MNCAR Focus/Twin Cities Retail Market Gaining Ground

Twin Cities Retail Market Gaining Ground



 

Twin Cities Retail Market Gaining Ground

 

ĎA’ properties in strong trade markets are performing well while weaker less well-positioned centers continue struggling

 

By Liz Wolf

 

Twin Cities retail centers made some strides in 2012.  In fact, the retail market boasted its strongest year since the recession with a burst of activity in second half.  Bloomington-based Cushman & Wakefield/NorthMarq reported 802,000 square feet of positive absorption in second half, resulting in a drop in vacancy to 8.3% from 8.9% at mid-year.

 

“A lot of deals happened. A lot of the junior boxes were backfilled and people are feeling pretty optimistic moving forward,” says Stefanie Meyer, senior vice president/principal at Mid-America Real Estate-Minnesota LLC. However, she says it’s not across-the-board improvement.

 

“It’s still bifurcated,” she says. “It depends upon where you are. If you’re at the regional trade areas—Ridgedale, Rosedale, Southdale, 50th and France, Grand Avenue – there’s not a lot of space available anymore.”

 

However, Meyer says if you go to some other retail markets, like near Northtown Mall in Blaine, there are still boxes available. “Or if you go to the outer-lying areas like Otsego or Oakdale – where Targets and grocery stores were following the residential before that stopped – you’re still seeing some vacancies out there.”

 

Tim Igo, senior agent at St. Paul-based Suntide Commercial Realty Inc., agrees, saying, “The landlords are starting to be back in control on the “A” sites… but for weaker centers, what I see happening is they’re just being passed up by the nationals and regionals. It’s more of the mom-and-pop, start-up businesses going into those centers.”

 

Jen Helm, director of brokerage services at Cushman & Wakefield/ NorthMarq, believes some of the struggling shopping centers will be redeveloped or repositioned. “Either it’s not going to be retail any longer or you really need to put some money into it and redevelop the site to make it more attractive and re-tenant it,” she says.

 

Community centers reported most activity

The majority of leasing activity during the past six months occurred in community centers. “Big boxes and junior boxes are active again and back in the market filling holes that were left after the recession,” Helm says.

 

Noteworthy leases included Becker Furniture World opening in Maple Grove and Woodbury. Trader Joe’s opened in Bloomington. Forever 21 opened an 80,000-square-foot, flagship store at Mall of America. H&M leased space at Calhoun Square, Big Lots! opened in Bloomington, and Cost Plus World Market returned to the market with locations in Bloomington and Roseville.

In new development, Walmart opened three Twin Cities stores in Lakeville, Burnsville and Brooklyn Center, and Helm says the giant discounter is actively scouting the metro for more sites, including Andover and Cottage Grove. Also, Target opened in Inver Grove Heights. Other bigger-box retailers expanding in the market include La Fitness, TJ Maxx/Marshalls/Home Goods, Sports Authority and Staples.

 

Don’t leave out small-shop space

Many regional and national small-shop retailers are very active, especially in urban core or first-ring suburbs, reports Colliers International | Minneapolis/St. Paul. Competition for these spaces is heating up and rental rates are rising. To meet demand, developers are pursuing small land sites near existing retail to build small-shop space. Active retailers include Aldi, Dollar Tree, Five Guys, Smashburger, Caribou Coffee and Starbucks, cell phone retailers, Jimmy John’s, Goodwill, and Cherry Berry, Yogurt Lab and other yogurt shops.

“Small-shop groups are most active and paying good rents, but there’s not enough new development for these retailers,” Helm says.

 

Franchises are back

Franchise activity is also picking up. “Since January, there are more people looking,” says Igo. “It looks like the money has loosened up for franchise companies to get financing for their people. Firehouse Sub has picked up tremendously. We just had the corporate guy in from real estate, and we approved three, four or five sites and have activity with franchisees. Clothes Mentor is also doing very well nationally and picking up a lot of franchisees.”

 

Deals are happening, but they’re taking longer and retailers are “cautious”

Meyer says brokers are seeing much more scrutiny in the real estate deals. “Before the recession, when you negotiated a letter of intent and had a deal, it was pretty much done,” she says. “Today, until that lease is signed, there are so many deals being pulled. There’s more scrutiny. As brokers, we need to do more work than ever in preparation for these deals to get approved when it comes to what the sales are around the sites they’re looking at, what others are paying for rent, demographic research… So much more is going into the decisions.”

 

Right-sizing trend continues

An ongoing trend is many retailers are rethinking their real estate strategies and looking at downsizing or right-sizing their stores; this is due to challenges in the economy and changes in technology. Walmart, Target, Staples, Office Max and Best Buy are examples. Best Buy closed some of its stores in the Twin Cities and is trying to sublease them. Also, a pending merger between Office Max and Office Depot could result in a shakeup of stores both locally and nationally.

 

“Office Max is downsizing and we have a ton of deals going with them,” Meyer says. “They used to be 23,000 square feet and now they want to be 14,000 square feet.” She says the pending merger between the two retailers probably won’t happen for nine to 12 months.

 

New development moving forward

While most of the new retail construction occurring is multitenant, smaller-shop buildings, a handful of large retail developments are getting ready to start construction in 2013, including phase II of Shingle Creek Crossing in Brooklyn Park -- the former Brookdale Center site where Walmart is now an anchor. Meyer says LA Fitness is under construction and three multitenant buildings are underway; each is 70 to 90 percent preleased.

 

Construction began on the Promenade of Wayzata, which is being developed by Presbyterian Homes & Services. Its $125 million, first phase will include two five-story buildings with ground-level retail shops and 225 senior-living apartments. Lunds will anchor the retail.

 

Also, Eagan has two planned, large retail developments. One is an outlet center that will be developed by Paragon Outlet Partners, which recently announced Off 5th as its first confirmed tenant for the 400,000-square foot outlet center set to open in 2014. The Gap and Banana Republic are also lined up as tenants.

 

“Outlets throughout the country are hot right now,” Meyer says. “They’re the highest sales-per-square-foot center when it comes to any centers.”

 

Also planned for Eagan is Central Park Commons, a 500,000-square foot center proposed for the former Lockheed Martin site. CSM Corp. owns the 50-acre site and has drawn strong interest from potential retailers including Target, Walmart, TJ Maxx, Trader Joe’s and Whole Foods.

 

What does 2013 hold?

Local experts expect a slowdown in activity in first-half 2013 and are predicting between 500,000 and 700,000 square feet of positive absorption for the year. Much of the activity will likely occur in community centers and regional malls.

Caution remains due to predicted increases in tax rates and healthcare costs, which could diminish consumer confidence spending, Colliers International reports.

“We’re seeing improvement, but 2013 won’t be a blowout year,” Meyer says. “It’s not throttle down. People are still cautious. Deals are taking longer.”