Retail Enjoys Robust Activity, Led by Community Centers

• Construction continues at record-setting pace; absorption remains very strong
• Retailers and developers recycle inner-ring real estate to enter desirable, densely populated markets
• Regional malls redefine, reinvent themselves 

The Twin Cities retail market is still going gangbusters with a drop in vacancy to 5.5% (5.8% with sublease space) from 6.4% six months ago and more than 3 million square feet of positive absorption in the past 12 months. And it’s not about to stop any time soon. Demand continues to outpace supply, and another 2 million square feet is under construction with much of it pre-leased. Also, another 3.7 million square feet is planned with start dates set for later in 2006 and 2007.

Community centers, typically anchored by two big-box retailers, are the growth engine; they boasted 655,564 sq. ft. of positive absorption in the first half of 2006, resulting in more than 1.2 million square feet in the past 12 months. This strong activity helped further push down their vacancy to 2.8% (3.2% with sublease space), a drop from 3.7% at year end. This may be the lowest-ever historical vacancy. Seven community centers totaling 1,645,000 sq. ft. are under construction with another 3,187,000 sq. ft. planned.

Target/Wal-Mart Spur Growth

Target and Wal-Mart continue to fuel retail development as they compete for market share and expand their “super” formats. Three SuperTargets are planned or underway, and Target also is aggressively pursuing “scrapes” where it razes traditional stores and builds SuperTargets. Scrapes occurred in West St. Paul and Roseville and are approved in St. Paul’s Midway and in Edina. Meanwhile, Wal-Mart expanded with stores in West St. Paul, Inver Grove Heights, Woodbury and St. Anthony and is going “super” where it has available land, including Vadnais Heights and Oak Park Heights.

Redevelopment Is Name of Game

As the supply of attractive retail sites continues shrinking in the highly sought-after, inner-ring and core cities, developers and retailers are being creative in redeveloping and recycling existing spaces. Retailers are buying nontraditional properties—particularly in the Interstate-494/694 loop—and redeveloping them into retail. Hot spots include 50th and France and other Edina neighborhoods, downtown Wayzata and St. Paul’s Grand Avenue. Wal-Mart, for example, is looking at redeveloping the former Best Buy headquarters in Eden Prairie. Target is redeveloping its Midway store and acquired the adjacent Four Points Sheraton in order to build a SuperTarget. Haugland Company is redeveloping the southwest corner of 50th and France into retail and condos, which included scraping an Arby’s. Cypress Equities is demolishing a movie theater in Edina to develop retail and condos.

However, developers will attest that redevelopment often is complex, costly and time-consuming. The price can be double that of conventional retail sites. Retailers hope that by gaining access in high-density, well-established markets, their strong sales will support these more expensive redevelopments.

Regional Malls Evolve

Retailing never stops changing, and regional malls never stop evolving in their quest to attract shoppers. While sales remained strong, the vacancies at Northtown and Brookdale continued to affect the malls and surrounding properties. Both properties are in the process of repositioning themselves by adding both traditional and nontraditional anchors. Northtown added Burlington Coat Factory and Steve & Barry’s, and Home Depot is underway. Brookdale is planning on redeveloping sections of the property. Meanwhile, stronger regionals are adding open-air, lifestyle elements to stay fresh. Rosedale’s $40 million lifestyle center component will include an AMC movie theater, Granite City Brewery, Borders Books, and many more. Southdale also may undertake a lifestyle conversion at some point and also has been in talks with upscale anchors Nordstrom and Neiman Marcus.

Fast-Casual Offers Recipe for Success

The “fast-casual” concept—combining fast-food’s quick service with high-quality, fresh food—continues to be a popular trend. Examples are Chipotle, Panera Bread, Salsarita’s Fresh Cantina, Pei Wei and the new Cosi cafes—a mix between a coffee shop, bistro, sandwich shop and wine bar. These eateries cater to time-crunched consumers wanting more than typical fast-food. Sit-down restaurants like Chili’s and Applebee’s are retooling and adapting to compete by quickening up service, changing menus and adding curbside delivery.

New Retailers, Restaurants Looking at Metro

National retailers, attracted to the metro’s diverse economy, are exploring locations. New players include outdoor gear and apparel retailer North Face, Cosi, LA Fitness, Boston Pizza, Gimme Sum and Raising Cane Chicken Fingers. The International Council of Shopping Centers (ICSC) recently ranked the Twin Cities as the second-most promising U.S. market for retail developers, considering GLA per capita, projected yearly population and income growth.

More Users Buying Land

Traditionally, retail developers take down large tracts of land and do multiple leases with multiple retailers or sell parcels to retailers. However, general merchandise and home improvement retailers are self-developing land.

Tale of Two Cities

Two metro-area lifestyle centers are open—Shoppes at Arbor Lakes in Maple Grove and Woodbury Lakes in Woodbury. While Arbor Lakes appears to be thriving, vacancy remains at Woodbury Lakes. One issue may be that the Woodbury trade market is not as large and does not generate as much daytime traffic as Maple Grove. (Developers Opus and Red Development recently sold Woodbury Lakes for $99 million to Cornerstone.) Meanwhile, developers continue to look for opportunities to build new lifestyle centers. One is proposed in St. Louis Park, and there’s discussion of one in Chanhassen.

The Outlook

Construction and absorption will continue to be strong with 2 million square feet under construction—much of it pre-leased—and 3.7 million square feet planned. Community centers will continue to fuel the growth. Attracted to the metro’s diverse economy, national retailers and restaurants will continue to explore sites. Retailers will continue to recycle inner-ring sites to gain access to high-density, sought-after markets. They also will continue to face challenges in redeveloping this real estate. Regional malls will continue to redefine and reinvent themselves to draw shoppers—whether that means adding lifestyle components or repositioning themselves by adding nontraditional tenants.

Lifestyle centers will continue to be the sought-after development and investment option as more locations are explored. Increasing land and construction costs and more stringent city requirements may stall some future retail development.