Rapidly becoming the envy of other cities in attracting retail, Chicago buzzes with new construction, redevelopment, and leasing deals hammered out at a rapid-fire pace. For a close-up look at the action taking place around the Loop, SCW Managing Editor Vicki Phillips joined Mable Gin, senior retail specialist at Northern Realty Group, for a walking tour of vibrant downtown Chicago. The following day, July 22, SCW hosted a roundtable discussion at the Four Seasons Hotel with a group of Chicago-area retail development experts.

The Chicago MSA boasts impressive fundamentals, with unemployment at 4% to 4.5% and median income in 1998 reaching $51,075, according to a recent study by Marcus & Millichap, based in Palo Alto, Calif. Basking in such healthy figures and surrounded by 7.2 million sq. ft. of retail space under construction, the roundtable participants debated how the city has become so adept at wooing retail, what kinds of leasing trends are popping up, and the ramifications of e-commerce. An edited transcript follows.

SCW: An official with the Urban Land Institute recently noted that Chicago quite possibly leads the list of cities that draw retail successfully. What factors led up to this renaissance? What can other cities do to accomplish the same feats that Chicago has?

Rich Tucker: The city understands how to put programs together. We've done one deal in the city - a grocery-anchored center wrapping around an existing Sears facility - and in that process there was a TIF, there was a CD float, there was a rezoning. There wasn't much you could do throughout the process that we weren't involved with at one point or another.

Mike LaRue: This success began in 1985 under Mayor Harold Washington, who essentially took a gun to large developers' heads and said, "Unless you contribute both talent and money to stimulate and streamline neighborhood development, we're not going to give you that last 10 or 20 stories in a downtown office building that you're asking for the variance for. There are a lot of moving parts in an inner-city deal; it's almost impossible for a developer to do it alone without help. It took a long time for the city to begin to understand what the priorities were and to respond to them - which they have done extraordinarily well.

Also, the market has changed from an area where there were plenty of suburban greenfield opportunities easy to build on, to one where the easy ones are done. Those difficult sites in the city start looking attractive when you find out there are 250,000 people in a three-mile radius who are underserved.

Kevin Augustyn: To a large extent, retail development is driven by demographics. One of the reasons MCL shifted to the retail business is the very strong housing market of Chicago. There has been a big increase in the amount of residential buildings in the near North Side-central city area and near the South Side. It was a natural outgrowth for strong retail development around the city to fill in behind the residential.

Greg Merdinger: There are four components that fed the decision to build: There's a great population that started both from demographics and density in Chicago. There's infrastructure. Chicago has a great infrastructure, from the airports to the highway systems to mass transit. There's a political environment. The greatest thing a developer wants is stability, an environment you can understand with certainty - it can't be arbitrary. I think the city has created that.

And the last component is availability of land. Chicago is not landlocked like a lot of other cities. The fact that a large number of users open flashy stores here really relates to the fact that they can.

Scott Greenberg: It's the leadership, particularly the business leaders who live and work in Chicago and look forward and say what the city needs to do. And they put those priorities in front of Mayor Daley and the aldermen. I think the leaders are recognizing the challenges in front of us for the next 10 to 20 years. That kind of spirit is what encourages the investment we're making in the future.

Fran Spencer: One thing that's important is Mayor Daley's emphasis on education - because you would see so many families and couples who would come here, then go out into the suburbs where they had decent schools. We started working on that several years ago. His belief is that we have to build further on the base of people who can enter any kind of field the market needs.

Jeff Kuchman: What Fran is alluding to is not necessarily just the educational element but the ultimate element of livability. The city of Chicago has done a good job of identifying the untapped potential the market has for merchants. It does a very good job of promoting the livability of the area, either for work or play or residing. It does that through the school system, promoting a sense of safety. All these elements combine to make the city desirable, and that's what all our cities need to do.

Spencer: Our "Get in the Loop" program brings some of the mom-and-pop retailers and small retailers down to the city core of State Street, so that some of that neighborhood flavor that we are famous for is passed on to visitors and tourists. It also steers residents to start coming downtown.

SCW: Fran, one special concern to you is the enormous buying power of Chicago's ethnically and economically diverse neighborhoods. Are these neighborhoods still being written off by the retailers?

