Twin Cities area retail space is in demand: 'We're having our best year'

For shoppers, it's a click-and-pay world.

That doesn't, however, mean there's a glut of vacant and boarded storefronts in the Twin Cities.

"We're having our best year on record," said JoAnna Hicks, co-founder of Twin Cities-based Element Commercial Real Estate, a brokerage that specializes in filling retail spaces.

Hicks said there's been a post-pandemic surge in in-person shopping, boosting demand for stores, restaurants and other retail spaces in the Twin Cities. That's especially true in urban neighborhoods in Minneapolis and St. Paul that have long played second fiddle to suburban shopping malls. Those hyper-local neighborhood nodes are even attracting national investors.

It's a trend that flies in the face of attention-grabbing headlines about store closings, such as when Nordstrom announced this month that it was shuttering its Nordstrom Rack location in downtown Minneapolis.

Coresight Research, a retail data firm, said that this year U.S. retailers have announced about 4,432 store openings compared with 1,954 closings. Discount stores, the firm said, topped the list of announced openings, followed by restaurants and apparel stores.

Those openings, and a post-pandemic return to in-person shopping, are happening at a time when supply chain and labor constraints have made building new projects difficult, time-consuming and costly. In turn, that has boosted demand for existing spaces.

In the Twin Cities only a half-million-plus square feet of new retail space was built in both 2019 and 2020. That's far less than during previous years. In 2021, with the pandemic forcing consumers almost exclusively online, only 80,000 square feet got built. That's about the size of a large grocery store.

In the first half of this year, 174,000 square feet of retail space was slated to be built.

With demand outpacing supply in some areas, the retail vacancy rate in the Twin Cities has been steadily declining. During the first half of the year the average retail vacancy rate for such spaces in the Twin Cities metro was just 10.1%, according to Cushman Wakefield.

Absorption, the count of newly signed leases, accounted for a total of nearly 416,000 square feet during the first half of the year. That was almost as much as was absorbed during all of 2021.

Demand varied dramatically throughout the metro with the highest vacancy rate in downtown Minneapolis, where about one-third of retail space was vacant. Outlet malls also struggled. The most in-demand segment of retail real estate was neighborhood retail, where the vacancy rate was just 7.4% during the first half of the year.

Similar trends are playing out nationwide. Shopping center vacancies, for example, have been steadily declining over the past several years, falling to 6.1% at the end of the second quarter, according to Cushman Wakefield.

Those declines are being driven in part by a growing number of online retailers who are finding that it's prudent to maintain a brick-and-mortar operation where consumers can test the product, try on the clothes or at least return the item.

Sara Martin, executive vice president of Jones Lang LaSalle's Minneapolis retail team, said the pandemic led to more online shopping. Today, however, she's working with a number of local and national companies that are new to the Twin Cities and looking for space.

"There are always fads," said Martin, citing the proliferation of banks, drive-thru chicken restaurants, burger joints and car washes. "I'm as busy as I've been in 20 years."

Neighborhood retail is especially popular. Several northeast Minneapolis neighborhoods are seeing an influx of new tenants. It's the same in St. Paul, Grand Avenue and Highland Park. In the North Loop neighborhood in Minneapolis, brokers say there's less vacant commercial space now than before the pandemic.

Hicks said she recently signed a lease with Coen Partners, which is moving from a 4,500-square-foot space at the Lowry building in the North Loop to an 11,350-square-foot space in the Northwestern building. It expects to occupy in early 2023.

The firm also recently signed a deal with Martin Patrick to expand at the Colonial Warehouse building.

Jaxen Grey opened in September in the North Loop in the old Love Your Melon space after being a co-tenant with D Nolo, Hicks said. And Barre 3 took the remaining space in another nearby building.

The strength of the retail real estate sector is producing a bumper crop of commercial sales throughout the metro. The most notable this year was the sale of the Galleria Edina, a 398,585-square-foot luxury shopping destination.

It was bought by a group of local investors who paid $150 million. The seller was Houston-based Hines, which paid $127 million for it in 2012.

Hines initially tried to sell the mall in early 2020 just before the start of the pandemic, which led to the closing of stores and restaurants and gutting demand for commercial properties.

But the Galleria experienced strong leasing momentum since the first quarter of 2020, signing deals that account for more than 170,000 square feet of space, JLL said. It was 99% leased at the time of the deal, making it an outlier among malls in the region.

Upscale retailers have few options if they want a location in the Twin Cities, said Dick Grones of Cambridge Commercial Realty. "High-end retail has suffered but not as much as the midrange retailers," he said. "Wealthy people have just gotten wealthier."

Shopping malls have also explored other ways to increase their revenues and the value of their property. That includes selling outlots for restaurants and converting parking lots into apartments and for-sale condominiums.

Recently, Charlotte, N.C.-based Asana Partners has been buying up historic properties, including nearly an entire city block along E. Hennepin Avenue in northeast Minneapolis. It also bought a retail center in Wayzata. The company declined to discuss its plans in the Twin Cities.

Deb Carlson, senior director on Cushman & Wakefield's retail team, attributed the strength of retail real estate to a resurgence of consumer interest in small, independent retailers.

There's also been an increase in demand from a variety of service providers, ranging from dentists and doctors to manicurists and masseuses. Even companies that rely on online sales are looking for a physical space to display and promote their products.

Amazon Fresh, for example, is an online grocery now opening stores across the country, including several in the Twin Cities.

"There's been a huge change in retail," Carlson said. "And there's a strong consumer need to get back into stores."