How entrepreneurs create hot spots

New businesses turn bad neighborhoods into great business locations.

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Wilke at his furniture store in Milwaukee

(FORTUNE Small Business) -- "Are you crazy?"

That was his wife's withering assessment of the spot he had chosen to open his first store, Jamie Wilke recalls, and she probably had every reason to question her husband's sanity. Oconomowoc was a faded resort village in central Wisconsin. Many of the stores in its shabby downtown sported "Going Out of Business" signs. That's where Wilke was determined to open a furniture store. Understandably, his wife was worried. Was there a single soul eager to buy his wares in Oconomowoc? Would he go broke?

Hardly. Wilke's store, Jamie Wilke Interiors, opened fall 2000, and from the start the place was jammed with customers. Oconomowoc lies in the heart of the state's Lake District, and as it turned out, lakefront development was booming. The region's newcomers - young urbanites and wealthy retirees - were eager to outfit their second homes with his edgy, sophisticated pieces.

Call him a retail pioneer. Wilke is one of those rare entrepreneurs who can find a hip place before it's hip. Some pioneers plunge into crime-ridden slums, risking not just their capital but their lives. Others seek out lonely rural locations and hope that the market follows them to the end of their dirt road.

Not all are in it for the money. Some see their entrepreneurship as a social responsibility wrapped in capitalism. That was partly the case with Lauren Thomas, 30, and her mother, Debra Thomas, 54. Last summer, the two opened Ladels, the only children's bookstore in Detroit.

"This city needed a place like Ladels," Thomas says. "We just knew it before the city did."

Many retail pioneers seem to have a sixth sense about up-and-coming neighborhoods - but there's also science involved. Some pioneers study sidewalk traffic or the cars parked on the street. Some meander around watching shoppers make purchases (beer or wine, sushi or a sub). Still others pore over real estate data. After reading about a spurt of home-buying activity around Oconomowoc, Wilke drove around, poking into the coves around its lakes.

"Every other house was undergoing renovation," he says. "People were pouring lots of money into these properties." For him, that was evidence enough to gamble on.

Four years ago, John Longacre was a 31-year-old real estate investor who stumbled across a boarded-up bar in a rundown neighborhood. For two years, the bar had been for sale. Its windows were barred and filthy. Trash drifted into every corner on the block. Still, Longacre thought the place had possibilities. Housing in the neighborhood was affordable. Newcomers were renovating the row houses, many of them historic. Nearby was a busy hospital. Public transportation was accessible. To Longacre, it was a chance to test his mettle as an urban entrepreneur. He bought the bar, replaced the tiny plexiglass portholes with huge custom-made windows, and installed fancy light fixtures.

"People warned us they'd be stolen," he says. "They weren't."

In 2003, he opened the South Philadelphia Tap Room, featuring craft beers and wild boar burritos. Popular with young professionals, the bar is busy every night. Unprofitable for its first two years, the Tap Room is a moneymaker these days. In fact, in January, Longacre expanded, doubling the bar's size to 2,000 square feet. Area property values have soared, and dozens of new shops have opened.

Of course, trailblazing poses challenges. Customers may be leery at first to venture into unknown neighborhoods, especially if the areas have a reputation for crime or vandalism. Local vendors can be scarce. Town or municipal services are often limited or nonexistent. Wilke spent $10,000 on flowers and greenery to spruce up the exterior of his new store. He also swept the sidewalks and curbs in front of his store daily. (Oconomowoc was a bit lax about keeping its downtown tidy.)

Pioneers aren't settlers, though. In October, Wilke opened a new store in the Third Ward, a rapidly gentrifying commercial district in Milwaukee. Mirroring a shift that's happening all over the U.S., suburban empty nesters are selling their four-bedroom homes and snapping up condos in the city.

His wife's reaction to his latest proposal: "There are rats bigger than our children!" This time, Wilke sees her skepticism as a good omen.  To top of page

Check out FSB's full list of the 100 Best Places to Live and Launch - and stop by our forum to share your thoughts on our selections.

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