Spencer: No, they're not. The way we approach it with retailers is, "Don't think of (a site) as being the South Side of Chicago; think of it as, 'Here is the intersection we're going to talk about, here's the density one mile and two miles from there, here's the effective buying power'" - so it happens to be Afro-American or it happens to be Hispanic. Once you get them past that hurdle and they can actually look at the neighborhood in that way, they begin to see where they can adapt their presentation of merchandise and their footprint.

Augustyn: Oftentimes we find that if you look at a site on its surface, you may have some questions. But, for example, we have a Dominick's shopping center that is built directly across the street from Cabrini Green (a low-income public housing project). We found that once that center was developed and people saw what it looked like and began to see the shopping mix, it's a very wonderful mix of Cabrini Green residents, Gold Coast residents, near North Side residents. This site, which you might think of as serving an underserved area, in fact has such a large market share that it draws a very diverse group.

SCW: MCL's Cabrini Green project has had some controversy attached to it, but it's a story that could be repeated anywhere in America.

Augustyn: Absolutely. It's a story that can be repeated from a couple aspects: First, it's a very high-quality center. People look at it with pride in the neighborhood. Second, we had a wonderful partnership with the city on a job-training program. We hired 250 residents, trained through this joint program, to work at Dominick's. Sales have been wonderful for Dominick's and the rest of the tenants. We've attracted traditional national retailers: Blockbuster, AT&T, Pearle Vision. That type of success could very easily be translated to other neighborhoods.

Tucker: It takes real courage on the part of the retailer. You think through some of the issues that a lot of retailers have fought with going into urban environments. You know, years back we brought in a Filene's Basement and a T.J. Maxx at the corner of Madison and State. First time these retailers came to the city of Chicago. Now they can't find enough locations in the city of Chicago. But it's the courage of these retailers to come in and understand these markets and realize that this is my customer. It's not an easy sell.

LaRue: One key element is the perception of safety and/or lack of crime. I personally think the Cabrini Green project wouldn't have been as successful had there not been an understanding that neighborhood-wide improvement was taking place and that it wasn't going to be a project that was hard up against one of the areas of most abject poverty in the city.

Kuchman: What you really have is the issue of convincing retailers that they can serve a diverse group of shoppers. You mentioned, Kevin, that there's North Side residents, there's Gold Coast residents, there's Cabrini Green residents. What does the store management team need to look and feel like to make each of those three different ethnic components and economic components feel good inside the store, feel like it's their store? It's not so much identifying potential in the markets anymore; it's identifying how best to operate once the store is opened.

LaRue: But the first hurdle is still getting a retailer - whose decision-makers may be in an office 500 or 1,000 or 1,500 miles away - to commit to an inner-city neighborhood that they may never personally see. That's a great leap of faith. Once they've made that leap of faith, then they'd best go to somebody like Walgreens and hire a regional manager who understands how to operate in urban neighborhoods and teach their staff to project the level of respect and understanding that all of us - rich, poor and in between - demand when we go into a store.

Greenberg: Most of the development boom that has happened in Chicago, unfortunately, happens in a very tight geographic area: right around the Loop or just north of the Loop. While there are probably encouraging signs elsewhere, there are bigger regional issues that still have to be dealt with. Neighborhoods need to find ways to bring bigger businesses back into some of the outlying areas, to hold employment and to hold a good core of people in areas that will require retail services.

SCW: Will State Street ever approach Michigan Avenue, not for being so upscale, but for being a shopping destination unto itself?

Mable Gin: State Street has always had retail, but it's gone through various cycles. It's pretty much on the upswing because the mayor and companies that are currently in the city are very focused on maintaining it as a business hub. State Street has always been on the charts for retailers that want to be in a very active downtown area. The upside is that you do business Mondays through Fridays. It's easier to attract employees (to shop), since you don't have to persuade them to work long hours or on the weekends.

LaRue: We've always had this group of - I don't know the exact number - half a million or three-quarters of a million people down there in the Loop or near the Loop. It's a daytime population that is increasingly time-stressed. These folks, by the time they get home, have very little time left to go out and traditionally shop as Ozzie and Harriet did.

But at the same time, the tremendous residential growth in the south Loop, in Streeterville, in the near northwest side, is such that (a) those areas don't have enough population to support a conventional regional mall, but (b) they have, combined, maybe a half-million additional nighttime people who need the services of a regional mall.

