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METRO
MARKET OVERVIEW Retail developers enjoyed a second-half hey-day in the Twin Cities, building 2 million square feet of retail space. By year’s end, most of that new space was leased up, as evidenced by the overall market vacancy rate of 4.5%. That’s well below the average national retail vacancy rate of 6.7% cited in a
Wall Street Journal article.
There’s no sign that the construction boom is over either, with another 2.6 million square feet of retail space currently under construction and due to come online in 2003. Most of the recent and upcoming development is occurring in the outer-ring suburbs, where retailers – led by locally-based discount store giant Target and its SuperTarget brand – are rushing to open stores near burgeoning new population centers.
New Development, New Shopper Patterns Reshaping Retail Markets
Not all is completely rosy in Twin Cities retail land however. Landlords of some older shopping centers are seeing increased vacancies as tenants leave to move into newer developments. Regional Malls, of which there are nine in the Twin Cities, are seeing low vacancy rates today – but questions remain about the future of large department-store anchored malls in an era of compressed consumer shopping time and greater competition from discount stores.
Downtown Minneapolis received a retail boost when the almost 250,000 square foot Block E retail and entertainment center opened over the second half. Downtown St. Paul’s retail future shines a little brighter today too, now that the area’s major retail anchor, Marshall Field’s, has completed its $22 million renovation. But doubts are also being raised about the ability of the two downtowns to sustain their traditional retail base in the face of changing consumer lifestyles and competition from the discounters.
Twin Cities Retail Going Strong – With Room To Grow
Still, the overall picture of Twin Cities retail real estate is one of vibrancy and growth at year-end 2002. Even with the addition of millions of square feet of space, the Twin Cities area remains underserved because of strong population growth, higher than average per capita income levels and traditionally low unemployment.
Shopping Center World, a respected retail trade industry publication, included the Twin Cities on its list of “Midwest retail
meccas” in a recent article. The article cited the metropolitan area’s 17% population growth through the 1990s as a driving force behind new retail development.
Net Quoted Rates Rise 5%
Tenants absorbed positive 2,597,633 square feet of space throughout the market over the second half. Quoted net rental rates for all property types averaged $15.32 per square foot during the second half, up almost 5% from the year-end 2001 rate of $14.58 per square foot.
Positive Absorption In Most Submarkets
Retail absorption was positive in both the Minneapolis and St. Paul downtowns, although vacancy rates continue to exceed 10% in the urban cores. In Minneapolis, the 244,000 square foot Block E retail/entertainment center opened as the new centerpiece of the city’s burgeoning entertainment district.
Twin Cities Regional Malls finished the final six months of 2002 on a very strong note, with overall vacancy down to 2.8% -- well below the national average of 6%. Absorption was on the upswing at a positive 179,300 square feet.
Healthy Growth From Specialty To Neighborhoods
Well-located specialty centers such as The Galleria in Edina, Grand Avenue in St. Paul, Lake Street in Wayzata and the new Arbor Lakes Phase II shopping center in Maple Grove are also healthy. Year-end vacancy in the category is 1.7% compared to 2.5% at mid-year.
Discount store expansion, led by the SuperTargets, is the engine driving the explosion in Community Center growth. More than 1.7 million square feet of Community Center space was absorbed over the past six months, while vacancy in the category fell to 3.1% compared to 4.9% at mid-year. Target’s aggressive growth strategy has resulted in the opening of eight Twin Cities SuperTarget stores in the past two years.
Neighborhood Centers, the bread and butter of the retail marketplace, are also performing well with 380,037 square feet of positive absorption in the second half. Vacancy among Neighborhood Centers was 6.5% at year-end, compared to 8.1% at mid-year and 8.4% one year ago.
THE OUTLOOK
Twin Cities retail real estate trends remain positive, especially for continued growth in demand for new Community and Neighborhood Center space to meet the needs of rapidly growing suburban communities. More than 2.6 million square feet of new retail space is currently under construction for delivery in 2003. The vast majority of that – 1.8 million square feet – will come on line as Community Center development.
Specialty Center landlords also have reason to be optimistic – several national retailers are interested in entering the market, which is constrained by a lack of desirable sites for new development. Much of the growth in specialty store space is occurring in areas where affluent residential development is newly concentrated – Woodbury and Maple Grove are two such examples.
Both downtown Minneapolis and St. Paul are struggling to re-capture their allure as retail centers. Although restaurants – including upscale eateries – are thriving in the downtown areas, other traditional retailers such as department stores and apparel merchants are losing customers to discount chains. Traffic congestion and parking issues are also clouding the air over downtown retail. Professional sports, cultural and entertainment options are drawing destination traffic to the downtown areas, but the future of traditional retail in the two major urban centers is uncertain. Residential growth in both central business districts is very strong however, following the “flight back to the city” trend that’s reshaping central cities across the nation.
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