The Twin Cities retail market continues to steadily improve from the economic depths of 2008 and 2009. There has been 549,194 square feet of positive absorption since the first quarter of 2011. Another encouraging sign is the increased activity among landlords, tenants and developers.
One example of the positive outlook is the investment that landlords are making at regional malls to upgrade and reposition them. The Mall of America in Bloomington seeks to add 550,000 square feet of retail, medical office and hotel space.
Southdale Mall, Ridgedale Mall, and Maplewood Mall are also investing in their centers to better compete in this rising market.
Another sign of increased activity can be seen among food tenants. Quick service restaurants are betting that Minneapolis-St. Paul residents have a large appetite for yogurt, sandwiches, and burgers and are actively seeking space.
Burger and sandwich concepts include Smashburger, Which Wich, Firehouse Subs, and Freddy’s, which are growing in popularity along with Freeziac, Tutti Frutti, Menchies, and CherryBerry yogurt shops. Also active are Noodles, Chipotle, and Starbucks.
These types of tenants have gobbled up smaller spaces and end-cap spaces vacated by tenants such as defunct Hollywood Video and Blockbuster. They are pursuing the same spaces in the urban core or first-ring suburbs — spaces that are becoming increasingly rare. Rents at these coveted locations had bottomed, but are now increasing. And the competition is intense.
During the downturn, our market saw numerous tenants in the “junior” box category (spaces of 20,000 to 35,000 square feet), leave the market or downsize. The list included Cost Plus, Circuit City, Linens ’n Things, Borders, Barnes & Noble and JC Penney. They left behind a very significant number of empty spaces.
In the Roseville trade area alone, there were more than 10 such vacant spaces three years ago. Today there only three left. Examples include a Planet Fitness replacing a former Circuit City, Jo-Ann Fabrics occupying a former Wickes, and Cost Plus reopening a store it had closed. Remaining vacancies include Northwestern Books, JC Penney and T.J. Maxx.
Development has been limited to site-specific projects driven by tenants. Walmart alone has two stores under construction in Lakeville and Burnsville, and just opened a new store in Brooklyn Park. Menards, Whole Foods, Lunds, and Target also recently opened or are currently constructing new stores.
Meanwhile, development of traditional shopping centers has re-emerged. Commerce Hill in Woodbury, a 285,000-square-foot project anchored by a Super Target with side-shop space, is under construction. Planned developments include Shingle Creek Crossing, where a recently opened Walmart is anchoring the 804,000-square-foot redevelopment of a former regional mall. Other planned development includes retail space to accompany new apartment projects.
In the past, retailers have been driven by market penetration and achieving store count goals. Now they are more concerned with top-tier locations that will provide strong sales. They are drawn to areas with strong daytime population in addition to high, growing population densities and income levels.
There is no new development, or “pioneering,” occurring in the outer ring suburbs as was happening in previous years.
Many pioneering developments built around a big-box user like Target or Walmart have the same vacancies today as they did when the projects were built.
Best Buy has struggled in recent quarters with internal leadership upheaval and stiff competition from online sales. The company is planning a new strategy that involves aggressively expanding its smaller Best Buy Mobile stores and rightsizing its larger stores. The smaller stores feature an upgraded technical support area, higher-end home appliances, larger merchandise pickup areas to meet demand for online ordering and in-store pickup, and more highly trained in-store employees.
We expect positive absorption for all of 2012 and continued positive absorption through 2013. Lease negotiations will tip in favor of landlords, a departure from the tenant-favorable market of the last three to four years.
Shopping center development that includes some speculative space is expected to increase as space in premium locations is absorbed and rental rates rise to levels that support new development.
Expect longer timeframes to find and secure new locations in the sought-after urban and first ring suburban locations.
Developers, tenants, landlords and brokers are all feeling renewed confidence and experiencing increasing returns. Revenues in our retail brokerage business alone jumped more than 20 percent in 2010 and 2011. Activity in 2012 is on schedule to be close to pre-recessionary levels.
Growth in the retail market is inextricably linked to consumer confidence. As we steadily climb out of the hole, we expect activity to build with renewed excitement. Consequently, there will be heavier competition throughout the retail market.
— Chris Simmons is a senior vice president in retail leasing and brokerage with the Minneapolis office of the Welsh Companies and a member of the X Team.