So Sears, which left State Street, is rumored to be looking at coming back. And Lord & Taylor, which is up the street at Water Tower, is rumored to be looking at State Street. It could very well become a valuable regional mall surrogate for ordinary shopping needs.

SCW: Scott, as the only representative of a large REIT here today, what leasing trends are you seeing nationally? Do you foresee more experiential retailers popping up, like American Girl Place or DisneyQuest? Are we going to be seeing these kinds of tenants in regional malls?

Scott Keeney: One of the things that General Growth is focusing on is delivering experiential retail. We want to be the place that offers an experience for shoppers that they can't get anywhere else. They can't get it over the Internet; they can't get it via catalog. What does that mean? It means bringing in stores like Build-A-Bear Workshop, where you're not just buying a teddy bear. You're building a teddy bear with your son or daughter and making the activity a part of your life. You're coming to dine, going to the theater, maybe having a learning experience. If there's one real push in our sector, it's toward experiential retail to combat the threat or perceived threat of the Internet.

SCW: Mike, at last year's Chicago roundtable discussion, you expressed concern that entertainment retail might be a bandwagon that everyone is jumping on and that there might be too many movie screens. Do you still feel the same way?

LaRue: Sure. But I have to qualify it by saying that nothing is all good and nothing is all bad. There are some projects that may be dubbed "entertainment retail" because they happen to have a movie theater and some pads on which restaurants can be built, and by virtue of that are convinced that The Gap and Limited are going to come running along to locate next to them and take advantage of all that traffic. To folks who think that might happen, I would again say, "I don't think so." On the other hand, experiential retail that has synergy because the parts all come together, experiential retail that's in a location where people actually want to buy merchandise, is something that can add to the reason to go to that retail venue as opposed to any other retail venue. A General Growth project, Northbrook Court, is more successful after the opening of General Cinema's new theater within the mall than it was before. But if the mall didn't exist and the theater were built and somebody invited a few stores to come along, it wouldn't necessarily be successful.

SCW: Greg, are you seeing with the North Bridge project that the entertainment components have added to its vitality?

Merdinger: DisneyQuest has doubled what they projected. They are doing all the business they can do there. One thing I find interesting is the amount of capital and energy it takes to wow. I went and saw a center in Ohio, and I was reading all the fanfare write-ups about a combination movie-and-restaurant scheme and a lifestyle center. I had as my basis for comparison our involvement with North Bridge - with DisneyQuest, ESPN, Jekyll & Hyde Club - and what Virgin is doing across the street.

And I yawned as I was going through this state-of-the-art center that has just opened. I look at it and think this is not something that is off the chart. How do you one-up? I know what the investment needs are. One has to wonder, who besides Disney can do this?

Kuchman: At some point in time there's the law of diminishing returns. And then it goes right back to the core desirability of the project.

Greenberg: When you talk about experiential retail, you can't throw it all into one basket. There's the tourist-oriented experiential retailing, which is what The John Buck Co. is doing downtown. I think it's going to be successful because you have all the flood of people coming through. That business model makes sense. But the issue you have in putting that project anywhere else where there aren't a lot of tourists is this: It's a great thing to go to maybe once a year, but it's not something you would want to frequent. That's what we are all learning to understand about experiential retailing: What can you clone from the tourist environment and put in the suburbs? You can't do it! Because you rely on something that Disney isn't relying on, which is repeat business.

Augustyn: In the 1920s and '30s, cities were entertainment meccas. People came downtown whether they were from the suburbs or from out of town. Chicago is a popular place, and you are beginning to see the same thing - the synergy that is being built by the Buck Co., the retail on Michigan Avenue, the retailing that we have at River East. People once again are discovering the cities, maybe not as a traditional retail center, but as a real entertainment center.

Merdinger: Michigan Avenue only works with a five-state trade area. You cannot do that in a suburb. I don't think you've got the numbers for it. So the question is, when the person who lives in Northbrook comes for an experience downtown, everything else by comparison is deflated.

Greenberg: There are different kinds of entertainment. There's the wow entertainment, which, OK, by that measure is diminished. But what's good about Chicago is that we like to be wowed here. We like to have a good time, but I think we're a wholesome bunch of people. We like to read, we like to understand, we like experiences that mean something to us that are enduring, like Build-A-Bear.

