The Minneapolis-Saint Paul MSA was on the road to recovery long before many others. And while that might come as a surprise to outsiders, this market actually packs quite a punch. With more than a dozen Fortune 500 employers — including Target, Wells Fargo, U.S. Bank, Ecolab and 3M, to name a few—the MSA’s 5.1 percent unemployment rate is a full three points lower than the national average and is consistently ranked as one of the friendliest job markets in the country.
Little wonder national retailers have been so keen on taking space in prime Twin Cities markets such as Roseville, Edina (Southdale) and Minnetonka (Ridgedale). Whole Foods, for instance, opened a Minnetonka store in a former Circuit City box late last year and also razed a vacant Storables to make way for a Southdale store. More recently, the Texas-based chain announced plans to open a downtown Minneapolis store on the site of a former Jaguar dealership.
Slowly but surely, remaining Ultimate Electronics, Circuit City and Linens ’n Things boxes are being refilled by expanding chains. Some are leasing vacant boxes in their entirety; others are taking portions of subdivided boxes. Case in point: Last year T-Mobile, Godfather’s Pizza and Ulta Beauty took a former Linens box in Burnsville’s Burnhaven Shopping Center, and a 20,000-sq.-ft. anchor is on the verge of signing a lease there as well.
As elsewhere in the Midwest, the grocers have been expanding fastest here. Target has been converting older Minneapolis stores into its PFresh grocery concept, while Walmart has steered away from behemoth boxes in favor of smaller stores that emphasize food. Cub Foods/SuperValu, Aldi and Trader Joe’s, meanwhile, are looking hard at existing boxes in dense population centers—i.e. at “Main & Main.” The other hot category is quick-serve restaurants, particularly Smashburger, Chipotle Mexican Grill, Potbelly Sandwich Shop and Noodles & Company.
In recent years, in fact, these chains alone have taken a total of approximately 280,000 square feet of space in the Twin Cities market. Naturally, one effect of retailers’ renewed interest has been a transition to more positive absorption. In 2011, our 61.4 million-square-foot retail market had an overall vacancy rate of 5.8 percent, with fiscal 2011 net absorption of 508,759 square feet. ALDI, T.J. Maxx, Best Buy, Savers, L.A. Fitness, Trader Joe’s, Whole Foods, Home Goods, Gordman’s and even Goodwill helped make that happen thanks to their interest in vacant junior-anchor boxes.
This is not to say that landlords can breathe a sigh of relief. The top-tier Southdale market, which is known for its fashion and jewelry retailers and is home to two of the MSA’s wealthiest ZIP codes, still has plenty of empty boxes. When the recession hit, chains that had operated multiple Southdale locations closed their underperforming stores but kept the better ones open. Despite the rosy demos, they have no need for more space here. This is abnormal to say the least. Five years ago chains could not find 2,000 square feet of available space in Southdale, and today more than 10 big boxes are up for grabs in this affluent area.
Likewise, Maplewood, Woodbury and Maple Grove also have a number of big-box holes, forcing shopping center owners to go toe-to-toe with each other to re-tenant these spaces. This is keeping rents low and tenant improvement (TI) payouts high. Strip center tenants and quick-serve restaurants alike have grown accustomed to TI allocations 50 percent larger than during the boom. Gone are the days when a landlord with an end cap and drive-thru could sit back and enjoy the fruits of a bidding war between Starbucks and Caribou Coffee. Today, landlords are doing their best to make deals happen with even the most aggressive TI requests.
On the transaction front, well located, grocery-anchored centers are drawing a significant amount of investor interest and, in general, leading to lower cap rates in the strongest submarkets. To be sure, the credit-worthiness of the tenant lineup can make a huge difference from one property to the next, but here, too, the trend is basically positive. The flipside is that our exurban areas with low population density—the parts of Minneapolis that were “pioneer country” back when chasing residential growth was the strategy du jour—are of no interest to today’s skittish investors. Simply put, transaction activity is not likely to resume in these hinterlands until the U.S. sees a spike in housing starts.
Developers in this market face the same challenges that have kept bulldozers idle in so many other parts of the country—lack of demand and financing—leaving far fewer developers in the Twin Cities today than there were just a few years ago. Call it the Darwinian natural selection of real estate. Fortunately, there is at least some talk in the market about a few new projects on the books. The highest-profile of these is Minneapolis-based CSM Corp.’s purchase of the 51-acre Lockheed Martin Corp. property in Eagan, which boasts high incomes, easy freeway access and a strong daytime population. Ultimately, the site will likely be rezoned and redeveloped into a retail-only project that should be a boon to this second-ring suburb.
The plain fact is that hard economic times have forced everyone to make smarter, more realistic decisions. Not so long ago, Wall Street was encouraging most expanding retailers to put store count first and ask questions later. Today, retailers seem more concerned with asking lots of questions and thinking about earnings potential first. That means the competition for getting deals done is even harder. In the end, it will surely translate into a stronger, more vibrant retail industry; one that already seems to be emerging in the Twin Cities.
— Christopher E. Simmons is an X Team International partner and senior vice president of retail leasing for Minneapolis-based Welsh Cos.