Retailers selling everything from auto parts to office supplies are aggressively expanding in the Midwest. They are drivingin major metropolitan areas, as well as pushing farther out in pursuit of sprawling population and available land.
The explosive growth is driven in part by a continued strong economy, historically low unemployment levels and healthy consumer spending that is sweeping the country. According to the U.S. Department of Com-merce, total U.S. retail sales edged up 0.1% in June to a seasonally adjusted $243.32 billion after a 1.2% jump in May.
"Overall, the market in the Midwest seems to be very strong. Same-store sales growth reported by retailers is phenomenal," says William S. French, vice president of retail sales andat Colliers Turley Martin Tucker in Indianapolis. "Many store reports show 6% to 7% increases over the same period the previous year. Because of that, we have seen a continued appetite among many national retailers to expand as fast as possible."
"The Midwest is a great barometer of what is happening around the country," adds Michael Glimcher, executive vice president of Columbus-based Glimcher Realty Trust. "The economy is thriving. Unemployment across the country is incredibly low. More people have disposable income, and they are feeling good."
Now that national retailers have saturated many of the country's major markets, they're discovering the economically healthy second- and third-tier cities in the heartland.
"You're seeing a lot of retailers that have saturated large markets filling in a region because they already have distribution serving those markets," says R. Lee Harris, president and COO of Kansas City, Mo.-based Cohen-Esrey Real Estate Services Inc. "If a retailer is strong in Kansas City, Wichita and Omaha, it makes sense to go to Springfield, Topeka and Lincoln."
The impetus behind the thriving retail environment in the region is the overall economy, agrees Colleen John-son, an associate with CB Richard Ellis/Hubbell Commercial in Des Moines, Iowa. "A number of retailers are just beginning to look at the area," she says.
Even empty big-box space, including locations affected by the closings of Venture and Builders Square, aren't staying vacant for long. "Retailers keep contacting us looking for empty big boxes," Johnson says, adding that a new 25-acre big-box development is in the due-diligence phase in Cedar Rapids, Iowa.
Home Depot, Lowe's, Kmart, ShopKo and Kohl's have taken advantage of retailer bankruptcies or departures to increase their presence in the Midwest.was able to chisel the number of vacant big boxes there from 113 in late 1997 to 59 at year-end 1998, according to research by the Chicago office of Los Angeles-based CB Richard Ellis.
John Bucksbaum, CEO of General Growth Properties, a Chicago-based REIT that owns and manages a number of regional malls in the Midwest, agrees that retailer interest in the region is strong. "We're seeing continued enthusiasm by retailers for new locations. It shows no signs of plateauing," he says, pointing to high consumer confidence levels. Demand from national retailers may exceed supply in a few select markets, but for the most part, the industry is at a point of equilibrium.
Though retail development had reached a somewhat frenzied pace last year, the Midwestern markets "didn't get crazy like some others," Harris adds. "They might have, if the capital markets hadn't taken a tumble last summer and fall. That acted as a governor on development."
Current development is more controlled, and retailers are refocused on finding the best location, says David M. Block, senior vice president of Kansas City, Mo.-based Block & Co. Inc. Realtors. "In the past, many have been more concerned about penetration. If the best location wasn't available, they took whatbecame available."
Retailers aren't the only ones attracted to the Midwest. Movie theater mania also is making its mark, but to varying degrees. The downtown Des Moines area, for example, is eagerly anticipating a new 20-theater complex with 150,000 sq. ft. of retail and restaurants. The project is being developed by Centertainment, the development arm of Kansas City-based AMC Theatres and Columbus, Ohio-based Steiner + Associates.
But in Kansas City, it's becoming apparent that there's a flip side to this frenzy for new theater space. "Many of the non-stadium-seating, older theaters are closing, especially those that have 10 screens or less," Block says, adding that retenanting could be a challenge.
And the megaplex craze has yet to hit St. Louis, says Scott D. Saunders, assistant vice president of the retail division in the St. Louis office of Colliers Turley Martin Tucker. One reason is that developers don't want to use the city's expensive land to build the vast parking lots necessary for megaplexes. "When they look at the parking situation," he says, "they decide they'd rather put in a Lowe's or a Home Depot."
Minnesota High employment, increasing wages, and low inflation and interest rates are supporting a sturdy Minnesota retail market. "If we continue to have controlled expansion, controlled growth, I think we could have many, many more years of strong retail," says John Johannson, vice president of retail leasing for Bloomington, Minn.-based Welsh Cos.
The Minnesota Economic Index - a measure of wage and salary employment, unemployment insurance claims and weekly manufacturing hours - rose to an all-time high of 124.8 in 1998, which outpaced the U.S. Economic Index of 120.4. The state's unemployment rate continues to be among the lowest in the nation, at 2.3% statewide and 1.7% in the Twin Cities.