For our project, CityPark at Lincolnshire, we're hoping to bring a cooking school. The idea is a cooking academy, a place where there's a different menu or a couple different classes taught every day. You're coming with friends and doing something together. It's an experience.

And so no, it's not "wow," but it's something that leads to a relationship.

SCW: Part of the concern you all are expressing is the millions and millions of dollars it takes to sink into a DisneyQuest or a GameWorks. Is the point that the same type of experiences can be bought for a lot fewer dollars and can be duplicated?

Keeney: Some of the things we've done are very capital intensive; others are not. One example is the ice rinks we're putting in our new centers. This is a blast from the past. Very capital intensive but very popular. Northbrook Court has a very simple soft-play area, which is expensive but not nearly as much as an ice rink. It's a place where parents can bring their children, and it's arranged by seats and the kids climb over a cushy treehouse.

Now, is that an experience? Yes, we deem that a life-improving experience. With the reading hour, it costs us no more than finding a manager from a bookstore to do this. Is the reading hour that we provide for the children experiential? Yes. And it's virtually free.

Maybe we're not wowing them all the time, but we're offering an experience and we're attracting people because our core of competency is retail. But still we have competition and there are choices elsewhere.

Greenberg: We're looking at bringing live theater into our megaplex project (CityPark at Lincolnshire), putting in a 500-seat theater in the suburbs. On one hand, it seems like a big risk, but we're right down the street from the Marriott Lincolnshire, which is the longest running playhouse, I think, in the Chicago area, with some 30 years of ongoing, uninterrupted for-profit play experiences.

People are looking for what I call really authentic entertainment. Not make-believe entertainment where you walk into a toy store and have a clock sing at you, but something that means something. Some of the things we're looking for are the things that have been there all the time, whether it's the ice rink or even cosmic bowling.

Gin: The holiday season in Chicago brings out very traditional elements. People come downtown, they go to Marshall Field's, they bring the kids, see the windows, eat in the Walnut Room. Speaking of experiential retailing, those are traditions that have been developed from decades past and are still being maintained.

But retailing has become much more competitive because you need to provide compelling reasons to persuade people to leave their houses these days. They're more selective about what they're doing during their working hours as well as during their personal time.

And when you go out, the bar has been raised. Whether it's entertainment, whether you are going for a meal, you expect service and quality. There are some nationally known retailers that I wonder if they're long for this world. You can have the brand-name recognition, but if you're not providing the service and products that people really want, there are a whole lot of players out there that will take away your market share.

SCW: Jeff, in your position as director of tenant brokerage, what underserved categories are you seeing? What types of retailers is there a dearth of and what types is there a glut of?

Kuchman: There are very few merchants and very few product-specific categories that aren't well represented throughout Chicago and the suburbs. If anything, we've seen a glut of late, and you are seeing the effects of that glut in the form of surplus space. Several years ago, you'd probably see the third or fourth or fifth best category-killer come in on the coattails of the best two or three merchants in that particular product line. And you are now seeing the carcasses of those merchants strewn throughout the city. Fortunately, there are typically two or three tenants for those spaces. So there's great absorption in the surplus property area as well as the new development that's occurring.

I don't think we're lacking any specific categories right now. What I'd like to see happen is for some of the higher-end merchants to carve up areas inside the city and identify them as real opportunities for potential market share. You go to Ford City, for example, and you see a lack of a bookstore or a lack of a linen concept. Well, there's still 250,000 to 300,000 people inside the 600,000-person trade area who want to read, who want to buy sheets, and yet today you can't talk retailers into those markets.

Gin: Retailers tend to develop templates insofar as running pro formas. But before you even reach the pro forma stage, you have to get the attention and support of your operations people, as well as the real estate. And when you are evaluating markets, you're looking for the home runs because that's what you're evaluated on. Fran has shared with me how the city tries to enlighten and educate retailers by conducting tours, providing them with information, and getting them to persuade other retailers by providing sales information or demographics.

