgreens at sub-7 cap rates. If someone is in the market right now, they are going to be hard pressed to find a transaction. You see a lot of institutions, REITs and partnerships buying.

Caruso: Do you see any foreign investment?

Moyer: Maybe in some of the institutional partnerships, but none that I’ve been involved with.

SCB: What is the market for dispositions for retail locations in the Chicago market?

Joseph: We are predominantly divesting vacant space in the area. We track investment sales as well. The cap rates are mind-boggling. A center in Northbrook, for example, recently sold to a life insurance company for a 7 cap. With regard to the vacant space we represent, we are primarily dealing with opportunistic buyers and users of retail space. We have a lot of independent investors who have a lot of patient money.

Moran: We are seeing a lot of 1031 money that is driving a lot of structures. From a legal point of view, those take a lot more from us to put together than the tenant-in-common (TIC) structures.

Schiller: Retail continues to be a favored asset, particularly with some of the other types, like office and industrial, being weaker. Like Pat [Moran] said, we see a lot of 1031 deals. The new TIC industry has also allowed for greater flexibility for deferral of gains. That has been a big fuel for activity.

SCB: There are a number of developments making an impact in the suburbs. Richard [Tucker], your project in Des Plaines has been mentioned a few times. Tell us about it.

Richard Tucker, Edie Kessler

Tucker: We have looked at this site in Des Plaines — called Metropolitan Square — for 3 years. We broke ground about 30 days ago. It is an exciting opportunity. It involved the city acquiring 17 different parcels and, in that process, providing a tax increment financing district and some additional funds for the project. At the end of the day, it is a 300,000-square-foot project, which includes 142 residential units and 100,000 square feet of retail, including a 40,000-square-foot grocery store, and about 20,000 square feet of office space. In the process, we are also acquiring an office building that wasn’t part of the district, but we are bringing that into the fold. It is the first time we’ve gotten into the residential side. We are joint venturing the project with Joseph Freed & Associates. They have done a tremendous amount of residential. It has been a great partnership. The sales center has been open for 70 days and out of 142 units we have 10 left.

SCB: Inland has been an aggressive buyer. How are you looking at the Chicago market?

Jeffrey Howard

Howard: We operate under several different fronts. The Midwest REIT is the publicly traded arm. We are aggressively searching for properties to buy. We are finding opportunities; we are buying centers all the time in Chicago. We will probably close on six major centers this year in Chicago. Nationwide, we have purchased 183 centers in the last year and a half for a total of about $4 billion. We think the market is creating opportunities that we wouldn’t have looked at a few years ago. There are tenants that we deal with today that we probably wouldn’t have 3 years ago. At the end of the day, the important thing is that the retailer is doing business and paying rent.

SCB: Peter [Eisenberg], you brought in one of the most exciting tenants to enter Chicago this year at The Century.

Eisenberg: We have spent the last few years redeveloping The Century shopping center. We believe that we have the last piece of the puzzle in place now. Eatzi’s Market & Bakery will be opening in the first quarter of 2005. Based in Dallas, they also have units in Atlanta, Houston and Rockville, Maryland. At The Century, they will open a 15,000-square-foot flagship store on the garden level. As part of the project, we are relocating and expanding Aveda Institute, which was our newest tenant prior to this. Aveda is expanding from 14,000 to 18,000 square feet on three levels. Eatzi’s will give us exactly what we’ve been looking for in that it is a European-style market with a delicatessen, bakery, wood-fired grill, salads made to order, soups and sushi. They do a tremendous take-out business, but it will also have 100 seats that will enable us to capture traffic from the theaters.

SCB: We have also heard that Forest City has a major project going in Bolingbrook.

Ferstman: Yes, with Dave Bossy’s help, we’ve landed IKEA. Interestingly enough, we had a series of strategic planning meetings that went on between 1998 and 2000, and one of the things that we concluded was that Chicago should be one of Forest City’s core markets. We have a tremendous investment at Central Station on the residential side, and it has just taken off. Now, we’ve begun looking at infill sites within the city. Fran [Spencer] has pointed us to a couple. We are looking southwest. Bolingbrook happened to be a hole in the doughnut. We plan on starting the northern 46 acres with the IKEA at the beginning of August. We are projecting the balance of the center to start in the first or second quarter of 2005. The leasing is moving along briskly. We think there are tremendous opportunities in Chicago.

