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VACANCY
REMAINS LOWER THAN NATIONAL AVERAGE
Once
again, the Twin Cities retail market is flourishing, fueled by strong
demand, a diverse economy and plenty of new development that came on line
the second half of the year, most of which is fully leased. While the
nation’s average retail vacancy is 6.8 percent, the Twin Cities was well
below 5.0 percent at year-end. That’s a drop from 5.3 percent mid-year.
The market boasted 1.87 million square feet of absorption in the second
half of the year, following a modest 71,387 square feet the first half.
The market has absorbed more than 8 million square feet of retail space
since 2000.
Regional
malls reported the lowest vacancy at 2.3 percent, down from 3.8 percent
mid-year, followed by community centers, which remained steady at 3.3
percent. Neighborhood centers edged down a bit, from 7.7 percent to 7.3
percent, while specialty centers jumped from 1.6 percent mid-year to 7.5
percent. This is due to the addition of Arbor Lakes, which is not quite
100 percent leased yet. The
St. Paul central business district continues to struggle, reporting by far
the highest vacancy at 23 percent, up from 22.4 percent mid-year. Downtown
Minneapolis also lags at 12.7 percent, increasing from 10.3 percent. Both
CBDs have been hit hard by soaring office vacancies and a lack of job
growth. However, a saving grace in both CBDs is continuing strong
residential growth, which should help spur retail activity.
Due
to strong demand throughout most of the market, quoted net rental rates
are stable, and rising in high-demand submarkets. Rates at specialty
centers increased from an average of $19.94 per square foot mid-year to
$24.27, and neighborhood centers’ rates rose from $14.04 per square foot
to $18.01. Rates dropped sharply in St. Paul’s CBD, from $22.10 to
$17.68, but increased in Minneapolis’ CBD, from $28.47 to $30.57.
DEVELOPMENT,
DOMINATED BY GROCERY-ANCHORED CENTERS AND THE BIG-BOX DISCOUNTERS, CAME ON
STRONG
New
retail construction in 2003 hit 2.2 million square feet, the highest in at
least eight years. Most of the new construction was community and
neighborhood centers. The biggest retail projects were three SuperTarget
stores in Champlin, Blaine and Savage. Also, The Shoppes at Arbor Lakes in
Maple Grove, a 400,000 square foot project, is now open as the metro’s
first lifestyle center.
Many
of the shopping centers are being developed in fast-growing outer-ring
suburbs due to the strong housing construction occurring in those areas.
The new centers are providing for the expansion of general
merchandise, warehouse club, home furnishing, home improvement and grocery
stores. More than 75 percent of the new centers were grocery-anchored.
These centers are attractive to developers and other retailers, because
grocery stores have strong drawing power. Competition continues heating up
in the grocery store business.
Following Pewaukee, Wis.-based Roundy’s
Inc. acquisition of the Rainbow Foods chain from Dallas-based Fleming Cos.
Inc., Roundy’s made significant investments to reposition and revitalize
the stores to better compete with SuperValu Inc.’s Cub Foods chain. Look
for Roundy’s to open new Rainbow stores during the next few years.
Meanwhile,
Cub isn’t just sitting back on its laurels; it continues to expand and
soon will have 51 local stores. SuperTarget, Target’s grocery/discount
store concept, also is taking a bite out of the competition and will have
11 local stores by year-end. Though Wal-Mart Supercenter has not yet
entered the Twin Cities, its expanded concept is on the metro’s
outskirts. Meanwhile, German grocery chain Aldi opened its first local
stores in Inver Grove Heights, Minnetonka and Champlin. Trader Joe’s, a
Monrovia, Calif.-based upscale grocer, is currently shopping around for
locations.
NATIONAL
RETAILERS, ATTRACTED TO METRO’S FAVORABLE MARKET CONDITIONS, SCOUT TWIN
CITIES
In
addition to Aldi and Trader Joe’s, other national retailers are eyeing the local market or have landed
locations to make their debuts. National studies show retailers are
confident in the Twin Cities’ diverse economy, strong demographics and
low unemployment rate of 4.6 percent (the national average is 5.9
percent). Sales and Marketing Management’s 2002 Survey of Buying Power
ranks the Twin Cities 11th nationally in total retail sales,
compared to ranking 13th in population. CVS Drug Store is searching for sites and plans to open stores in
the first half of 2004. The company is
reportedly in various stages of negotiations to open at least 20
metro-area stores. Lowe’s Companies has its first home
improvement store location pinned down in Coon Rapids. Ikea, the large
Swedish furnishings retailer, is entering the market with a 330,000 square
foot store as part of Mall of America’s expansion.
