Twin Cities suburban outdoor shopping centers are hot, even in the cold

Strip malls and other outdoor shopping centers throughout the Twin Cities suburbs are busier than ever.

Demand from retailers has driven nationwide shopping center occupancy to its highest level since 2007, when commercial real estate firm Cushman & Wakefield first started collecting the retail data.

Local real estate brokers and property managers say it has been hard for tenants to find space at outdoor shopping areas, especially in first- and second-ring suburbs but also in outstate Minnesota as brick-and-mortar retail has experienced a resurgence.

With a possible slowdown or recession on the horizon this year, Twin Cities real estate professionals still say they believe outdoor shopping centers — from small strip malls to power centers with large anchor stores — will remain strong especially as space continues to be limited.

"After the last three years of devastation, things took a while to creep back up, but I think that [rents] are coming back to normal. … I think the suburbs are healthy," said Kris Schisel, vice president of retail services for real estate company Transwestern.

Schisel along with several other retailer and landlord representatives spoke at a well-attended panel held by the Minnesota Shopping Center Association (MSCA) at the Oak Ridge Country Club in Hopkins this week.

Open-air shopping centers were a popular alternative to inside shopping malls for many consumers concerned about COVID-19. Contactless purchasing options like store pickup, drive-up and drive-thru also helped make shopping at strip centers more convenient.

Many of these trends have continued even as COVID precautions have receded and more people have returned to in-store shopping, said Emilee DeCoteau, general manager of Woodbury Lakes and Centennial Shops and president of the MSCA.

DeCoteau has welcomed several new tenants over the last year to Woodbury Lakes, including activewear store Offline by Aerie, modular furniture provider Lovesac, Hazelwood Food and Drink and the By the Yard outdoor furniture store. The shopping center appears to be mostly occupied.

The national vacancy rate for outdoor shopping centers was a little less than 6% at the end of last year with the Minneapolis area having a tighter market with an under 5% vacancy, according to a report released in January by Cushman & Wakefield. Last year store openings across the country outpaced closures by nearly 2,500. National asking rents have also gradually increased over the last year.

Though leasing has been brisk, the type of tenants that are looking for space has changed, with an increasingly smaller pool of possible retailers that need large big-box stores, said Chris Simmons, managing director of retail services for Transwestern.

Instead its smaller, fast casual restaurants — many of which added drive-thrus or pickup options during the pandemic — that have become popular.

"That's what's keeping a lot of the developments alive around Minnesota — the standalone," Simmons said.

The Cushman report found that only 10,800 square feet of new shopping center space was under construction as of the end of the year.

"There's certainly new development that's going on out there," said David Daly, a senior vice president specializing in retail properties with CBRE. "I would say it looks far different than it did 10 years ago."

Instead of the traditional 10,000 square feet of speculative "inline" retail space attached to an anchor like a grocery store, many retailers now look for freestanding "pad sites," Daly said. Shopping centers can have several of these independent buildings that can serve as coffee shops, banks, veterinarian offices and more.

Daly helped seal the deal for West Des Moines-based Smash Park to build its pickleball and entertainment space at the new Twin Lakes Station shopping center near Rosedale Center. The space is expected to open this fall.

In outstate areas like Marshall, indoor mall tenants are trying to get into strip centers, said Stefanie Meyer, senior vice president and principal at Mid-America real estate.

"They are wanting to get out of these small market malls because they are dying inside of [them]," she said.

As for what lies ahead, some brokers said they think 2023 will bring a slowdown in retail leasing as consumers face high inflation and high interest rates. Brokers and property owners will need to get creative, said Tricia Pitchford, senior vice president of leasing at Mid-America.

"We're constantly having to rethink how we need to fill space," she said. "There's still a lot of deals that are happening, too, but I think the nationals [tenants] are going to slow down. I think some of the mom-and-pops are slowing down because they can't borrow money at a reasonable rate right now."

Several of the real estate experts on the panel said some closings of traditional retailers could allow for more opportunities for up-and-coming concepts.

"Sometimes it's sad to see these retailers close, but if they're not staying relevant, as a landlord, you want somebody who is relevant that's bringing more traffic to your shopping centers," Meyer said.