SCB: Dave [Bossy], what is making an impact on the Chicago retail market?

Bossy: Anywhere in the city, anywhere in the collar communities and anywhere in the suburbs, population is absolutely exploding. We are seeing a lot of infill activity. A lot of the retailers want to backfill the older markets and open stores in the new markets to serve the emerging growth. It is exploding on all fronts. It is related to the interest rates and the dynamics of the broad-based economy in the Chicago area. Sears is one example of an old-line retailer that has retooled its game and is opening new stores. It has also redesigned its format to take on retailers like Kohl’s and Target.

SCB: Karen [Case], as interest rates tick up a little bit, do you see any slowdown?

Case: Our economist is predicting a rise of 150 basis points by the end of 2005. Everybody worries about that, but I want you to think about how upset you really are about a 7.5 percent long-term rate. I want you to remember 10 percent and 15 percent rates and how excited you were when rates came down and you were paying 8 percent and 7 percent.

Eric Schiller, Terry McCollom

Schiller: It is interesting hearing all this positive news. However, when I have read my morning newspaper the past few years, all they talk about is the recession and the loss of jobs. Do you think this is true? And if the economy picks up, won’t this offset the higher interest rates?

Tucker: Most of us around the table have been in the business more than a couple of years. I was at a meeting recently where an economist was talking doom and gloom about interest rates being 7.5 percent. It wasn’t that long ago that any of us — if we could develop a pro forma with a constant in single digits on our permanent loans — were very happy. I think all of us in the development business will still look at deals that perform in the double-digit range. The economy getting better is only a plus to our business.

SCB: Andy [Hochberg], as an owner, are you looking for opportunities to buy?

Andy Hochberg

Hochberg: I see a very competitive market for new buys, as Greg [Moyer] talked about before. It has caused us to be a little bit creative and diversified. We have gotten very active in the parking arena. We have bought two parking garages and have several more under contract. I like the operational aspect of parking. We also have an emphasis on the brokerage business, especially for land. We have been active in Will County. That is an area that has been positive toward growth. We are spending time on our current properties; we are redeveloping 440 North Orleans, which was a Sportmart store some time ago. With the residential growth in River North, we think it is an exciting opportunity.

Lenhoff: We see a lot of different opportunities in the suburban markets. We’ve seen a lot of activity in re-leasing. We do a lot of subleasing for Walgreens, Burlington Coat Factory, Hancock Fabrics, PETCO, AutoZone and MC Sports. That puts us into the marketplace in a different way. It gives us opportunities to knock on doors and talk to a lot of the strong local tenants, as well as national tenants. Asian grocers are starting to come in and gobble up some spaces that are ranging from 10,000 to 175,000 square feet. It is interesting to see the kinds of retailers who are coming into the market and fighting for the B and C spaces that are vacated by other tenants.

Borzak: It has been like a perfect storm. With the economy down, the office and industrial markets are not great, interest rates are low and the apartment market is down. In the 20 years I’ve been in the business, I’ve never seen so much money being focused on retail. While these cap rates are great as a seller, I think they are artificially low for reasons that have nothing to do with the health of the real estate. If the economy gets better and the retail industry continues to do well, cap rates still may go up because there is more money that is going to other sources. Prices are so low right now, land sellers think that a completed center is going to be a 7 cap deal. It is difficult to explain to them that by the time you get the tenants and build it, you are talking about it being 2 to 3 years down the road before cap rates won’t be 7 percent.

SCB: There is something that has started here in Chicago that is probably going to spread to other parts of the country. That is the new retail oases along the Illinois Tollway system. Lee [Wolfson] you have been involved with these. Can you give us an update?

