The Twin Cities area, a region of more than 3 million people, is still trying to extricate itself from the base of this pesky commercial real estate cycle. While the retail real estate deal volume is starting to pick up here, it remains more of a trickle than a flow, with value-priced merchants spurring much of the activity.
In the first half of 2010, the Twin Cities retail vacancy rate stood at 10.4 percent, meaning nearly 7 million square feet of retail space remains vacant, according to Minneapolis-based NorthMarq, a commercial real estate services firm.
On the national tenant side, several retailers are repositioning themselves, either by upgrading existing stores or relocating to more advantageous spaces as leases expire. There are also rumblings of several national tenants eyeing vacancies in the 10,000- to 25,000-square-foot range. Not surprisingly, value merchandisers such as Dollar General, Big Lots and Dollar Tree have increased their footprints in this environment as well. We are also seeing a slight resurgence in demand from mom-and-pop tenants. As in past downturns, there’s a growing roster of talented people who were displaced by corporate America that are opening their own retail businesses.
At the commodities level, the grocery trade of Walmart Supercenter, Super Target, Sam’s Wholesale and Costco continues to challenge traditional grocery stores. An independent grocer lamented the death of customer loyalty recently, and said the business is more promotionally driven than ever with many consumers shopping at grocers to buy deeply discounted “loss-leader” promotional items and little else, adding that people will drive across town to save a nickel. Meanwhile, Walmart continues to experiment with a downsized grocery prototype that would help it squeeze into smaller neighborhoods.
Marshall's, TJ Maxx, Panera Bread, Noodles & Co.
As shoppers trade down, apparel sellers Marshall’s and TJ Maxx are having solid years. The trading down effect is apparent at other levels, including the service and restaurant spaces. People are choosing $12 haircuts at Great Clips and other discount stylists over $20 to $25 cuts elsewhere, for example. In restaurants, diners are trading down from “white table cloth” eateries to such lower-priced venues as Panera Bread and Noodles & Co., and in other instances, moving down from fast casual to fast food. There’s evidence that luxury consumers are slowly returning, but with a more discriminating mindset. Nordstrom is growing sales again, but the middle markets are still being squeezed.
Microsoft, Omaha Steaks, Crate & Barrel, Apple Store
While there are few big leases being inked, some new-to-market tenants are finding promise in Minneapolis-St. Paul. Microsoft is opening one of its retail stores at Mall of America in Bloomington, which at 18 years of age remains a retail force. Its fourth floor, once an energetic nightlife hub that suffered a major tenant exodus, is rebounding with new restaurant and entertainment businesses. Omaha Steaks entered the market with an outlet at Shops at West End in the affluent St. Louis Park neighborhood, which recently attracted Toby Keith’s I Love This Bar & Grill, the area's first, and Le Crepe Nanou, a French bistro. Crate & Barrel’s stylish CB2 furniture store is reportedly heading to Calhoun Square in the chic retail area of South Minneapolis called Uptown. A few blocks away, Apple Store just opened its fifth area location.
Whole Foods Market, Aldi, Walgreens, CVS/pharmacy
Elsewhere, Whole Foods Market plans a 32,000-square-foot store in Edina's Centennial Lakes Plaza near the Galleria, slated for a 2012 opening. Part of the center will be razed to make way for the new store. Trader Joe’s has opened two stores in the past year, stepping into a breach left by Cost Plus World Market, which has closed all six of its Minnesota stores as it retrenches. Hockey Giant has opened two sporting goods superstores, approximately 10,000 square feet in size.
German-owned Aldi, a deep-discount grocer, opened a handful of stores locally in the past year. Industry pharmacy leaders Walgreens and CVS/pharmacy continue to expand in strategic locations. Earlier this year, Walgreens acquired the pharmacy business of 25 company-owned Snyder's Drug Stores in Minnesota.
Bed Bath & Beyond, Toys “R” Us
Bed Bath & Beyond is expanding as well, with its buybuy BABY and Christmas Tree Shops concepts. Buoyed by favorable lease terms and landlord concessions, the two are eyeing big-box locations of about 20,000 square feet for market entries. In preparation for the Christmas season, Toys”R”Us has opened several pop-up “express” locations as well. Panera Bread, Buffalo Wild Wings and Burger Jones, a new restaurant and cocktail bar concept, are also seeking space.
There’s still an abundance of big-box inventory available from the national bankruptcies of Linens 'n Things, Circuit City and others. The centrally located suburb of Rosedale has fewer vacancies than other towns in the region and tends to draw upscale clientele. The submarket is poised to absorb vacancies quicker than others and could lead the charge in a recovery. Clothing retailer Forever 21 is in the process of opening a large-format, 32,000-square-foot store at Rosedale Center this fall.
While action remains relatively slow in the Twin Cities retail market, there’s far more leasing and sales activity than a year ago. Major retailers, particularly publicly traded ones, are focusing on top-line sales again now that they’ve shored up their bottom lines, and they can't afford to sit on their hands forever. That’s one big reason that retail brokers, developers and other industry professional believe a gradual recovery has begun and will continue to gain momentum in 2011.
— Howard Paster is president of St. Paul, Minn.-based Paster Enterprises, a family-owned leader in shopping center management and development throughout the Twin Cities.