Augustyn: We're seeing Costco coming to the market now, with a store in Oakbrook and Schaumburg. They are a very strong competitor of Sam's Club. There are a lot of items in those stores that appeal to an upper-end consumer and at a very discounted price, but it's merchandise that you would find in a specialty store. At the same time, it carries a lot of bulk supplies for small businesses. So if you look at plopping one of those down in an area that would draw from both a solid middle-income market and an upper-end consumer market, I think those are wonderful concepts.

Spencer: The problem you run into with those kinds of tenants is that they want the population to be right there where they're putting the store down, and unfortunately that means buying up two to three blocks of houses.

Augustyn: You have to be creative with sites. We don't want to displace housing and mom-and-pop businesses. There are under-utilized sites, maybe vacant warehouses or spaces that are no longer appropriate from a land use standpoint. We have to be creative in terms of adaptive reuse.

SCW: OK, our last topic is e-commerce. Rich, would you like to start? Your company is very grocery-oriented, and that is one of the potential victims, if you will.

Tucker: We've been talking a long time about what's going to happen with the staple end of the grocery industry. Eventually, there's going to be a scanner on your kitchen counter, and when you're done with your Reynolds Wrap, you're going to scan it and throw it in the garbage and they're going to show up with your next Reynolds Wrap. You don't have to go to the store for that.

Think about it, there's probably 20,000 to 30,000 sq. ft., up to 70,000 sq. ft. stores that have these items. So will you see the grocery stores going away? No. The prepared foods, the produce - there are too many fresh items that people want to see and touch and feel. But do you really need aisles and aisles of Reynolds Wrap and canned goods? Probably not.

That's the biggest impact that is going to happen over time, but it's not going to happen tomorrow. A couple of organizations have online shopping, none of which are profitable yet that I know of, but it's going to work and it's going to have a real impact on long-term viability. What do you do with this extra 10,000 or 20,000 sq. ft. of space that the grocers have?

So there's definitely a surplus space issue going forth, as well as planning the new center from the ground up.

SCW: A columnist wrote in a recent issue of SCW, "Market sentiment is shifting against REITs that have a disproportionate number of tenants susceptible to online sales migration." What do you think about that, Scott?

Keeney: Some categories, even prior to e-commerce, have been eroded from malls. Music is one example. Music businesses tended to go outside long before anyone was selling music online. The same with the book business. There are many sectors in the malls that have come under pressure from e-commerce, from big boxes, from discounters - but we are rebounding. Curiously enough, music in our malls last year was up 7%.

SCW: What do you attribute that increase to?

Keeney: I think it goes back to the consolidation of that business. We used to have two, possibly three music stores in our malls of 2,500 or 3,000 sq. ft. They all offered about the same product. Today, you are seeing a more exciting environment, with stores of 6,000, 7,000 or 10,000 sq. ft.

The book people have discovered that, yeah, you can work very well with a prime piece of real estate at the intersection, but the malls continue to penetrate a much larger trade area than any one bookstore can. And it's not so bad being at the front door of a suburban superregional mall where you have the advertising and drawing power of several large department stores and 100 or so specialty retailers.

You see the music business online is just growing and growing and growing - but yet it's growing in our centers, too. With the proper mix and the proper approach, we can work very well with and compete very well with online retail. In fact, many of our retailers use e-commerce to drive business to our stores.

Greenberg: I think we all understand that not just the shopping center industry but the entire world is going to be revolutionized for the next 20 or 30 or 40 years. It's going to take at least a decade before it has an effect.

But people who are 15 or 20 years old are the ones who will change the demographics of shopping in another 10 years. Those are the people who are right now living a web lifestyle. We should begin to adjust and alter our business plans because people's tastes and habits will change.

Right now one of the things that we are enjoying from e-commerce has to do with the economy. We've all talked about how, as soon as a retail space goes empty ... boom! ... there's another retailer going in. Everything is great today. We're fat and happy.

Traditionally we should expect a recession, but what's going to counteract that is the e-world providing lots of productivity, lots of boost to our economy. I think we're going to live through another boom period - thank you, e-commerce! What we're good at in the United States is tearing things down and rebuilding them, so we're all going to have very busy lifestyles.

Merdinger: We could have had this meeting via teleconference, but we chose not to, for good reason: We wanted to see each other, we wanted to interact. The leaders in technology - Microsoft, Apple, Digital - why do all those guys still go to office buildings when they don't have to?

