Hawking Chicago

Retail Building Outpacing Construction Overall

by Pamela Dittmer McKuen

Despite overall threatening market conditions, Chicago’s retail-construction niche is thriving, with 2007 seeing the biggest surge in decades.

Last year an estimated 8.4 million sq ft of new shopping center space was built and delivered within the metropolitan statistical area, according to an annual survey by Oakbrook Terrace-based Mid-America Real Estate Corp., a management and brokerage firm specializing in retail property. That’s a 40% increase over 2006 and a 70% increase over the annual average, which has been tabulated since 1983.

The numbers reflect the enormous growth in residential construction earlier in the decade, says Andy Bulson, vice president of Mid-America.

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“We’re talking about a construction boom and huge amount of gross leasable area that is coming out of the ground in shopping centers at a time when everyone else is talking about how bad the market is,” he says. “But it takes years to put these shopping centers together. They are a lagging indicator, if you will.”

The Analytics division of McGraw-Hill Construction, publisher of Midwest Construction, shows similar findings. In the Chicago metropolitan area, construction starts for stores and restaurants were up 19%, from $930 million in 2006 to $1.1 billion in 2007.

What a contrast from the overall building picture. Starts in the Chicago area were down 8%, from $21.8 billion in 2006 to $20.1 billion in 2007.

Bulson predicts that 2008 volume will be down but still way above the average of 5 million sq ft.

“We’ve had a couple of off-the-chart years,” he says. “Now we’ll go back to solid years.”

Playing Big, Eating Big

The data also point to emerging trends in the areas of retailer, location and architecture.

The big category winner is sporting goods, with grocery stores coming in close behind. Bass Pro Shops and Cabela’s each opened two stores.

“The category is competitive,” Bulson says. “Sports Authority and Dick’s Sporting Goods are often chasing after the same site. They want to be in the same centers anchored by Kohl’s and JCPenney, but there’s only one position. REI was also active in ’07.”

Sporting goods stores are popular with consumers, not necessarily because of the canoes and catcher’s mitts they offer but because of their vast lines of casual apparel, he says.

As for grocery stores, Jewel and Whole Foods added three stores, including a highly successful—and publicized—one in the South Loop. Dominick’s was the most inactive of the group, with a single new location.

The big-box category slowed its pace a bit from the previous year. Wal-Mart opened four stores, instead of the projected 14. Costco opened one store. Target, which pulled the plug on its superstores, opened two, as did Kohl’s.

“Kohl’s has a pretty solid network in Chicago,” Bulson says. “They usually put in [a new store] for one of two purposes: to relieve an existing store with high sales and to fill in voids in their store coverage.”

The home improvement category all but hit the brakes in late 2007 as residential sales cooled. Lowe’s opened two stores, but Home Depot opened none and closed its Chicago real estate office. The privately owned Menard’s—not subject to the same scrutiny and stock prices as its publicly traded competitors—opened three stores.

Geographically, the most activity has been south: the south and southwest suburbs and the South Loop.

“The city has really seen a lot of new activity,” Bulson says. “The limiting factor is barriers to entry, mostly the availability of sites to accommodate big boxes. To get into the city, it’s almost always going to be re-use of some kind—a brownfield site or something industrial or obsolete. In the suburbs, it’s all new stuff coming out of the ground.”

Whether or not the recent doubling of the Cook County sales tax to 1.75%—resulting in an overall 10.25% sales tax in Chicago city limits, the highest in the nation—pushes developers away remains to be seen, he says.

Design, Configuration Styles

Two architectural styles dominate, with power centers the most ubiquitous. A typical power center is a strip mall with multiple big-box anchors such as Target or Wal-Mart, a few junior anchors such as a pet supply and office supply stores, and numerous smaller shops. They usually measure between 600,000 sq ft, with some as large as 1 million sq ft.

Lifestyle centers tend to be unanchored collections of upscale specialty shops, restaurants and service providers. Many have park-like gathering spots and entertainment venues. They typically measure about 300,000 sq ft.

“The lifestyle trend is probably going to continue, but these projects can only work in certain types of environments,” Bulson says. “They can’t be near an existing regional mall, usually 3 to 5 mi away, and their area needs to have a higher income and education demographic.”

One variation is the recently completed Promenade Bolingbrook, which was designed as a Main Street-style “downtown” for a village that grew up without one. Five years in the making, it was built by Homewood-based Graycor. The mammoth endeavor sprawls over nine blocks and more than 1 million sq ft of retail space and includes 11 restaurants, a theater and 40,000 sq ft of office space. Anchoring the Promenade is a 143,000-sq-ft Bass Pro Shops Outdoor World retail store.

“Bolingbrook is really a shopping center with a little bit of mixed use,” says Graycor vice-president Dave Wing. “It doesn’t have a residential component. I think the next wave that we see is the destination center where we live, shop and have entertainment facilities.”

Graycor’s current projects are a lifestyle center in Plainfield, a combination lifestyle and power center in New Lennox and a mixed-use project in Pittsburgh.

“The last few years have been really good,” Wing says. “A lot of projects are slated to move forward, but they are moving very slowly. Lending is obviously tough to come by. Banks are demanding a lot more of developers in regard to how leased up a project is before moving into construction.”

Within the last year or so, Pepper Construction Group, which has a dedicated retail division in Chicago, completed Orland Park Crossing in Orland Park; Prairie Market West in Oswego; Lincolnshire Commons in Lincolnshire; and four JCPenney stores. In the works are lifestyle centers in Oswego, Volo and Pleasant Prairie, Wis., plus four JCPenney stores and renovations to Water Tower Place in Chicago.

Senior Vice President Richard Tilghman expects to stay busy at least through the year.

“These jobs were all in the pipeline,” he says. “Most of them are just starting to be under construction. After that, we’re all a little worried, with the credit crunch and the residential market slowing down.”

Mid-America’s Bulson is optimistic. Even if retailers catch up to earlier residential growth, other opportunities remain. Several large in-fill communities are being completed in densely populated areas of Chicago and collar counties, and the new Interstate 355 extension has a number of interchanges awaiting development. Another factor is that Chicago has a diversified economy that has not suffered the dramatic downtowns of other Midwestern states such as Ohio and Michigan.

SIDEBAR 1

Retail Building vs. Overall Building (Chicago-area starts; in billions of dollars)

Retail construction far outpaced the overall building market, 19% increase in starts vs. an -8% decline, respectively.

SIDEBAR 2

Chicago Retail (new space in sq ft)

Demand for retail space is resulting in a construction boom.

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