Minneapolis-St. Paul, the state's retail hub, has a base of 49 million sq. ft. of gross leasable shopping center space, according to a 1999 market report from Minneapolis-based Colliers Towle Real Estate. A growing population base, currently at 2.8 million, continues to fuel demand for additional retail space. "We lose sight of the fact that the metro area adds about 30,000 people per year," Johannson says.
Despite the addition of 1.4 million sq. ft. of new retail space last year, vacancy rates improved in almost every category and submarket to average 7%, according to the Colliers Towle report. Development continues at a healthy pace with more than 1 million sq. ft. of new retail under.
"Occupancy and rental rates are strong, very strong," Johannson notes. Development is driven largely by super big-box users - the Home Depots, Targets and warehouse-style grocery stores. Meanwhile, there has been a significant slowdown in the more conventional big-box users in the 20,000 to 40,000 sq. ft. range, he says.
New retailers entering the Twin Cities market in 1999 include Mars: The Musician's Planet and Zany Brainy, while Von Maur is searching for potential sites. Meanwhile, Minneapolis-based Dayton Hudson Corp. is debating pulling the plug on its local Mervyn's stores. If they continue to struggle financially, the retailer could decide to close some or all of the nine locations.
Wisconsin Wisconsin is experiencing a flurry of expansion activity in metropolitan Milwaukee and Madison as well as secondary and tertiary markets that include communities such as Appleton and Grafton. The state reported a population of 5.2 million in 1998 with disposable per capita income of $20,925, according to the Commerce Depart-ment.
Existing and new retail chains continue to expand in the Milwaukee area. Kohl's department stores, Menards, Home Depot, Walgreens, Jewel-Osco, Pick 'N Save and Wal-Mart helped account for 1.2 million sq. ft. of new, freestanding big-box space in 1998, according to a 1999 market study conducted by Polacheck CB Richard Ellis in Milwaukee. In 1999, about 1 million sq. ft. of retail space was under construction, with approximately 800,000 sq. ft. of construction pending in the six-county area.
Mars: The Musician's Planet is one of the most recent retailers to enter the Wisconsin market, and Kmart has been on an aggressive campaign to convert its existing stores into the Big K concept. "It seems like there is always a host of retailers looking to come in and do a three- to four-store package," says David Devorkin, senior vice president for Polacheck CB Richard Ellis.
Retailers are just beginning to realize the redevelopment potential that exists in urban Milwaukee. For example, the very first enclosed mall built in the city has been purchased and razed to accommodate a new Wal-Mart store. "I think you'll continue to see urban growth over the next 24 to 36 months," Devorkin says.
The state's middle markets with trade areas of 300,000 to 400,000 people also have been active in recent months. "We're seeing a tremendous amount of growth in the smaller markets," Devorkin says. For example, the east side of Appleton is going "gangbusters." During the past 12 months, the area has added three new grocery stores, a 16-plex theater, Kohl's and Target, with additional development under way. The east side of Madison is seeing similar growth with the addition of stores such as Circuit City, Menards and Old Navy.
Michigan Population growth is boosting the metropolitan Detroit retail market. It grew to roughly 4.37 million people in 1999, which accounts for nearly half of the state's overall population of 9.8 million, according to a report from the Detroit office of Northbrook, Ill.-based Grubb & Ellis. The Commerce Depart-ment estimates disposable per capita income at $21,700 for the state's residents.
"The activity is very much a reflection of the economy," says Russell Barnett, vice president and director of retail services for Grubb & Ellis. "But I would also say that, as a state, Michigan has been significantly under-retailed for many years." However, that picture is changing as new development continues, spanning a variety of activity from the aggressive "drugstore wars" to the building of new regional malls.
The heaviest expansion in recent years has taken place in the drugstore arena. CVS and Walgreens have both been active throughout Michigan. "We continue to have a large number of freestanding drugstores that have come into town over the past several years," Barnett says. "We're also seeing a lot more of the eatertainment or theme-oriented restaurants being developed with large movie houses."
Downtown Birmingham, Novi, Dearborn and Sterling Heights continue to move forward with Main Street development, attracting new specialty shops, unique restaurants, office space and new condominium dwellings, according to the Grubb & Ellis report.
Construction within the city of Detroit also is prompting new interest from retailers. Two new side-by-side sports stadiums are under way, and three casinos are planned. Work is set to begin later this year on Campus Martius, a five-block, 9.2-acre mixed-use development in downtown Detroit. The $500 million project will feature nearly 600,000 sq. ft. of retail, including a multiscreen theater, restaurants and entertainment venues. Campus Martius is a development of Kern Woodward Associates, a joint venture between Schostak Brothers & Co., Southfield, Mich.; the Sterling Group, Detroit; and Detroit lawyer Butch Hollowell.
