By  on April 16, 2007

CHICAGO — The Mills Corp. may have bungled some of its former development projects, but Block 37 has the potential to become a premiere retail destination on State Street and launch a major revitalization of downtown Chicago retail as a whole.

Formerly known as Block 37, 108 North State Street was an eyesore in Chicago's Loop. It sat undeveloped for decades and passed through the hands of multiple developers before landing with Mills in 2002. The company had planned a major office, residential, retail and entertainment center, including a bowling alley and restaurants, but as the company crumbled due to mismanagement, it sold the development rights to the site piecemeal.

The site is a sensitive subject for Chicagoans, to say the least. But Joseph Freed & Associates, a local developer that acquired the retail development rights to the site from Mills last year, hopes to turn the tide. The company controls the roughly 265,000 square feet of retail on Block 37. Golub Co., another local developer, acquired the office and residential development rights. They expect the project to open in the fall of 2008.

Having this historic site in the hands of Chicago companies has eased the minds of retailers and residents, especially given Block 37's location as the northern hub of the Loop. The massive project encompasses an entire city block, bordered by the trendy, restaurant-packed River North neighborhood and the booming theater district. It sits across the street from the historic Marshall Fields-now-Macy's flagship, which still suffers soft sales since its conversion to the Macy's banner in fall 2006. Many retail real estate executives are optimistic that redevelopment of the site will spark a renewal on State Street, which they say is short on retail and ripe for redevelopment.

"Mills had too many other issues with the company to really focus on the development," said Sharon Kahan, a Chicago retail specialist with brokerage CB Richard Ellis. "Freed is homegrown and understands Chicago and what we need."

Still, some skepticism surrounds the project. Ross Glickman, chief executive officer of Urban Retail Properties, who was a previous owner of the Block 37 site with JMB Realty, questions how the development will be executed."You have two different developers with very different philosophies," said Glickman. "As good as both of those firms are, you have to have a true spirit of cooperation, and I hope the city is helping facilitate that. You only get one bite at the apple."

Mills gained control of the site in 2002 after a long bidding process. After the real estate investment trust landed in hot water with the Securities and Exchange Commission, it started selling interest in many of its key developments, including 108 North State Street and the Meadowlands Xanadu in New Jersey. Since it was recently bought by Simon Property Group, which closed on its $7.9 billion acquisition of the beleaguered company in early April, it no longer exists as an independent entity. The ghost of Mills, though, remains on its projects.

In March, Golub sued the company, alleging that Mills misrepresented the development to Morningstar, one of its anchor office tenants, causing Morningstar to break its lease with Golub (see sidebar). CBS, the other anchor tenant, still plans to move in. Simon, which is now responsible for the lawsuit, did not respond to a request for comment.

Though there are currently no legal disputes regarding the retail portion of the development, Joseph Freed must merchandise and brand the center using Mills' original ideas and is only able to put its stamp on the project by tweaking the merchandising plans.

"We essentially inherited the layout and the floor plans," said Paul Fitzpatrick, managing director of Joseph Freed. "Every bit of the construction has already been approved, so right now we're just working with the interior finish."

There are multiple bilevel spaces at the site, which the company touts as ideal flagship opportunities for retailers. Fitzpatrick hopes to pack 108 North State Street with affordable, upscale fashion retailers such as Theory, Ted Baker, Kate Spade, Coach, Puma and Zara, as well as strong brands such as Apple. The plans also have space for smaller specialty stores.

Working within Mills' plans hasn't been a detriment, said Freed executives. "From our perspective, it's fairly easy," said Fitzpatrick. "Because one of our executives came from Mills, we had institutional knowledge of Mills and the site. The transition into the project hasn't been too difficult."The larger challenge has been changing the perception of State Street as a whole, both for retailers and shoppers.

Joseph Freed also controls the other major redevelopment just two blocks away, at 1 South State Street, a former Carson Pirie Scott department store it is rebranding as the Sullivan Center. The store, vacated in early March by the retailer, will offer nearly 200,000 square feet of retail on three levels in the historic site and is expected to be open in the spring of 2008. A Gourmet Garage or other upscale grocer with prepared foods would be ideal for the Carson space, as would a Williams-Sonoma or Sur La Table, said senior vice president of leasing Tom Walsh.

"This is really a matter of evaluating and changing how the shopper in Chicago organizes her shopping patterns," said Stanley Nitzberg, principal at Mid-America Real Estate, a full-service retail real estate services firm. "It's incumbent upon Freed to not just do the deals that are available, but to bring in the retailers that State Street needs."

Elsewhere on State Street, other developers and economic development officials are tackling the street to capture the momentum catalyzed by Freed and 108 North State. Thor Equities out of New York, for example, recently acquired the historic Palmer House, just south of Sullivan Center, from the Hilton group, and has booted the inexpensive retailers from its first floor and is rehabbing the building to insert more relevant fashion. The Chicago Loop Alliance will launch Looptopia, an all-night musical and entertainment festival modeled after city festivals in Europe, in May to draw more attention to the growing masses of residents, students and entertainment in downtown's core.

"State already has momentum," said Michael Shields, principal at retail brokerage firm Northern Realty Group. "The challenge is recrafting the image of State Street away from dollar stores and big boxes to create an identity that's more consistent with downtown Chicago as a whole. Block 37 could change everything overnight."

"Everybody wants Block 37 to work," said Glickman. "It's the last part of the puzzle to complete."

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