Kuchman: But up until recently, a typical retailer's response to e-commerce was, "People have to come; they have to get around." Well, the truth of the matter is, if I haven't seen my kids in five days, and I have a choice between going to the grocery store and going home and bouncing them on my knee, I'm going home.

Merdinger: You raise an important point, which was the last point Scott made. So who wins? The guy who creates experiences where you want to be there. And if you don't want to be there, you're not going there; you'll do it over the line.

Kuchman: But the danger in our business is when Scott's concept is stood on its head, and instead ofe-commerce promoting the physical plant, the physical plant might start promoting the e-commerce.

LaRue: Anybody who is worried that e-commerce tomorrow is going to make retail real estate worthless is overreacting. And anybody who is convinced that retail real estate is so good that e-commerce will never affect it has their head deeply in the sand.

We're looking at a mid-term metamorphosis being stimulated by one of the great agents of change the modern world has seen. It is the printing press, it is the telegraph, it is the telephone, it is the television, and now it is the Internet. None of them can inherently deliver a product to somebody's hands. All of them can change the way somebody goes about getting that product in their hand.

Augustyn: Retail is many, many segments. There will be different spaces for commodity-type items, and different spaces where people go for interactive experiences, whether it's a place to go for a cup of coffee with your friends or a place to make teddy bears.

We have to be very realistic that e-commerce will change things dramatically. It's probably changing things right now in terms of percentage rent and how you allocate sales of stores. It's signage issues. Do you allow your retail tenants to publicize their websites on signage?

I think there will be some evolution as to what a retail space will be. You'll have stores that may serve as catalog showrooms for orders over the Internet; there may be a place for the return of items, serving mainly to keep the name in front of people's eyes.

Keeney: One of the biggest objections is having to wait for the product. Well, what happens if there is a whole new delivery system of goods? That's when, if I were a grocer, I would be very concerned. What happens when some bright person figures out how to overcome the objection of a return and build consumer confidence? When those two objections are overcome, you will see a real blossoming of product being delivered in a very different manner than it is today.

Tucker: It will be interesting to see as the delivery systems do get better, those of us in the shopping center business now will be in the industrial business building warehouses. Because that's really where it's going to be. And we don't need to be at the corner of Main and Main. You can take the least desirable piece of real estate and build a big warehouse.

SCW: Do you have a problem with that? Can you adapt?

Tucker: Sure. You have to change.

Kuchman: Retail will evolve. Remember, 10 years ago, nobody wanted to open a Blockbuster Video. It was a dead concept because movies were being fed over your cable line, and the theater business was supposed to be dead in the water. We can't sit here and predict the ultimate end for retail.

Greenberg: One of the restrictions we have in our thinking is our own personal conditioning and our own personal habits. Because it's an issue of a different demographic living an entirely revolutionary kind of lifestyle than we're used to living. We have to forget about what we've done in the past and forget about the existing buildings and think brand-new.

Merdinger: There are so many conflicts to what you are saying. Think about all the people who are moving back to the city. If they wanted to be by themselves, why are they moving back into the city? They're not necessarily looking to be isolated; they're looking for a higher quality of life. If you watch television now, where are all the sets being played? On streetscapes in towns. That's where people want to be.

Greenberg: Right, it's where they want to be. But you have to think about where you are going to be delivering business - and what is going on in those streets that they want to be there for.

Tucker: I'll still take the corner of Main and Main anytime. E-commerce has its place, but it won't devastate retail.

Kevin Augustyn Vice President of Asset Management

MCL Cos.

Chicago

Mable Gin Senior Retail Specialist

Northern Realty Group

Chicago

Scott Greenberg President

Environmental Community

Development Co. (ECD)

Buffalo Grove, Ill.

Scott Keeney Senior Vice President of Leasing

General Growth Properties

Chicago

Jeff Kuchman Principal/Director of Tenant Brokerage

Mid-America Real Estate Corp.

Oakbrook Terrace, Ill.

Mike LaRue Principal

Litvin/LaRue/Greenfield

Chicago

Greg Merdinger Principal

The John Buck Co.

Chicago

Fran Spencer Director of Retail Chicago

City of Chicago Department of

Planning and Development

Rich Tucker President

Tucker Development Corp.

Highland Park, Ill.