Twin Cities retail market is strong; but lack of space is pushing rates to new highs as concepts compete for prime locations
By Liz Wolf
The Twin Cities retail market is seeing strong demand and has given a stellar performance so far in 2016.
“We have low unemployment and disposable income is pretty high these days,” says Stefanie Meyer, principal at Mid-America Real Estate - Minnesota LLC. Retailers are looking to take advantage of healthy market conditions and looking to enter the market or expand locations.
“We’ve seen an influx of activity over the last 18 months to two years in all sectors, from the quick-service restaurants to junior-box space to medical clinics. It seems that every side of the business has seen a major focus on opening new stores. The one pretty obvious category that’s not expanding right now is apparel --like Gap and Christopher & Banks. That’s the biggest concern.”
Market has returned to pre-recession levels
After a record-breaking 1.1 million square feet of absorption in 2015, Colliers International | Minneapolis-St. Paul reports a 4.4% vacancy rate in first-quarter 2016. http://bit.ly/2aqbxGz
The company projects strong absorption through year-end, with 1.3 million square feet of retail space under construction.
Bloomington-based Cushman & Wakefield/NorthMarq (CWN) reports that the metro’s improving economy and increasing consumer spending are driving retailers to expand. However, the shortage of quality space -- due to the lack of new construction – and escalating rents are challenges facing retailers. http://bit.ly/2atfxod
Despite modest absorption in the first half, the vacancy rate -- at 6.7% -- has reached pre-recession levels, according to CWN. The vacancy could drop below 6% by year-end, with nearly 1 million square feet of absorption projected.
“It’s tight and expensive and I think we’re past recovery,” says Jen Helm, senior director of brokerage services at CWN. “I think it’s better than what it was in 2006 in the heyday.”
High-demand trade markets see most activity
“The market is hot and active but it’s specific,” Helm adds. “Minnetonka, Edina, Plymouth – those are the areas where it’s hard to find space and you’re going to get the best rents.”
Ian Halker, senior associate with the retail group at Colliers, agrees that the strongest trade markets are tight. “We’re seeing a very high number of retailers wanting to come into the market, but frankly, we’re having a difficult time finding spaces for them that fit their requirements in the top-tier retail trade areas.”
He points to the Ridgedale trade area in Minnetonka at a 0.1% vacancy rate, Eagan Town Center at 0.8% and Eden Prairie at 1%. However, the good news is these tight conditions are giving new life to “B” centers.
“The tight market is driving retailers to look at sites they may not have looked at before,” Halker says. “B locations are getting a lot more looks.”
Numbers don’t tell whole story
CWN points out that while construction has picked up momentum, it’s nowhere near pre-recession levels. Also, much of what’s being built is smaller in scale—including mixed-use, residential projects with a retail component—compared with past cycles where developers built big suburban shopping centers.
“The low absorption doesn’t tell the right story, because we’re not building these big power or community centers anymore because we don’t have the land,” Helm says. “We don’t have the space and we can’t afford to do it. So we’re building these small buildings, which don’t get tracked, so it really doesn’t show the activity in the market.”
“Stuff that’s being developed is more niche and it’s tenant-driven,” Halker adds. “New development -- minus Woodbury and Eagan-- is predominantly outlot development – maybe a Starbucks, a fast-casual restaurant, a dental clinic.”
The two biggest developments underway are Central Park Commons in Eagan, anchored by Hy-Vee, and City Place in Woodbury, anchored by Whole Foods. Once these two developments are complete, there are no large-scale retail projects on the horizon, CWN reports.
Who’s most active and what are hottest trends?
Grocers compete in a crowded field
The grocer market is showing no signs of a slowdown. Active grocers include Hy-Vee, Fresh Thyme Farmers Market, Aldi, Jerry’s Foods, Whole Foods Market, Trader Joe’s, Lunds & Byerly’s, Cub Foods, and Kowalski’s Markets. CWN reports that Lucky’s Market, 365 By Whole Foods and Meijer’s are also scouting locations, while food co-ops are also expanding. The question is how deep is the market?