Wolfson: What we tried to do with the oases is to create actual shopping centers. There are seven oases total in Chicago. Two of them opened 2 weeks ago. We have put together something that is nowhere else in the nation where we have combined restaurant uses with retailers and service uses. We are going to have drop-off dry cleaners, and business media centers in the facilities. Krispy Kreme Doughnuts and Coffee and Starbucks Coffee are center court in all the facilities. McDonald’s is there. Tropicana is making its first entry to the market in the oases. We’ve had several other states already approach us and come to the opening of the new facilities to see them. We hope on the development side that it becomes a trend.

SCB: Do you see an area of Chicago that is overbuilt or an area that has a need for retail?

Bossy: In terms of the underbuilt markets, clearly retailers have discovered the inner city. If the average Target store does $35 million in the suburbs, it will do $150 million in town. The Home Depot will do $40 million to $50 million in the suburbs and $100 million in town. All the major retailers are looking at how they can go to the major metropolitan markets. In Chicago, some retailers, like Wal-Mart, had an outside-in strategy. Other retailers, like The Home Depot, had an inside-out strategy. I also see a lot of growth in the suburban downtowns. A lot are now mixing the uses of retail and residential. In one case we are doing retail, restaurants and hotels. Every mayor of every suburban city has an agenda. That agenda includes the redevelopment of the downtown core. In downtown Oak Lawn we are building a project that consists of an 800-unit parking garage, 87 units of luxury condominiums, senior housing and retail on the ground floor.

SCB: How far out is Chicago going?

Bossy: It seems every 5 years, it goes out another 5 miles. The bottom line is that jobs have been created in the strong suburban markets, whether it is O’Hare, Schaumburg, or Oak Brook. That enables people to live further out and still have that half-hour commute. The big question is can the state continue to create the infrastructure to allow for the residential growth? As every major homebuilder looks at Chicago and wants to do 1,000-acre projects where they can build 2,500 homes, they are looking at cheaper land in order to offer more value. Where Schaumburg and Hoffman Estates led the growth in the 1970s and ‘80s, where Fox Valley, Naperville and Aurora led the growth in the ‘90s, I think that in the 2000s and 2010s all of the growth is really going to occur in Oswego, Plainfield, Joliet and Channahon. Will County and Kendall County are poised for tremendous expansion.

SCB: We have heard of one suburban area where they are building a downtown because there really isn’t one.

Peter Eisenberg, Lee Wolfson, Jerome Ferstman

Ferstman: Bolingbrook is an example of that. There is no downtown Bolingbrook. When we began to look at the town, retail was scattered around. One of our objectives is to create a focus and a business district. We want it to feed on itself. There has been some talk of extending [Interstate] 355. If the state or the Tollway Authority can address that, I think it makes a town like Bolingbrook even better.

Bossy: Park Forest was a good example 35 years ago. Klutznick went down and tried to create an urban community where the town was developed around the mall.

Caruso: In Chicago I think the successes in the downtown suburban villages point to their access to the train line.

Lenhoff: Sy Taxman [The Taxman Corporation] is developing Aspen Pointe, a mixed-use center, in Vernon Hills. I have lived there since 1979, and when we moved there it was the mall and it was a Dominick’s-anchored center. That was it. Now, things have changed. We don’t have a downtown area. Sy Taxman has planned to take the old Half Day Inn and relocate it. We have a new Metra station that opened about 2 to 3 years ago that is being expanded. Sy plans to build a downtown community there with restaurants and higher end shopping.

Tucker: One thing making a difference in the suburbs is that we now have a number of the national homebuilders who have come in and brought in their operations. As they are building more and more product, they are expanding the market — and that provides opportunities for retail as well.

McCollom: I am the president of the Chicago Shopping Center Owners, in addition to being a developer. I think that my group has forgotten why we sold some of our centers to companies like Inland. That is the 15 percent tax. I am selling one of my properties because I will save the 15 percent tax. Smaller owners end up holding their centers. My firm also does brokerage work, and we have two deals with Marsh Supermarkets, one in Naperville at an old Kmart and one at 75th and Ogden. That’s a new retailer to Chicago. We spent 3 years looking for property for Marsh. A lot of money was spent on their entry into the market. Probably their biggest reason for entering the market is that it is just so big. Chicago is such a big place. Marsh felt that they could find a niche here. I think the stores that they are going to locate in those two locations are the finest grocery stores I have ever been into in my life. They have one in Noblesville, Indiana; it is a different concept from any grocery store I’ve ever seen. They want to be more of a Midwest supermarket. They will open some stores in other states. The stores are 65,000 square feet. They are looking mainly in suburban areas.