National
restaurant chains also have landed locations, including Qdoba Mexican
Grill in St. Louis Park, Eagan and Eden Prairie, Bear Rock Cafe in Eden
Prairie and Maple Grove, Potbelly Sandwich Works in Richfield and
Pancheros in downtown Minneapolis. Crescent City Beignets, Roly Poly
Sandwiches and Zyng Noodlery are restaurants reportedly scouting the area.
Strong
residential growth in the Twin Cities is spurring much of this activity.
Some of the hottest residential markets include Blaine, Lakeville, Savage,
Shakopee in the south metro, Maple Grove in the north, Coon Rapids and
Woodbury to the east. Woodbury is particularly sought-after as Ryan Cos.
is proposing a new SuperTarget, Opus Northwest LLC and Red Development are
joining to propose a 400,000 square foot upscale lifestyle center, and
Robert Muir Co. recently received approval to develop a Wal-Mart store on
the former Prime Outlets site. That site will be repositioned from an
outlet center to a community center. Other tenants said to be scouting
locations in Woodbury include J.C. Penney, Sears, Costco and Lowe’s.
REGIONAL
MALL TENANTS SEE ADVANTAGES OF INLINE SPACE
Some
national retailers that traditionally only called regional malls home are
considering freestanding retail space for the first time. The Bombay
Company, JC Penney, Sears, Lane Bryant, Banana Republic, Ann Taylor and
Christopher & Banks have all signed inline leases. The primary reason
for this trend is retailers want to be in fast-growing residential markets
– many of which don’t have regional malls -- so they are willing to
take alternative sites. They are locating in lifestyle centers, mixed-use
projects and town center developments. A bonus for retailers is that
operating expenses for inline space are significantly less than regional
malls’.
THE
OUTLOOK
Fewer
retail projects will come on line in 2004. That coupled with the already
tight vacancy means retailers will be challenged to find high-quality
space. Much of the new construction will be freestanding buildings,
including those built for Aldi, Lowes, Walgreens, CVS Drug Store and
restaurant pads. The amount of new retail product coming on line will pick
up again in 2005.
The
continuing strong residential development in downtown Minneapolis will
spur the opening of a grocery store in the CBD in the near future.
Downtown St. Paul may also see a larger grocer and more retail services,
as that city is experiencing healthy residential growth.
Wal-Mart,
which has its Supercenter concept on the fringe of the Twin Cities – in
such communities as Cambridge, Hastings and Northfield – is expected to
debut the Supercenter concept in the metro within three or four years.
Wal-Mart is acquiring additional land near its stores, so in the future it
can expand to the larger format. This will mean even more competition in
the big discount/grocery store war.
While
many local regional malls underwent major renovations in the past few
years – adding more entertainment options like restaurants and theaters
-- some will continue to reinvent themselves. Southdale Center, for
example, plans to add a 50,000 square foot wellness center on the lower
level by JC Penney’s. Similarly, Knollwood Mall, which added Foss Swim
School several years ago, may add a health club to its tenant roster.
These types of tenants provide mall retailers with a steady stream of
traffic.
Mixed-use
developments will continue to be popular. Many include apartments and/or
senior housing with retail on the first level. Examples include The Artist
Corner at 26th and Nicollet in Minneapolis, The Kensington at 77th
and Lyndale in Richfield and Excelsior and Grand in St. Louis Park, as
well as City Bella at 66th and Lyndale in Richfield. United
Properties plans to develop a $35 million, mixed-use project at Lyndale
and 84th in Bloomington, consisting of a senior cooperative,
townhomes and a new facility for an existing Cub Foods store.
Light
rail transit eventually will impact retail. Passenger service for
the Hiawatha LRT line opens in April 2004, from downtown Minneapolis to
Mall of America. Initially, LRT will move a limited number of
passengers and won't have the traffic counts that retailers demand.
However, if an when a second or third phase opens, LRT may generate enough
traffic to create retail development near transit stations.
In
both CBDs, major advances in the retail market will not happen until the
office markets rebound. Retail lags office by about a year. Meanwhile,
restaurants and entertainment will continue to thrive near Block E and
Target Center in downtown Minneapolis and the Xcel Energy Center in
downtown St. Paul. A request for proposals for a retail redevelopment, for
example, recently went out for a site across from Xcel Energy Center.
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