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If the secret to success is location, location, location, what's the secret to finding the right one?By Sarah A. Klein
June 18, 2007Potter Palmer, the 19th-century real estate mogul who created State Street out of a narrow dirt road, understood the science of location long before it became an academic discipline.
Mr. Potter's gift was grasping the importance of creating a destination. He transformed depressed land into prime Chicago real estate by anchoring it with attractions, such as the precursor to Marshall Field's and the opulent Palmer House Hotel. In doing so, he flipped the city's commercial corridor on its axis, drawing masses away from Lake Street, then the city's busiest shopping district.
State Street remained a vibrant location for more than a century, until the developers of Water Tower Place replicated his trick in the 1970s. The lure of an indoor shopping center on a winter's day moved shoppers to North Michigan Avenue, closer to another one of Mr. Palmer's famous creations: the Gold Coast, which drew residents from then-fashionable Prairie Avenue in the late 1800s.
What Mr. Palmer seemed to understand intuitively was that geography wasn't destiny, but rather what he made of it. A desirable destination could, and still does, create a gravitational pull, luring traffic and business. Doubters need only look at Millennium Park and the many restaurants and cafés that have taken up residence in and around it.
The phenomenon underlies much of the theory of location, which developed in the 1930s and borrows heavily from Newtonian physics. At its heart, location theory is about the classic relationship between mass and distance.
"The further you are from a retail opportunity, the less likely you are to visit and shop," says Richard Greene, associate professor of geography at Northern Illinois University in DeKalb.
Customers, however, are willing to travel farther to get to a larger mass, as measured by the size of a store or the attractiveness of its contents. It's why a Home Depot draws customers from a wider radius than a mom-and-pop hardware store.
As with physics, however, mass and distance —” as interpreted by location theory —” aren't as simple as they sound.
Location theorists measure distance not only in miles, but also in terms of travel time and road quality. And the attractiveness of the business, which determines its mass, is largely in the eye of the beholder.
About 80% of people's buying habits are determined by distance, location theorists say. If traffic is congested enough around a shopping area, customers will drive a longer distance to avoid it.
"I know a lot of people who live in Lincoln Park and shop in Skokie," says Doug Jones, senior mapping specialist in the Chicago office of CB Richard Ellis Group Inc.
ENTER TECHNOLOGY
The distance customers will travel varies with the industry. Downtown sandwich shop owners, who depend on foot traffic, don't locate themselves more than two blocks from their customers. Like hotel developers, they look for spots close to office towers because they generate more business. Hospitals generally are located near older populations, while chiropractors shop for office space in neighborhoods with young residents.
Mapping software and the computerization of demographic data have made the job of measuring population characteristics and travel time easier, says Tony Rickard, a North Carolina-based real estate broker who sits on the board of the Realtor Land Institute, a Chicago trade group. He used to do site selection work for McDonald's Corp., figuring out the radius from which restaurant sites would draw customers during morning rush hour, lunchtime and afternoon rush, driving in his car and using a formula that considered speed, distance and time.
If he were doing the same work now he would use a computer program. "It takes two seconds," he says.
Having such data helps developers identify good locations. It even helps determine what kinds of businesses work together. For example, a good location for an office supply store would be near a Starbucks that attracts office workers.
Apparently less complementary business combinations even work, says Simon Thompson, director of commercial marketing for Environmental Systems Research Institute Inc. The Redlands, Calif.-based company develops global mapping software used by commercial real estate firms and other businesses to identify prime parcels for development.
"The common logic was that you couldn't have two coffeehouses close to one another," he says. In fact, that's not the case. What matters is the type of customer: Does the coffee shop cater to those in a rush, or those who sit down? If they appeal to different customers, they do fine side by side.
Despite new technologies, location theorists say nothing can replace driving through a neighborhood to determine its desirability. Shoppers want to go where they feel comfortable and where they see other people. And that's an aesthetic, subjective judgment.
"It is amazing how much you perceive when you are driving around," Mr. Thompson says. People are always asking themselves, "Do I really want to be here?"
Potter Palmer, we're guessing, asked himself the same question.
©2007 by Crain Communications Inc.