SCB: Edie [Kessler], you had mentioned your firm being involved with the CTA (Chicago Transit Authority).

Kessler: We are handling the retail at the new CTA headquarters. The building will be at Jefferson and Lake streets in the North Loop. They will be relocating in October over a three-phase process from the Merchandise Mart. The new headquarters is a 12-story building that has about 400,000 square feet. We are in the process of doing the retail leasing. There will be about 10,000 to 12,000 square feet of retail. We also worked on a Metra-oriented development. We were the development manager of The Glen Town Center. Mid-America did a great job of leasing that center. We also leased a smaller piece that’s right at the Metra station. It has been very successful.

SCB: There are a lot mixed-use projects going on.

Caruso: Chicago is one of the largest markets — we start in Northwest Indiana, we go 50 miles to the west of the city, and we go as far north as the Wisconsin border. There is no shortage of available land as you go further to the west. Those retailers who really want to take advantage of the city, though, really are going to have to get creative. The developers are going to have to help them. They are going to have to add residential and parking to make projects work. We are seeing it downtown and in the suburban villages throughout the area.

Case: Aren’t a lot of the municipalities requiring office to get density? I have a number of projects where the developer is doing second-story office over retail not because they want to, but because they have to.

Tucker: Communities are definitely forcing it. They feel that they need that boutique-type office space within their communities.

SCB: Around the country, you find that depends on the market. You find that happening in areas near New York, like White Plains.

Bossy: As a developer, you like to have vertical architecture; you like to add a second or third story. We are a developing a prototype that has senior housing stacked on top of retail. I don’t see big boxes being a party to any mixed-use development. It might happen peripherally, but I don’t see them being ingrained into any type of mixed-use development. We are doing another project in Oak Lawn where we are tearing down a Holiday Inn in order to build a Target store that has parking beneath. It is only on 5.25 acres. We are also doing a project in North Aurora with Woodman’s, a 237,000-square-foot grocery store. They are based in Madison, Wisconsin. It is a combination of a Sam’s Club and a conventional format food store. This will be their third store in the market.

SCB: Are players like The Fresh Market and Whole Foods active in the Chicago market?

Bossy: Whole Foods is focused on the urban markets. The Glen Town Center is soon to open a new fresh food market. Any developer would love to have these gourmet markets, but they are really focused on high-density markets. It is difficult to get them in the suburban areas.

SCB: What’s happening in the South Loop?

Spencer: There are a lot of people that have never been off the Dan Ryan Expressway, and they think that there is nothing east of the expressway except railroad tracks. If they go over there, they are absolutely floored about what’s happening in the South Loop. The West Loop is the same thing. There are over 7,000 housing units between Lake Street, Eisenhower, the river and Ashland. To speak to your question of mixed-use, it is one of the things that the city of Chicago has tried to encourage on some of those buildings that are loft buildings or that have been converted from old factories. The reason is that it gives goods and services to the residents in the area and also to maintain some form of street life.

SCB: We talk so much about big box, infill projects and smaller shopping centers. What about the malls? How are they doing?

Tucker: All the malls have to continue to reinvent themselves to a certain extent. They have to bring in quality retailers and continue to increase traffic flow. When you put a 50,000-square-foot boutique department store like a Saks Fifth Avenue in downtown Highland Park, that is not going to replace the customers that want the 150,000-square-foot department store. The people that want a wide selection of soft goods are still going to the malls. We also have strength in the ownership of malls. When you have companies like Simon Property Group, The Westfield Group and General Growth Properties owning the majority of the quality malls in the market — they are not going anywhere, and they will continue to do what they have to do to make them competitive in the market.

