“Playing Chicago’s Retail Game”                                                                          Heartland Real Estate Business
-Keith E. Lord                                                                                                                                                  July 2003

It seems that everywhere you look in the urban Chicago retail market-place, retailers large and small are throwing out
conventional wisdom – and their rulebooks – to stay in the game of obtaining locations and market share in this vibrant city.  
For example, blockbuster Video, Aldo Shoes, Einstein Bagels and an oversized Starbucks Coffee on Chicago’s North Side
all have sites without parking.  In addition, Banana Republic, Express, Victoria’s Secret, Restoration Hardware and Z
Gallerie – all in the same area- have two-story street entrance stores that are well outside of their standard store plans.

It seems that not long ago, retailers analyzed urban sites in the same manner as traditional suburban locations.  Site analysis
included square feet of available land, traffic counts, ease of access and, of course, parking ratios.  Next, retailers analyzed
whether their typical corporate space needs would be met.  Standard store size, optimal layouts, ceiling heights, loading
requirements, standard signage and normal hours of operation were  key.  If an urban site or developer did not conform to
“the game rules” of the retailer, the retailer punted and went somewhere else.  The conventional wisdom was to stick with
what worked rather than try something new.

Then, the innovation came to Chicago.  Starbucks Coffee opened a 5,800 square foot urban concept, without parking,
located on Rush Street.  This location became its highest volume store in the country.  Next, The Home Depot squeezed its
first urban store onto an undersized, under-parked site on North Avenue.  It also became one of the retailer’s highest
volume stores.  Target followed soon after  with a smaller than optimal store on Elston Avenue and, after resolving its
parking problem with a structured parking deck, this site became one of its highest in sales volume per square foot.  
Dominick’s has also successfully opened a two-story, 32,000-square-foot store in the heart of Lincoln Park and a 40,000-
square-foot store in the West Loop, complete with underground parking.  Both of these new store concepts have been
innovative and successful.

The requirements set by retailers have indeed changed and, as some struggle to understand why, others are quickly getting
into the game by acquiring the new and preciously few great locations remaining.  By looking at the trends in Chicago and a
few other national residential urban cities, the roots of the change are identifiable.

First, land is scarce, expensive and, many times, must be developed to its maximum floor area ratio to be economically
viable.  This means that typical “suburban sprawl” has been replaced by “urban climb.”  If there is no room to spread out,
then developers must build up or down; this trend applies to all types of retail.  The big box must now reconfigure to a show
box, and this involves new creative store designs.  Many 10,000-square-foot and larger concepts understand that they must
lose their freestanding identity and compromise with signage, loading  and access increases to become part of a larger mixed-
use development.

Chicago currently has more than 10 banks looking to open urban sites.  Most have already conceded their rules for parking
and for onsite, drive-thru lanes.  Smaller stores are conforming to typical 25-foot wide lots.  This trend can demand that
retailers take second floor or basement space to operate profitably.

At 200 East Ohio, in order to reach a very dense area east of Michigan Avenue called Streeterville, a combination Dunking
Donuts / Baskin Robbins Store is taking an off-corner location with some second floor office space.  Restaurants and bars
ae also choosing to conform to the new rules of the game – as multilevel, valet-parking only locations are becoming the norm.

Second, the macro set of trends for the urban game lie with the consumer.  The typical urban resident no longer wants the
big mall or the grocery-anchored center.  Instead, they want to shop quickly and for specific items, and smaller stores have
become preferable.  Consumers are less concerned about available parking because the cost to insure and park a car in the
city has increased and now ranges between $3,000 and $8,000 a year.  River north condominium parking spaces have
climbed to more than $50,000 per space, which has forced many urban families to have only one car.  These consumers are
walking or taking public transportation for shopping and entertainment.  

Subsequently, retailers’ analytical rules of traffic counts by intersection are being replaced with pedestrian counts per block.  
Furthermore, consumers are education retailers that convenience and location are far more important than conventional retail
store design.

Since the playing fields (available sites) and the players (consumers) have changed, and the old rules no longer apply, what
should retailers look for when analyzing the urban market?  Retailers should start with their typical demographic report, and
throw it out the window.  Education level; average age; race; median income; and 1-, 3- and 5- mile radios reports are just
no longer as important.  For example, a typical Chicago suburb may have an average household income of $75,000 with
two wager earners in a four-bedroom house on half an acre.  In urban Chicago, on that same half-acre foot-print, a retailer
could access 50 to 100 condominiums with $15 million to $30 million in household income.  The urban site would give the
retailer access to disposable incomes 400 times greater than the suburban site.   

The retailers’ new rulebook should focus on density of income, pedestrian traffic patterns, off-site public parking, commuter
routes, public transportation hubs and vertical co-tenancy of mixed use projects.  Urban rental rates must be re-examined
because they are significantly higher, but they may be offset by retailers’ higher sales volume.  Also while these rental rates
are higher, many times common area maintenance, exterior maintenance and joint marketing fees are lower.  Retailers must
also learn how to maximize floor plans and operate with less square footage.  This change may involve reducing SKUs,
changing loading programs and re-educating urban store personnel.

For example, CVS/pharmacy has entered Chicago in the past few years, and it has been very flexible adapting its stores to
the urban requirements.  The retailer has several sites without parking or drive-thru windows – including one at Armitage,
Lincoln, and another site that is under development at Division and State Street.  CVS has decided to take these risks in the
“infield” of Walgreen’s, one of their largest national competitors.  Walgreens has responded with a very with a very different
game plan.  It is holding to its typical prototype store – a freestanding box with a consistent look, surface parking lot and a
drive up window.  This strategy has eliminated many urban sites for Chicago’s hometown pharmacy.

Another retailer, Market Foods, out of Rogers, Arkansas, is pursuing several sites in Chicago.  Its concept is a 17,000-
square-foot to 25,000-square-foot market place, which is ideal for the urban community and lifestyle center developments.  
Several cities across the country are offering sites to this retailer, as they can satisfy the urban grocery consumer with a small
store site concept.

In the past few years, the Chicago urban market has proven to retailers that if they will change their normal operating rules,
the consumers will respond.  Is this city unique?  In some ways the answer is yes.  Chicago’s urban residential growth has
been nothing less than extraordinary.  The lake setting, the culture and the urban lifestyle are attractive to all demographic
segments.  The Mayor’s office, the Department of Planning, Retail Chicago and many aldermen understand the importance
of retail growth throughout the city.  Many new developments have retail components that are mandated by zoning, and
many community groups are supportive of neighborhood retail development.  Other urban centers should take note.

If retailers want to play by the old rules and simply wait for their ideal site to come along in Chicago, the game may be over
before they step on the field.  If their competitors understand the new rules of land use, city planning and urban consumer
trends, and the retailer is willing to rewrite their rules, its will win the urban climb.  Of most importance, for those already
playing the Chicago urban retail game by following the new rules, the game has been proven to be worth winning.

Keith Lord is president and managing partner of Chicago-based
The Lord Companies, L.L.C.