In addition, retailers are vying for space within a proposed terminal expansion at Detroit's metropolitan airport. "We're seeing a tremendous amount of redevelopment going on throughout the state," Barnett says.
Grocery chains such as Kroger and Farmer Jack have begun to address consumer demands for more one-stop-shopping conveniences. Both have opened new stores in the metropolitan Detroit area that feature coffee bars, sushi bars, salad stations, sandwich bars and complete meals to go. These new concept stores are expected to grow at a fast pace through 1999, the Grubb & Ellis report predicts.
Ohio The lack of boom-and-bust cycles makes Ohio an attractive retail marketplace, and national tenants continue to fill in their positions with new stores. The Cincinnati market is experiencing ongoing growth among large-format retailers like Lowe's, Target and Home Depot, according to a market report by CB Richard Ellis in Cincinnati. Home Depot has opened seven stores in the Cincinnati market with more on the way.
The Cleveland-Akron-Canton market, which constitutes about 40% of the Ohio market, added over 1.4 million sq. ft. of retail space in 1998, and an estimated 1.5 million sq. ft. is slated to come online in 1999, according to a 1999 retail report released by the Westlake, Ohio, office of CB Richard Ellis.
"There are a lot of things on the drawing board, under construction, planned and proposed across the board," says Mark Rantala, vice president and director of retail services for the company. "It really is an extremely active market, probably as busy as we have seen in the past six years."
In the past 10 years, the market has increased by over 10 million sq. ft. - a 23% increase in space, according to the report. Occupancies improved to 92.8%. The retail market has remained solid for six years with vacancies holding steady at 7% to 9%.
The capital city of Columbus is one of the fastest growing cities in the Midwest. Economic diversity is key to the consistent rate of growth in Columbus, according to a local market report by CB Richard Ellis. The six-county Columbus area is home to 1.46 million people, and retailers are expanding along with the population base. Retailers that have added stores in the Columbus area in recent months include Kohl's, Target, Best Buy, Galyan's, Wal-Mart, Circuit City and Old Navy.
"We're just in the process of opening Polaris Towne Center, which is well over 95% leased," Glimcher says. His company already has back-up tenants for leased space at the 700,000 sq. ft. power center in Polaris, a suburb of Columbus. "We literally have had to turn retailers away."
Glimcher Realty Trust also is planning a 2001 grand opening for its 1.5 million sq. ft. superregional center, Polaris Fashion Place, which will be located across the street from Polaris Towne Center.
Indiana Indiana's population edged slightly higher in 1998 to an estimated 5.9 million, while disposable per capita income increased 3.5% to $20,577, according to the Commerce Department.
"We're very fortunate that our market has expanded conservatively," French says. "A strong population and strong income growth are the primary factors driving this expansion."
The Indianapolis retail market is expanding on the north and south sides and in the suburbs of Avon, Carmel, Fishers, Greenwood, Noblesville, Plainfield and Westfield. One retailer new to the area is Von Maur, which purchased Montgomery Ward locations at Castleton Square Mall and Greenwood Park Mall.
The majority of growth, however, came as existing retailers added new locations. "We're seeing a number of freestanding developments with Menards, Cub Foods and others," French says. New Wal-Mart stores are springing up in both metropolitan Indianapolis and submarkets such as Noble and Greensburg.
Several of the mature trade areas in the Indianapolis market have become prime targets for redevelopment. Norgate Shopping Center, Glendale Mall and the Eastgate shopping area are all slated for redevelopment to make better use of the attractive demographics and dense population found in these markets.
Rents continue to increase in the market areas where growth is strong, ranging between $13 per sq. ft. (triple-net) and $16 per sq. ft. in most areas, according to a report from Colliers Turley Martin Tucker.
In high-profile, high-visibility space in selected areas such as Keystone at the Crossing, Clearwater and Carmel, rents reached the $20 to $25 per sq. ft. range. Rents also increased for small shop spaces located near high-demand intersections and trade areas - due largely to the steep costs of development.
Illinois The newest, most advanced movie theater complexes are still being built throughout the Chicago area. "There is still a tremendous interest in Chicago for theaters with 16 to 24 screens and the latest technology," Bucksbaum says. "And this, in turn, gives us a lot of opportunity for additional restaurants."
Growth is being driven by the development of entertainment complexes and the expansion of grocery chains. Twelve of the 18 new community/neighborhood centers will be grocery-anchored, according to a survey by the Chicago office of CB Richard Ellis.