Caruso: Chicago is unique in that we have about 35 regional malls. If you take the bottom 10 percent, they are still surviving. We haven’t seen situations where people have completely scrapped the properties. Coincidentally, there was a report done by the Illinois Department of Revenue, and in 2003, Northbrook, Vernon Hills, Schaumburg, Oak Brook and Skokie all had losses in retail sales. I have to believe that sales per-square-foot in the malls today are flat, if not declining. For those folks who are creative, their first line of defense is often to create some outward facing retail with some restaurant uses. The second line is obviously to take it another step further where there might be some vacant department stores and they can bring in big box uses. The third line is similar to what Tucker is doing in Milwaukee, which is a complete redevelopment.

Schiller: What about community resistance to new projects? I live in Glencoe, where we have grocery stores that you can’t get two carts side-by-side down the same aisle. Anything that they try to put in Glencoe is immediately resisted by the community.

Tucker: It is getting tougher and tougher all the time. Every community is more and more difficult. The community thinks it is more intelligent about what it needs. They have their own concepts about what retailing should be, and they often think that they don’t need parking lots for their retailers to survive.

Ferstman: I had the opportunity to meet one-on-one with the board of trustees of one of the southwest suburbs. They had just lost what I thought was a great retail opportunity. The developer just got tired and went up the road. After that happened, there was this realization that they let the horse out of the barn. I agreed to sit and talk to the board, and at the end of 3 hours, I concluded that it was just impossible to do anything. Their demands in terms of tenant mix, construction, landscaping, etc., were just impossible. I feel very fortunate with Bolingbrook. They are not a walk in the park on a Sunday, but they are realistic. A lot of the communities are not.

Making New Business Easier in Chicago To ease the start-up process for small businesses, which compose 93 percent of the businesses in the Chicago area, the city of Chicago has started the Small Business Assistance Center. The program offers prospective small business owners various information on starting a new business. For example, owners can receive guidance in obtaining licenses and permits or on bidding on city contracts. The center also has a wealth of demographic information available, such as community maps, census data and industry analyses. To access the center, owners can call (312) 744-CITY or visit www.cityofchicago.org/smallbusiness. By logging on to the website, owners can use the Small Business Wizard. This online tool provides customized information to fit an owner’s prospective business. After answering a series of questions, owners will receive a report with information on city contracts, inspections, marketing data, neighborhood demographics, workforce development, site assistance and zoning that corresponds with the owner’s particular profile. The owner can also determine if their business is in an Enterprise or Empowerment Zone or in a Tax Increment Financing District. The website also connects owners to other organizations that can assist small businesses, including information on 130 public, private and not-for-profit organizations. The link to the City Treasurer’s office has information on the City’s Linked Deposit Program. This program deposits city money in banks that lend to neighborhood small businesses. Currently, the city has $30 million in linked deposits available and has committed an additional $15 million. The Small Business Assistance Center was developed by the City Department of Planning and Development and Chicago small business owners. — Chris Thorn

Forest City develops combination power center/lifestyle center in Bolingbrook, Illinois Bolingbrook Promenade Cleveland-based Forest City is developing Bolingbrook Promenade in Bolingbrook, Illinois. The 1.1 million-square-foot shopping destination, which is being built in two phases, will be a combination of a power center and a lifestyle center. “Bolingbrook’s surrounding 5 or 6 miles is remarkable for retail because of a lack of lifestyle competition,” says Jerry Ferstman, regional development director with Forest City. The closest lifestyle center to Bolingbrook Promenade’s location on Boughton Road is 20 miles away, and the closest regional center is 10 miles away. In addition to less lifestyle competition, there are also stronger demographics near Bolingbrook than there are near existing lifestyle centers, Ferstman says. Because of the area’s lucrative demographics and regional accessibility, Forest City has landed a unique anchor for the center’s first phase. A 310,000-square-foot IKEA, the retailer’s second location in the Chicago area, is currently under construction. The remaining 446,000 square feet of the first phase will be a power center with home décor and hard goods tenants. That portion will break ground this fall and is scheduled for completion next fall. The second phase of the project will be a 633,000-square-foot lifestyle center. Tenants will include a department store and a mix of national and local retailers. Phase II is scheduled for completion in spring 2006. The two phases will span Boughton Road but will link to form one large shopping area. The center also will include 11 out parcels for various retail and restaurant uses. — Chris Thorn

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