The Twin Cities retail market continued to improve in the second half of 2013 due to robust leasing activity at neighborhood centers. The vacancy rate registered 7.2 percent at the end of 2013, down from 8.6 percent a year earlier, according to Cushman & Wakefield/NorthMarq. That is the lowest vacancy rate since the fourth quarter of 2008. The market saw healthy absorption of 439,000 square feet during the second half of 2013.
With retail spaces filling, rental rates declined modestly, dropping from an average of $27.73 per square foot during the second quarter of 2013 to $27.60 per square foot in the fourth quarter.
The rental rate decrease was primarily due to the decline in rates at community centers, as discount retailers negotiated lower rents. Many of these discount retailers filled big-box and junior-box spaces that had been vacant for a long time.
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The Franchise Factor
The majority of retailers that entered the Twin Cities in 2013, or expanded their operations locally, were focused on food and services such as hair care, massage, cellular and fitness. Five Guys Burgers & Fries and Yogurt Lab, relative newcomers to the market, now operate multiple stores in the state and both companies are looking to expand. Pizza and sandwich concepts also enjoyed success.
Established franchises are driving much of this growth in the retail sector, providing local business owners a greater chance of success. By franchising, business owners often benefit from a franchisor’s proven track record, many times making leasing agreements easier to accomplish.
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.
Some of the other major players to watch this year include Noodles & Co., Chipotle, Panda Express, Buffalo Wild Wings, Freshii, Qdoba, Caribou Coffee and Starbucks.
Retailers that sell traditional goods, such as apparel and home furnishings, are largely directing their real estate strategies toward regional malls, specialty centers and outlet malls.
Closures Create Opportunity
While Minneapolis and St. Paul are experiencing a residential boom downtown in the form of new apartments and condominium buildings, both central business districts lost major retail tenants in 2013 with the closing of Neiman Marcus in Minneapolis and Macy’s in St. Paul.
Some of these former retail spaces are being converted into office and residential uses, shrinking the total retail universe and lowering vacancy levels.
New retailers and restaurants are moving into some smaller shop space, concentrating on convenience goods and services to meet the daily needs of the new residents. Due to the smaller retail universe and the entrance of these retailers focusing on the daily needs of consumers, vacancy rates are expected to drop significantly in both CBD markets, and rental rates should continue to increase due to the lack of space.
The CBDs are poised for a successful 2014 with the start of the new light rail transit line connecting both downtowns and the new Minnesota Vikings and Saint Paul Saints stadiums under construction. New residential units coming on line will also aid CBD performance.
The Outlet Wars
Paragon Outlet Partners could be a real retail game-changer in the Twin Cities. The company’s 409,000-square-foot Twin Cities at Eagan is an open-air outlet center that is under construction on a 35-acre site in Eagan’s Cedar Grove redevelopment district. A Saks Fifth Avenue Off 5th discount store will anchor the development, which is expected to include 100 shops.
By the time the outlet mall opens in late 2014, it is expected to be 85 to 90 percent leased. That leasing activity alone will account for approximately 350,000 square feet of positive absorption during the second half of 2014.
With the pending opening of this new outlet center, the existing three outlet developments (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 look for them to try to strengthen their customer base and positions within the market in 2014.
Meanwhile, Walmart plans to open new stores in the suburbs of Cottage Grove and Roseville this year. New housing projects scheduled for completion in 2014 in downtown Minneapolis and St. Paul — as well as suburban downtown Wayzata and the uptown area of Minneapolis — should spur new retail activity. Buoyed by the opening of the new outlet mall in Eagan, the retail real estate community expects 800,000 to 900,000 square feet of positive absorption in 2014.
After a successful 2013, the retail real estate market in the Twin Cities is poised for another strong showing in 2014. The outlook is for the vacancy rate to hold steady or even inch down. Rental rates are forecast to remain flat overall, but strong demand for the best retail assets will drive prices upward.
— By Deb Carlson, Director of Brokerage Services, Cushman & Wakefield/NorthMarq. This article originally appeared in the March 2014 issue of Heartland Real Estate Business magazine.