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Kroger shops for land: Grocer gathering property for full-size downtown store

June 12, 2006

Downtown residents might finally get their second full-service grocery store.

Cincinnati-based Kroger Co. has purchased an acre of land immediately west of its store near the intersection of 16th Street and Central Avenue in hopes of razing the existing store and replacing it with a new, and much larger, grocery.

"We would like to build a brand new store that incorporates all of the amenities that [we] have at our newer stores," said Jeff Golc, a Kroger spokesman.

Neighbors are thrilled by the possibility. They've long complained that the 35,000-square-foot O'Malia Food Market in Lockerbie Square is the only full-service grocery serving downtown residents, despite the proliferation of residential development in the area in recent years.

They also say the existing 22,000-squarefoot Kroger near 16th and Central needs remodeling and lacks many of the conveniences of other full-service supermarkets, such as a flower shop and pharmacy.

But at least two big hurdles stand in the way of the earthmovers.

Ideally, Kroger would acquire at least the five parcels of real estate immediately north of the land it just purchased before it begins construc- tion, giving it roughly four acres of land on which to build.

King Park Area Development Corp. owns one of them, however, and says it won't sell unless Kroger builds a store the neighborhood likes.

And King Park's vision for the store is much different from Kroger's. The group wants a mixed-use project that's in sync with its urban setting, while Kroger's plotting a cookie-cutter, 60,000-square-foot suburban-style store.

"We will probably be the last ones to sell to make sure the neighborhood has as much opportunity to provide input as possible," said Robert Frazier, the group's executive director.

Another one of the properties is tied up in a messy foreclosure dispute. It was scheduled for a sheriff's sale last month, but a successful appeal of the foreclosure has left the property's future in limbo.

The legal fireworks could easily stretch out several months unless a settlement is reached, said John Kolas, an attorney with the Indianapolis firm Slaughter Kolas & Centers, who represents the building's owner.

A vacant apartment building sits on that property. Vacant apartments also sit on two other parcels Kroger wants to buy. The owners of those properties and a small parcel immediately to the south did not return calls or could not be reached.

If Kroger is unable to assemble a goodsize chunk of real estate, it will likely look elsewhere downtown. It typically requires eight or nine acres to build a new store.

"We're still looking at all different options," Golc said. "[The property we just purchased] is not large enough to build a new store."

Golc would not share the purchase price of the land. Real estate sources said vacant land in the area usually sells for around $250,000 per acre.

The median construction cost for a grocery store is now $125 per square foot, according to the Washington, D.C.-based Food Marketing Institute. That would put the construction cost for a 60,000-squarefoot store at around $7.5 million.

Neighborhood reaction

Neighbors have their fingers crossed they'll score a new place to buy tenderloins, but they would prefer Kroger not plunk a fit-for-the-suburbs asphalt monster in the middle of an urban neighborhood.

"We'd love to see Kroger expand and improve at that location in an urban-sensitive manner," said Amy Kotzbauer, president of the Near North Development Corp., which is just north of the existing grocery. "A typical suburban, 60,000-square-foot Kroger with a gas station out front is not going to work."

King Park residents agree.

They even went so far as to hire Indianapolis-based Eden Land & Design Inc. to draft detailed plans for what they'd like the new Kroger to look like. They'd like mixed-use development with residential space as well as additional retail space for more small businesses.

They shared their designs with Kroger in the fall.

"Everybody wants the Kroger there," said King Park's Frazier. "People just want to try and help in the decision-making."

He added that the neighborhood hopes to "work with [Kroger] to make sure a new store goes in."

Kroger's Golc acknowledged the conversations with King Park, but said, "We are looking at just amassing enough [land] for Kroger Co. and the store."

Steve Zinkan, a real estate developer who works with Kroger on local projects, declined to comment on the recent purchase of land. But he told IBJ in November that adding residential components or space for additional retailers to a downtown grocery project would be a dicey proposition.

"We are not accustomed to having retail on the first floor and residential on the floors above it [in Indianapolis]," said Zinkan, a partner at the Indianapolis firm Zinkan & Barker Development Co.

What about adding space for additional retailers? Same answer.

"It's a great concept," Zinkan said. "It just won't happen."

The problem: economics. Big supermarkets require big parking lots. People may walk or bike on a nice day, but the vast majority of people still drive cars to the grocery store.

And if there isn't enough surface parking because of additional retailers taking up the land, that means underground parking or a parking structure.

Each costs more than $11,000 per space, meaning they'd end up putting the cost of bananas on par with the cost of gold.

"You can't sell milk for $10 a gallon," Zinkan said.

Risky move?

Some say the area is ripe for a new place to pick fruit, but others say building another downtown grocery is rife with risk.

"We see it as a viable area for new growth," said Golc, who would say only that the existing store at 16th and Central "performs well."

A demographic analysis of the area prepared for IBJ by the local office of St. Louis-based Colliers Turley Martin Tucker supports Kroger's position.

The average family income within a three-mile radius of the location is projected to rise from nearly $36,000 to almost $39,000 within five years, as more affluent residents move downtown. As a result, disposable income for residents is projected to shoot up 8 percent.

Downtown's population is also on the upswing. Roughly 1,750 residential units will be completed downtown within four years, according to Terry Sweeney, vice president of real estate development for Indianapolis Downtown Inc. Approximately 825 of them should be ready within the next year.

"With the number of new residential projects that have recently been completed and the number that are in the pipeline, hopefully, it would contribute to making sense for [Kroger] to reinvest in the neighborhood and update their store," Sweeney said.

Others, however, are skeptical.

"The consensus of opinion in the industry is that Indianapolis is grossly overstored," said Joseph Lackey, president of the Indiana Grocery and Convenience Store Association Inc.

Lackey conceded the boom in downtown residential development works in favor of Kroger's opening a larger downtown store, but he said the demographics alone won't make it a success.

Not to mention, say others, many of the new urbanites are younger couples and empty-nesters who like to eat out, not families that stock up on groceries once a week.

"There's a lot of talk going on along the 16th Street corridor and a lot of initiatives are under way, so you have to think demand is increasing, but at the same time there are some challenges in that neighborhood," said Chris Palladino, director of neighborhood development and finance for Indianapolis-based Mansur Real Estate Services, which is developing two properties with retail components in nearby Fall Creek Place.

One of the developments, at the corner of 25th and Delaware streets, offers first-floor retail with residential above it. Four of the project's nine units have been presold.

Mansur also hopes to break ground on a 12,000-square-foot retail complex at 22nd and Delaware this year, but has yet to sign a tenant.

The big roadblocks: small traffic counts, too many one-way streets and limited parking.

"Even though this neighborhood is getting better and has come a long way in the last 10 years, if retailers use their traditional economic models for site selection, they're still going to see the demographics are not as strong as they'd like them to be," Palladino said.

Kroger was the nation's second-largest grocer in 2005, behind only Wal-Mart Stores Inc., according to the Food Marketing Institute. It had $57.2 billion in sales.

Kroger operates 47 stores in central Indiana, including 28 in Indianapolis. It employs 8,000 statewide.
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