People who know the commercial development industry know the challenges it faces, the headaches of dealing with older structures, the high cost of building new and so forth.
But in public-private partnerships, the two most important variables are time and money, says Peggy Blanchard, the chair of the International Council of Shopping Centers’ Central Divisional Public Sector Alliance. The more time it takes a developer to get a project up and going, the less likely he is to lean toward a community that throws up a number of obstacles.
“The landscape of development is changing, and we have to be prepared in order to meet those challenges,” said Blanchard, who is also economic development director in the city of Barrington.
She was among speakers at the council’s annual Downstate Illinois Alliance Luncheon, held this year in Columbia, Ill. The Metro East event traditionally brings together a number of players in the industry, from builders to municipal leaders to economic developers to retailers to legislators.
This year, a panel of experts offered insight on how to drive retail development in the region. They reflected extensively on a locally generated report that shows an estimated $1.2 billion annual “leakage” of sales in Metro East because of its failure to attract some retailers. According to the same research, St. Louis City and County enjoy a surplus of $800 million annually. In other words, southwestern Illinois appears to be losing much of its retail money to Greater St. Louis.
Columbia Director of Community and Economic Development Paul Ellis said the annual leakage by individual Metro East counties is: $158 million for Monroe County, $329 million for St. Clair County and $267 million for Madison County.
“That’s a lot of sales going away,” Ellis said. “Everything from motor vehicle parts to home furnishings stores to electronics and so on.”
The state in general, he said, fares poorly. Illinois has an annual leakage of $10 billion, compared to Missouri’s surplus of $1.2 billion and Indiana’s surplus of $3.5 billion.
The research was pulled together by Chad Holland, managing broker/owner for CR Holland commercial real estate in O’Fallon.
The shopping center council brought together several people to discuss ways to cut down on the leakage.
Mark Kohl, the vice president of development for Drury Development Corp., said Illinois is fighting many perceptions, some of them overstated.
“We talk to people across the country, to find out where they are developing, etc. We had a conversation recently with a restaurant group … and they said, ‘We’re building just about everywhere but Illinois.’ We asked the question, and it came back to construction costs, labor costs, bureaucracy, impact fees and finally taxes. Any one of those things is an impediment. Whether it’s the truth or not, it’s out there. It’s tough to break. And we hear it on many occasions.”
Stephen Bell, a founder of Tricorp Management Co., which runs about a dozen TGI Fridays outlets, said he believes the biggest challenge to development is the sheer variety of competition. The casual dining industry, he said, is running up against the categories of quick dining (fast food), fast casual (like Panera’s) and a relatively new concept of smaller, serve-yourself restaurants.
“It’s getting very crowded in the dining segment,” said Bell, who added his best year in 22 years in business was the pre-recession 2007. “We’re now at the point where we’ve kind of bottomed out and looking for better days. You’re not going to see as many (casual dining) restaurants expanding as they would have six or seven years ago.”
One major exception is the new TGI Friday’s in Fairview Heights, which is planned to be built as a freestanding facility by the fourth quarter of this year, pending permits. It would be the first one his company has built since 2006 and would be a new prototype, a slightly smaller version that is increasing in popularity.
He expects the overall investment to be in the $3 million range.
“What we like to do is look at, at least a one-to one investment. If we invest $3 million we want to do at least $3 million in sales. Because of our past history with Fairview Heights, and our knowledge of the economics, we feel that store should be a good store for us. We typically do better with free-standing locations than we do with in-line locations.”
Bell said that during the next several years his company is also expecting to have to “reimage” most of his franchised stores, investing $500,000 or more in upgrades.
“It’s a tight-margin business, and I think there is a general evolution in food service as well,” he said. Many factors affect the Illinois retail environment, he said, mentioning specifically the Internet, governmental controls, competition, smoking ordinances and video gambling.
His particular business looks for a trade market with median household income of around $75,000 and population based of at least 100,000.
Dan Gibson, who is vice president at Kimco Realty Corp., dispelled the notion that retailers can’t be gotten. He is tasked with acquisition, disposition and redevelopment of shopping centers throughout a seven-state territory in the Midwest, including in Southern Illinois. He oversees an 80-center, 15-million-square-foot region.
“Are retailers avoiding Southern Illinois? No. Retailers are in this to make money and if you can show them how to make money they’ll be there,” Gibson said. “Getting over some of the hurdles, generating bigger volume, is what you have to show.”
