Retail Vacancy Rate in Twin Cities Continues to Decrease

  • Food and service retailers active in the market
  • Shake up expected for the outlet malls
  • Mixed-used development with retail
  • Slight upward pressure on rents across the board
  • Retail universe shrinking in CBD despite residential growth

The retail market continued to improve in the second half of 2013 thanks to strong leasing activity in neighborhood centers. Vacancy continued to decrease from the five-year low of 7.9% in 2008 to an even lower 7.2%. There was more than 439,000 square feet (sf) of positive absorption that contributed to the market’s success.

While spaces filled up, rental rates dipped slightly from $27.73 per square foot (psf) to an average of $27.60 psf. The rental rate decrease is primarily due to the decrease in rates in community centers as discount retailers negotiated lower rents. Landlords welcomed the discount retailers with open arms as they are filling up many long vacant big-box and junior-box spaces.

Shift Toward Food and Services
As we track the spaces that were leased in 2013, it is apparent that the majority of retailers entering or expanding within the market are focused on food and services, such as hair care, massage, cellular and fitness. In the past, we have discussed the burger and yogurt wars. The fittest have survived, including Five Guys Burger & Fries and Yogurt Lab, and continue to look to open new locations. We are also seeing more pizza and sandwich concepts eating up space in the market. The list of newer retailers to watch in 2014 includes Pizza Rev, Toppers Pizza, European Wax Center, Waxing in the City, Salon Concepts, The Joint and Nothing Bundt Cakes. Also active are Noodles & Company, Chipotle, Panda Express, Buffalo Wild Wings, Freshii, Qdoba, Caribou Coffee and Starbucks.

Overall, retailers who are focused on traditional shoppers’ goods, like apparel and home furnishings, are concentrating their real estate strategy on regional malls, specialty centers and outlet malls.

CBD Retail Universe Shrinks
Both downtown Minneapolis and downtown St. Paul are experiencing a much welcomed residential boom. New apartment and condo buildings are going up each day. However, both CBD markets said goodbye in 2013 to some big retail tenants—Neiman Marcus in Minneapolis and Macy’s in St. Paul. Some of these former retail spaces, along with others, are being converted into office and residential uses and thus shrinking the total retail universe. In an extreme example, the former AMC theater and other second-floor retail space at Block E in downtown Minneapolis is in negotiations to be repurposed into a training facility for the Minnesota Timberwolves and the Minnesota Lynx.

While new retailers and restaurants are moving into some smaller shop space, they are focused on convenience goods and services to meet the daily needs of the new residents. The good news is the vacancy rate will drop significantly in both CBD markets, and rental rates should continue to improve due to the lack of space. It appears the CBDs are poised for a very successful 2014 with the start of the new light rail transit line connecting both downtowns, new entertainment venues under construction (namely the new Vikings Stadium and the Saint Paul Saints stadium), and more residential units coming on line.

Outlet Malls Bracing for Impending Change
Paragon Outlet Partners continued construction of its 409,000-sf outlet mall in Eagan. The open-air outlet center, called Twin Cities at Eagan, is located on a 35-acre site in Eagan’s Cedar Grove redevelopment district. It will have approximately 100 shops. To date, Paragon announced that Saks Fifth Avenue Off 5th discount store will anchor the development and has released a long list of additional tenants that have already signed onto the project. By the time it opens in late 2014, it is expected to be 85-90% leased, which means there will be approximately 350,000 sf of positive absorption in second-half 2014.

With the pending opening of this new outlet center, the existing three (Albertville Premium Outlets, Medford Outlet Center and North Branch Outlets) in the greater Minneapolis-St. Paul area will be on the watch list. Time will tell if all three can survive this increased competition, but in 2014 look for them to strengthen their customer base and position within the market.

Outlook
The Twin Cities enjoyed a very strong and successful 2013. Looking toward the coming year, the vacancy rate should hold, if not continue to inch downward, and rental rates are expected to remain flat, though pricing will likely continue to be driven upward in the best assets. In 2014, Walmart will open new locations in Cottage Grove and Roseville. New housing projects will be completed in downtown Minneapolis, downtown St. Paul, downtown Wayzata and Uptown, which should attract new retail activity. And, thanks especially to the opening of the new outlet mall in Eagan, approximately 800,000 to 900,000 sf of positive absorption is expected in total for the year.

To read more, visit the January 2014 edition of Cushman & Wakefield/NorthMarq’s Compass report, now available online.  Visit the web site: www.northmarqcompass.com

About Cushman & Wakefield/NorthMarq

​Cushman & Wakefield/NorthMarq is a joint venture formed in September 2011 by NorthMarq Real Estate Services and the Minnesota operations of global real estate services firm Cushman & Wakefield. By combining the talent of both organizations at the regional level with the global platform of Cushman & Wakefield, we offer clients the best combination of regional strength and global capabilities. The result: the leading commercial real estate firm by all measures in the Upper Midwest.
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