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The Twin Cities retail market is still on the road to recovery, with 231,913 square feet of absorption since the beginning of the year. With steady positive absorption, the former tenant-favorable market is beginning to even out, especially with regard to the urban core or first-ring suburbs.
Lease negotiations have started to tip in favor of landlords. Developers, tenants, landlords and brokers are all expressing increased confidence in the strength of the market.
Among the tenants contributing to the healthy absorption of space have been Whole Foods, Walmart, and LA Fitness, all of which are opening stores throughout the suburbs. The overall vacancy rate in the third quarter stood at 5.7 percent, down from 6.2 percent the prior quarter, according to data compiled by the Welsh Cos.
Vacancy at regional malls is 2.1 percent. The retail vacancy in the trade areas surrounding these regional centers follows suit with premier areas of demand among growing retailers.
Chick-fil-A has also entered the Twin Cities market, opening stores in Apple Valley, Bloomington, Coon Rapids and Maple Grove. This continues the trend of new food tenants seeking more space in the Twin Cities, including Smashburger, Which Wich Superior Sandwiches and Freddy’s Frozen Custard & Steakburgers, as well as grocery chains that include Whole Foods, Trader Joe’s, Lunds & Byerly’s and Aldi.
Development Trends
As of the second quarter of this year, the Twin Cities led the nation in space under construction, thanks in large part to four new Walmart stores under development in suburban cities and the new outlet center under development in Eagan by Baltimore-based Paragon Outlet Partners. Known as Twin Cities at Eagan, the outlet center is scheduled to open in August 2014.
The increase in building activity stems in part from a significant rise in apartment construction across the metro area. Many cities are requiring these multifamily developments to include a retail component, which helps satisfy the pent-up demand found in the inner-ring suburbs.
While there is growth and strong retailer activity, significant, multi-tenant shopping center development has been stymied as retailers give back space due to consolidation and shrinking footprints. Retail market segments including toys, electronics and office supplies have all seen consolidation.
However, there are still significant developments underway across the area. Perhaps the most well-known project is Twin Cities at Eagan, the outlet mall under construction. Paragon Outlet Partners recently announced that more stores are coming to the center, including Chico’s Outlet, Cole Haan, Destination Maternity, Skechers and Helzberg Diamonds Outlet, adding to a tenant roster that already included Saks Fifth Avenue Off 5th, Brooks Brothers, Michael Kors and Polo Ralph Lauren.
Move to Medical
Another significant trend in the retail sector comes from the medical tenants, which are showing strong interest in retail space. Healthcare users, like traditional retailers, can attract more customers with a convenient, highly visible location, where customers can combine a trip to the dentist or physical therapist with a stop at the grocery store.
Locally, we’ve seen quite a bit of evidence of this trend. The Hennepin County Medical Center, HealthEast Clinics, Allina and Aspen clinics have all located in retail centers. Smaller, service-oriented retailers are also active, including Pacific Dental Services, American Dental, Aspen Dental, Heartland Dental Care, The Joint and Massage Envy.
The combination of the Affordable Care Act and the aging generation of baby boomers will help fuel this trend well into the future, as more health care consumers will be created, and the aging generation will require more medical attention and care.
What’s Ahead?
The holiday season is almost upon us, and with it comes a slightly uncertain outlook. Some forecasters are predicting only a 2.4 percent increase in retail sales, while others, like the National Retail Federation, have a more optimistic outlook of 3.9 percent.
Part of this uncertainty comes from the impact of the partial federal government shutdown that recently ended (after some high drama) and the raising of the debt ceiling, as well as the predicted increases in tax rates and healthcare costs, which could cause consumer confidence to falter.
Since the retail market is heavily influenced by consumer confidence, this creates a potential for a slower end to 2013 and the start of 2014.
However, the overall trend of decreased vacancy in premier locations will most likely continue, leading to increased rental rates in the urban core and inner-ring suburbs.
Longer term, we expect demand for big-box space to falter due to the fallout from retailer consolidation and reduced store sizes in this category.
Overall, we expect the retail market to continue on its road to recovery from the Great Recession. With the help of new medical space in retail centers and the Twin Cities at Eagan under development by Paragon Outlet Partners, we can expect to see continued steady absorption.
— Chris Simmons, senior vice president, retail leasing/brokerage, X Team member, Welsh Cos.