Ottumwa, Iowa, Paducah, Ky., Clarksville, Tenn. Few average Joes could easily pinpoint such places on a map. But as prime markets get leased and become more costly, the industry is mining urban infill sites, rural areas and suburbs for new consumer dollars. Some call these lesser-known locales “B” markets. Others call them “secondary” or “middle.” Whatever the description, several firms — including The Cafaro Co., Youngstown, Ohio; Developers Diversified Realty, Cleveland; and CBL & Associates, Chattanooga, Tenn. — have embraced them.

The concept is simple: Move into markets where competition is limited and occupancy costs are lower and deliver a first-class project that captures locals' hearts and wallets.

Big fish, small pond

For retailers and developers, the desirable characteristics of middle markets include dense residential development poised for additional growth; diversified employment bases; strong household incomes; and a dearth of other shopping venues. “Retailers are looking for growth opportunities all the time. Our offering a mall in a market with a justifiable trade area with solid demographics is a compelling reason for locating in a middle market,” says Michael Lebovitz, a CBL senior vice president.

The Cafaro Co., for instance, loves a market with one mall — its own — and no others within at least 25 to 30 miles. Before Cafaro built Governor's Square Mall in Clarksville, Tenn., residents had to drive about 45 minutes to Nashville to do major shopping. And in Paducah, Ky., residents' options for serious shopping were limited to driving hundreds of miles to St. Louis or Nashville. Norman Peters, senior vice president of The Cafaro Co., points out that in such places, shoppers' think differently than those living in big cities or suburbs with multiple retail options. “When they come shopping, they bring the family and stay for the restaurants and theaters. It's a major social event.”

And it's not just local or regional retailers that find such places appealing. National bookstores, theaters, and big box retailers — names such as Borders Books and Music, Gap, JCPenney and Circuit City — are all flocking to such markets. Governor's Square, for instance, has Old Navy, Victoria's Secret and Gap, in addition to its anchors. “When national tenants determine their primary markets, they can't just stop growing,” says Peters. “So they turn to secondary markets. They've been surprised by the profitability. They're not paying prime rents, they don't have the competition, and they're very big fish in small ponds.”

Lebovitz agrees and says, “The advantage is that we become the No. 1 shopping destination in these markets, with limited competition.”

Dan Hurwitz, DDR's executive vice president, points to movie theaters as a category that performs especially well in middle markets. “In smaller markets that weren't the focus of large stadium seating theater companies, the theaters that existed in those markets have avoided competitive pressures, and continue to be dominant operators in the trade areas and continue to operate profitably. But in the larger markets, there's been self-cannibalization.”

Sprawl's upside

Urban infill and places where suburbs have sprawled are also promising growth areas. Hurwitz points to the Cleveland area — west and east of the city — as one market with great potential. “Suburban sprawl has grown to a point where it can support retail projects of significant size,” he says. “And that's happening in many suburbs around major metro areas throughout the country.”

And what about the extra hoops developers need to jump through to satisfy locals who may view them as the enemy? “In reality, smaller markets welcome the tax base and the opportunity. It's also a job base for young people,” observes Peters.

Usually people aren't resistant to change just for the sake of being resistant, notes Hurwitz. “But rather they have a particular issue — landscaping, public spaces, architectural features — that needs to be addressed. If we're attentive to those issues, we can typically garner support. We do whatever is necessary to satisfy the population. We want them to be supportive because ultimately, they'll be our shopper.”

But there's no one concept or formula that wins in every market. At DDR's 475,000-sq.-ft. CityPlace in Long Beach, Calif., anchors will include Nordstrom Rack, Wal-Mart, Albertson's and Walgreens in an urban market that includes a population of about 94,000 within two miles (with average incomes of just over $70,000) and more than 500,000 within five miles.

CBL is upgrading its recently purchased Fashion Square Mall in Saginaw, Mich., to include the likes of Abercrombie & Fitch to be sure the center satisfies shoppers' hankerings. “Regionals and locals have a place in middle market malls, but consumers demand a strong representation of national, hot tenants, or they'll shop elsewhere,” observes Lebovitz.

Profits, too, vary from place to place. “We build a pro-forma based on the specific market,” says Lebovitz. “We design a mall in Atlanta differently than we design a mall for Muskegon, Mich., because the costs and rents are different. But we are very sensitive to maintaining a realistic double digit return on these new mall projects.”

Hurwitz says it's hard to generalize that properties in middle markets improve a developer's bottom line more easily or quickly than a “A” market properties. “Each project has to be looked at individually and each has to be tailored for that specific market.”

Elyse Umlauf-Garneau is a Chicago-based writer.