Strong Activity in Retail Market Not Reflected in Flat Vacancy Rate

After a very strong 2013, the retail market in the Twin Cities held steady in first-half 2014. The vacancy rate remained flat at 7.2%, which is slightly below 2008 levels, and rental rates saw a slight decrease from $27.60 in second-half 2013 to $27.36. However, the market experienced 122,710 sf of negative absorption. The good news is the negative absorption can mostly be attributed to the fact that many properties vacated tenants to make way for new deals in second-half 2014 and others that will open in 2015.


Roundy’s Exits the Market
The big news in first-half 2014 was that after much speculation Roundy’s Inc. is exiting the Twin Cities market. The Milwaukee-based grocer announced the sale of 18 Rainbow Foods stores to local grocers Lund Food Holdings, Supervalu Inc. and three other independent retailers. Roundy’s has slowly been closing stores in the market for a few years while focusing on the Chicago market.

There are still nine Rainbow Foods stores available that were not part of the sale, and they are all expected to close in second-half 2014. This will have a significant impact on the neighborhood and community center markets. The nine stores are Apple Valley (60,100 sf), Blaine (65,400 sf), Bloomington (62,800 sf), Coon Rapids (63,500 sf), Cottage Grove (70,000 sf), Inver Grove Heights (57,000 sf), Maple Grove (63,100 sf), Savage (57,000 sf) and Shoreview (63,300 sf). While many offer great redevelopment opportunities, their fate will probably be unclear for the next 6-12 months, and they are expected to drive more than 500,000 sf of negative absorption across the market.

Malls Prepare for New Tenants
The regional centers have spent a lot of time and money over the past few years renovating their centers, improving amenities and strengthening their tenant mix. The tail end of that work is being completed as they rearrange tenants to make way for new users. Examples include DSW at Eden Prairie Center, Hobby Lobby at Northtown Mall and Nordstrom at Ridgedale Center. In addition, the Mall of America broke ground on a $325 million expansion, its largest construction project since opening in 1992. Meanwhile, Southdale Center is preparing its currently vacant basement and third-floor levels for potential new tenants. In the next 6-12 months, more deals are expected to be announced.


Eagan Prepares for Outlet Mall
Paragon Outlet Partners is wrapping up construction on its 409,000-sf outlet mall in Eagan, which will open in August. The open-air outlet center, called Twin Cities Premium Outlets, will have approximately 100 shops and is located on a 35-acre site in Eagan’s Cedar Grove redevelopment district.

Paragon announced that Saks Off 5th will anchor the development, and its list of tenants includes American Eagle, Asics, Calphalon, Cole Haan, Crabtree & Evelyn, Helzberg Diamonds, Watch Station and White House/Black Market, Calvin Klein, Coach, Michael Kors, Polo Ralph Lauren, Gap, Hot Topic, J. Crew, Johnston & Murphy, Talbots, Torrid, True Religion, Under Armour and Lucy. It is expected to be 95% leased, which means it will contribute approximately 390,000 sf of positive absorption in second-half 2014.

Emergence of the North Loop
The retail universe in downtown Minneapolis is shrinking due to the conversion of the former Neiman Marcus space and the upper levels of Gaviidae Common into office space. Further, Block E has reduced its retail footprint as it undergoes a major renovation and prepares to welcome Mayo Clinic and serve as a training facility for the Minnesota Timberwolves and Minnesota Lynx. Also, Saks Off 5th announced it will close in January 2015. In the CBD core, what remains as retail will be more focused on convenience goods and services to meet the daily needs of the daytime employees and growing residential population.

While a more unique shopping experience might no longer live in the CBD core, it can be found nearby in the increasingly popular North Loop neighborhood. Centered along Washington Avenue, the North Loop is attracting residential developers and an exciting array of specialty boutique shops and restaurants. In first-half 2014, the area welcomed Roe Wolfe, Grethen House, Lole, Shinola, Filson and The Office Pub & Grill. And in second-half 2014, Caribou Coffee, Merchant Restaurant and Red Cow are all expected to open their doors.

Inventory of Big Boxes May Rise
While small shop users are really active in the market, creating significant deal activity, there has been an overall slowdown among the larger users. Cushman & Wakefield/NorthMarq tracks vacant big-box and junior-box spaces of 15,000 sf or larger across the Twin Cities. As of first-half 2014, approximately 34 remain available, compared with the 80 that were available in 2009. Recent deals include Herberger’s Clearance Center, Forever 21 and Burlington Coat Factory.

However, due to the imminent closing of nine Rainbow Foods stores and other known boxes that are being marketed (though currently occupied) that number could quickly rise to 49 by the start of 2015. Some retailers like Hobby Lobby, Planet Fitness and Total Wine have aggressive expansion plans, but many of these vacant spaces will be larger than desired. Landlords will have to decide how to best address this issue. Some are quality locations and may attract the attention of new entrants looking to enter the market, but others may have to be redeveloped to make way for other uses.

There has been a great deal of fluctuation in the market as every piece of good news seems to be mirrored with some bad. While HyVee, an Iowa-based grocer, is looking to enter the market with 15-20 locations that occupy 90,000 to 105,000 sf, Roundy’s is exiting and will leave behind nine empty stores in its wake.

Neiman Marcus left downtown Minneapolis at the end of 2013, and now Saks Off 5th will do the same in early 2015. However, an appetite for these goods does not seem to have diminished as Eagan prepares to welcome 100 new stores totaling more than 400,000 sf of space at the Twin Cities Premium Outlets.

In the first-tier markets, space is tightening. Many areas are enjoying vacancy rates below 6%, including Edina, Bloomington, Maple Grove, Wayzata, Minnetonka, Eden Prairie and Woodbury. Further, quoted rates are off the charts. At existing properties, rents have stabilized and are inching upward, while new development is quoting $35-$40 on small-shop space in many new 12,000- to 15,000-sf centers that have come on line.

Overall, 275,000 to 315,000 sf of positive absorption is expected in second-half 2014. This is significantly less than predicted at the start of the year due to Rainbow Foods exiting, but it also means there will be more opportunity in 2015 to welcome new tenants and concepts to the Twin Cities. Vacancy should remain around 7%, and rental rates are expected to continue to increase. The news might seem mixed, but the outlook is strong.

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

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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