Larger retailers that once paid a lot of attention to housing starts and served as anchors of shopping developments are now “retrenching.” They are not building as many units, or consolidating with other companies, or the structures they are building are smaller.
“They are not putting up bigger footprints. Look at the office supply business. That used to be a 25,000-square-foot box. Today, it’s 12,000 to 15,000. Office Depot is opening up some 6,000-square-foot locations,” Gibson said.
Location remains all-important, but so does efficiency. His company helped relocate Sports Authority to a more visible site in Fairview Heights, and suddenly people noticed, he said.
“The store management has had people coming in the store saying, ‘I’m so glad you’ve opened a store in Fairview Heights.”
Sports Authority had been in the community for decades.
“Maybe it’s not about bringing the new stores. Maybe it’s about being more efficient with what you do have,” Gibson said.
Retailers who once paid $25 a square foot to build are not as likely to do so today, Gibson said.
“We have to generate a certain return. Retailers don’t mind spending money and will spend money all day long as long as they get that return,” he said.
Communities have to become partners with the builders, he said.
“Open up your toolbox and show us what tools you have to help us,” Gibson said.
Todd Berlinghof echoed the sentiments about the limited ability of developers to set their rental costs.
“When rents in 1985 are the same as they were in 2010, things have changed,” said Berlinghof, a partner in Hamilton Partners, the largest private commercial real estate development partnership in Chicago.
Shopping centers builders are strafed by competition from on-line merchants.
“When the Internet showed up I saw even more of my tenants disappear. More of the mom and pops that I used to lease to went away because they couldn’t compete,” he said. Fewer developers are building sites on spec because of leasing difficulties, and those who are building are generally doing it smaller, he said.
Berlinghof is an advocate of the Main Street Fairness legislation passed by the U.S. Senate, which calls for sales taxes on Internet purchases to level the playing field with brick and mortar businesses. The measure is on hold in the House, with critics fearful of the tax connotations.
Peter Sheahan, another member of the panel, offered a generally positive view of Southern Illinois’ potential. He is a founder of St. Louis-based NAI DESCO and has worked with dozens of regional and national retailers in the sale and lease of shopping centers.
“Southern Illinois is a great place to do business and a lot of the retailers we work with are incredibly happy with the markets over here. You have some of the highest-performing stores in all the (St. Louis) MSA. You have the Top 2 Target, you have the Top 2 Best Buy, Menard’s is doing incredibly well. Kohl’s, one of their best stores, is over here. There is a lot of good stories over here, it shouldn’t be all gloom and doom,” he said.
Sheahan said he’s had developers tell him the labor cost in general in the metropolitan area is 22 percent higher than the rest of the country, which affects both sides of the river.
“When you’re competing nationally for sites, that 22 percent makes a difference,” he said.
Some retailers interested in St. Louis have to be convinced to make Metro East part of their investment. They sometimes don’t understand the crossover nature of shopping patterns in the Bi-State.
“There’s an education part when you’re teaching the retailers. You can be as successful in Fairview Heights as you can in Baldwin, Mo.,” Sheahan said
Rich Sauget Jr., the mayor of the town of Sauget, offered the most regional view of development and an experienced one — he once owned one of the most profitable Quizno’s stores in the nation before the economic tides changed. He joked that he made a small fortune but started with a larger one.
“Things in the restaurant business tend to go in waves,” he said.
The experience taught him the value of flexibility and adapting. The best thing for a municipality to do is be ready for visitors.
“Maybe the IKEA is not what you want in your town, but if you put down exactly what you want and you have it set up and you have everything in place and everything in line, you have your board members (cooperating), then you have the ability to act and act quickly. From the experiences I’ve had, whenever I have the podium in front of the retailers or the developers or the Realtors, you have a small little window (of opportunity) because there are communities right next door looking for the same thing.”
Sauget, who serves on the MidAmerica Workforce Investment Board, sees value in regional cooperation.
“From my perspective whenever a neighboring community — I guess the word would be competition — wins (a new business), it’s a win, it’s a win for me, it’s a win for all of us. We have to promote our community, but we also have to promote the community next to ours. A rising tide will raise the boats for all of us,” he said.
A couple of legislators were present to offer their view on what it will take to lure business.
State Sen. James Clayborne, D-Belleville, said access and highways are a big asset. So is regional cooperation, he said.