This article first appeared in the April 2012 issue of Heartland Real Estate Business.
The retail market in the Twin Cities turned the corner in 2011, despite economic uncertainties. Positive absorption helped drive down the vacancy rate from 9.8 percent at the end of 2010 to 8.4 percent at the close of 2011. The improving vital signs are providing strong evidence that retailers want to do business in this market due to its very healthy demographics that include high household discretionary income, a highly educated workforce and a large concentration of Fortune 500 companies.
The Twin Cities is outperforming many other retail markets nationally. One reason for the rise in leasing activity is that the gap in expectations between landlords and retailers in lease negotiations is narrowing, making it easier to complete deals. Fewer Class A spaces are available; the “cherry” sites have been taken.
Seizing their opportunity
Expanding retailers have taken advantage of market conditions and snagged premier space in the strongest trade markets. Those retailers who hesitated missed the opportunity. Top-performing centers in prime markets are now gaining pricing power, while other centers are still offering aggressive leasing deals.
Community centers, which posted a 7.5 vacancy rate at the end of 2011, continued filling big-box vacancies. The market started with 80 vacancies in early 2010 and is down to 61.
Approximately one-third of vacancies are good retail sites and will likely be leased to expanding retailers. LA Fitness is actively looking for sites, and so are thrift and discount stores. Big Lots opened three new locations and Goodwill continues expanding.
Walmart is active with three stores under development, a fourth planned and two others proposed. The giant discounter also is considering redeveloping existing buildings.
Noteworthy leasing deals include Herberger’s department store at Southdale Center in Edina, Home Goods in Maple Grove, Becker Furniture World in Maple Grove and Roseville, Whole Foods in Minnetonka, and Bed Bath & Beyond in Roseville.
Life after dark
Meanwhile, less sought-after space may be repurposed into non-retail uses like medical, fitness, schools or churches. Landlords have had to consider uses that they normally would not during healthier market conditions.
Some shopping center owners held on for a couple of years and finally conceded to more unconventional users to backfill space. For example, value/thrift concepts, once not so desirable to landlords, are expanding and moving into better locations as consumers remain price-conscious.
Another hot trend: Medical clinics and outpatient facilities, which want to be highly visible and accessible for patients, are leasing high-profile retail sites in locations previously unattainable and at more affordable rates than newly constructed buildings. Park Nicollet Clinic leased a former Hollywood Video in Lakeville and converted a former Movie Gallery in Woodbury into an urgency room.
However, some of this positive momentum is being offset by store closings, as market challenges continue. Lowe’s closed stores in Cambridge and Rogers, three more Borders bookstores closed, Gander Mountain is closing in Maple Grove, and 100,000 square feet of retailers vacated the Northtown Village shopping center in Coon Rapids.
Some retailers — facing soft sales and online competition — are considering downsizing stores. Sears and Best Buy are looking to “right-size.” Target and Walmart have smaller-format stores, and The Gap and Zales are experimenting with their formats. Another challenge facing owners and developers is eroding property values. They developed or purchased properties at a certain price with a certain rent expectations, and the plan
has had to be reworked with rent concessions. In some cases, rental rates in new leases are one-third less than they were at peak market levels. Also, simply keeping retailers open is challenging. In some cases, owners not only made significant leasing concessions for new deals but also for renewals of existing tenants.
Meanwhile, developers are challenged by the lack of demand. Many once-active retailers are not developing new stores. While development slowed significantly during the past three years, an uptick is starting to occur. Approximately 1 million square feet is under way and being driven by big big-box retailers such as Walmart, Menards and Whole Foods. Most projects, however, are in the preliminary stages as developers wait for anchor tenants.
A bright spot is urban or “core” development. Many retailers are pursuing dense urban and first-ring suburban markets due to their strong demographics. Trader Joe’s is considering a store in the Lyn-Lake neighborhood of South Minneapolis, and Walmart is pushing a smaller concept in urban locations.
There will not be a big, sudden explosion of activity, but rather a slow, gradual return to a “new normal.” Well-positioned centers should experience continuing improvement in demand, including interest from medical space users, while less desirable centers will be candidates for repositioning.