“We’ve been waiting for the fallout for years,” Helm says. “Rainbow Foods left and I think it’s going to be who’s next? Who’s on the watch list to start closing some stores?”
Fitness craze continues
Fitness concepts are on hunting for space. Halker says they range from big fitness centers like Lifetime and LA Fitness, to studios like Corepower Yoga, PureBarre, and Club Pilates, to specialty centers like OrangeTheory Fitness and Soul Cycle. Planet Fitness, Xperience Fitness and Crunch Fitness are also seeking sites.
Quick-service restaurants (QSR) scout locations
Active QSR restaurants include Piada Italian Street Food, Zupas, R Taco, Punch Pizza, Pancheros Mexican Grill, Five Guys Burgers and Fries, Naf Naf Grill, Freshii, Chick-fil-A and Shake Shack. National QSRs are willing to pay some of the highest rents the market is seeing.
Coffee shops compete for prime corners
As Tim Hortons and Dunkin’ Donuts announce they’re entering the market and have sites lined up, there will be intense competition with Caribou Coffee, Starbucks and Dunn Bros.
“We’re very active with Starbucks,” Meyer says. “They have more deals than I can even put my head around.”
And don’t count out smaller, local coffee shops either. “You’re going to see a lot of local mom and pops who are coming on strong, like Spyhouse Coffee Roasters,” says Andrea Christenson, vice president at Cushman & Wakefield’s Minneapolis office . “There’s a huge market for people who are anti-chain coffee house.”
Discount-driven concepts are active
Discounters Nordstrom Rack, Saks Off 5th, T.J. Maxx, Marshalls and J. Crew Mercantile are aggressively looking to add stores.
How high can rates go as retailers compete for space in a tight market?
Rates at newer, small-shop space at the best-performing centers in high-demand trade markets are in the $60-per-square-foot range, which is a new threshold, CWN reports. High-demand markets include Edina’s France Avenue, St. Paul’s Grand Avenue and Woodbury’s Radio Drive.
“We’re seeing rents we’ve never seen before at main corner, tear-down gas station sites,” Meyer says. “I just don’t know how they can sustain that long term. But a lot of these are merchant builders, who are building it and flipping it, because the retailer’s credit is so good. And today there are so many buyers for that.”
Are increasing rates pushing out locals?
Colliers reports that national retailers are dominating the local market as nationals have pushed to expand.
“When the rents are so high, it’s one thing for a national concept to be able to duke it out with another national retailer and start to drive up rents, but if you’re the local individual… it’s tougher to get to some of those rent thresholds and feel comfortable,” Halker explains.
Recycling of tired concepts
The recycling of older concepts will likely continue, offering retailers the opportunity to expand or enter the market, CWN reports. Total Hockey, Sports Authority, Old Country Buffet and Hancock Fabrics filed bankruptcy and are closing stores. Golden Corral is already backfilling several Old Country Buffet locations while PGA Tour Superstore took over a former Sports Authority in Minnetonka to make its entrance into the market. Other retailers showing interest in backfilling some of these vacancies include Total Wine, Hobby Lobby, PetSmart, Pet supplies Plus, and several grocers.
Seeking ways to compete with e-commerce
“The big thing right now is how do you differentiate yourself and how do you become special?” Christenson says of bricks-and-mortar stores. “How do you get people to walk in the door so you can compete with online retail?... It’s about the experience, the knowledge of the staff, a reason to go in vs. the convenience of having it delivered to your house. And you have to make it somewhat social, too. People have to walk in and feel good.
“Also you need to remodel. You need to freshen it up,” she says of retailers’ space. “You have to stay relevant. Nowadays you can’t be reactive; you gotta be proactive. What’s the next thing? You have to get out in front of it.”
Posted at: 9:24 am on July 28th, 2016