The Chicago area had 4.5 million sq. ft. of new retail construction in 1998, up from 3.2 million sq. ft. in 1997, and currently has 10.4 million sq. ft. of new centers planned, according to the survey, which included Chicago-area shopping centers of more than 50,000 sq. ft. but excluded regional malls.
The CB Richard Ellis survey also showed that after a two-year decline in the overall vacancy rate, a slight increase to 8% was posted at mid-year 1999. However, the vacancy rate for 5.3 million sq. ft. of power centers declined to only 1.3%.
Missouri/Kansas A survey of shopping centers in the St. Louis market by the local office of Colliers Turley Martin Tucker showed community centers 90.7% occupied and neighborhood centers 93.4% occupied. Kohl's is expected to open six stores in the St. Louis area, including moving into five former Venture stores. Kmart took eight of the former Venture locations. Walgreens opened more than half a dozen new freestanding stores in 1998 and will open more in 1999.
St. Louis has averaged one new power center every year for the past three years. "And we have a lot on the table," Saunders says. Chesterfield Commons will open this year, and plans are under way for Kirkwood Commons.
Retail development is split almost equally between new construction and redevelopment in-fill projects. "Wal-Mart, Lowe's and Home Depot are among those driving the new developments," Saunders says, adding that he doesn't foresee a problem retenanting vacant big boxes. "Several areas in the market are extremely tight, which precludes tenants from finding space." South St. Louis County is one area where demand is exceeding supply.
One retailer pursuing opportunities in both states is Costco, a competitor of Sam's Club. The warehouse-type chain is building multiple stores in both St. Louis and Kansas City, according to several reports.
Mixed-use developments in downtown St. Louis and Kansas City continue to fare well even with the burgeoning suburban development. Union Station in St. Louis is now focused more on entertainment with the opening of a 10-screen cinema and Hard Rock Cafe.
Crown Center, an 85-acre, mixed-use development near downtown Kansas City, will welcome Morton's of Chicago this year. The restaurant is opening its first location in the city at the complex. Fritz's Union Station restaurant and the first Crayola Cafe and Store also plan to open at Crown Center in 1999.
In the Kansas City metropolitan area, much of the shopping center growth is in the south Kansas suburbs, but new retail developments are under way on the Missouri side in the Independence, Lee's Summit and Blue Springs suburbs.
BarryWoods Crossing Shopping Center, developed by locally based RED Capital Development LLC, opened fully leased last year with an AMC 24 Theatre along I-29 in north Kansas City, Mo.
New entrants into the market last year included Lowe's, Walgreens and Nordstrom, which opened in a new, 200,000 sq. ft. expansion area at Oak Park Mall in Johnson County, Kan. Copaken, White & Blitt, the Kansas City-based developer of 1.6 million sq. ft. Oak Park, also is pursuing plans for a 1.3 million sq. ft. superregional center in south Johnson County. Tentatively called Blue Valley Place, the center will incorporate characteristics of both enclosed and open-air centers, according to co-owner Jon Copaken.
In Wichita, the state's largest city, a lot of national retailers are still scouting for sites, says Craig Ablah, secretary-treasurer of locally based Classic Real Estate Inc.
For many retailers, their first choice is the city's main eastside thoroughfare known as the Rock Road corridor. But those sites are not available, so they're looking farther to the northeast and northwest parts of the city, where two new power centers are being planned.Iowa/NebraskaCentra l and eastern Iowa still are seeing considerable retail development, says Johnson of CB Richard Ellis/Hubbell Commercial. In central Iowa, the city of Des Moines is assembling a five-acre site downtown, where construction is expected to start next year on the city's new entertainment and retail complex. The project is a development of Centertainment.
"With a population of about half a million, it was difficult for a long time for Des Moines to attract national retailers," Johnson says. "But over the past several years, retailers have expanded as much as they can in the larger markets and they're seeking markets our size."
General Growth's 1.2 million sq. ft. Coral Ridge Mall in Coralville, a suburb of Iowa City, was fully leased six months before opening last year. Dillard's, one of the anchors at the center, is a newcomer to the area. The department store also is entering the Des Moines market, constructing a 200,000 sq. ft. location at Valley West Mall.
National retailers in increasing numbers are discovering the secondary market of Lincoln, Neb., home of the University of Nebraska with a population of 200,000, according to Harris of Cohen-Esrey. "You're seeing retailers moving out of their norm."
Lincoln's recently opened South-Pointe Pavilions, a 512,000 sq. ft. mall developed by RED Capital, attracted an array of new retailers, including The Gap, Old Navy, Bed Bath & Beyond and Abercrombie & Fitch.