• Roundy’s rounds into town with a promise to revitalize Rainbow Foods chain in Twin Cities

• Specialty retailers following customers to more retail corners outside of Twin Cities regional malls

• Diverse economy, low unemployment rate continue to support retail expansion: 2.1 million square feet of new retail space due to come online this year

METRO MARKET OVERVIEW  National restaurant chains are circling the Twin Cities like so many airplanes waiting to land at the airport on a stormy day. Moderately-priced restaurants are scrambling to land choice locations throughout the region, helping feed a healthy retail real estate market that is expanding by some 2.1 million square feet this year.

Restaurants, home improvement centers, gardening centers and home furnishing outlets are all among the retail segments thriving in the Twin Cities.

Not that all is completely rosy in the Twin Cities retail world at mid-year 2003. Some pockets of concern exist, particularly in some older neighborhood and community shopping centers and the Minneapolis and St. Paul Central Business Districts. Downtown Minneapolis has witnessed the exit of a handful of high-end restaurants, including the city’s only gourmet Norwegian restaurant, Aquavit -- where lutefisk was a menu item. Owners of the restaurants cited a falloff in business travel to the city as a primary reason for closing. Concerns are also growing over whether the Twin Cities may be over-stocked with traditional department stores.  At last count, the Twin Cities is supporting twelve department stores.

All in all, though, the Twin Cities retail picture at mid-year is one of robust health, supported by a diverse local economy that has helped keep metro-area unemployment at 3.9%, well below the national average. The mid-year vacancy rate for all retail property types in the Twin Cities is 5.3%, slightly lower than the 6.1% rate at mid-year 2002. First-half metrowide absorption was a modest 19,776 square feet, however, virtually all of the 2.1 million square feet of new construction, a majority of which is fully leased, will come online over the second half of the year in community and neighborhood shopping centers.

Vacancy in the Community Center category edged up slightly to 3.3%, compared to 3.1% six months ago. Vacancy inched up slightly in the Neighborhood Center category as well, from 6.5% at year-end to 7% at mid-year.

Roundy’s Fires Up Twin Cities Grocery Market With Purchase Of Rainbow Foods Stores

By far the single biggest piece of news in the retail market, especially in the Community and Neighborhood center markets, was Dallas-based Fleming Companies Inc.’s sale this past June of 30 area Rainbow Foods stores to Pewaukee, WI-based grocer Roundy’s Inc.  Local real estate professionals had long raised questions about the viability of the Rainbow Foods chain in the Twin Cities, especially after Fleming Companies filed for Chapter 11 bankruptcy in 2002. Launched in 1977 as a Minnesota-grown company, Rainbow Foods enjoyed success as one of the first warehouse-style grocery chains in the country. However, the company had fallen to a distant second in the Twin Cities market with 36 metro area locations, behind SuperValu Inc.’s Cub Foods and its 44 metro locations.

Roundy’s announced it will commit significant dollars to reposition the Rainbow Foods brand in the Twin Cities, a move that will likely spur a revitalization of the 31  neighborhood and community shopping centers in which there are Rainbow Foods grocery store anchors (30 of which were acquired by Roundy’s).

Other news of significance in the first half included the entry of Lowe’s Home Improvement Center into the Twin Cities market. Several other national retailers in various categories are known to be looking in the area for entry locations or to expand on their existing base. Incongruous as it may seem in a market that has absorbed more than 7 million square feet of retail space over the past three years, there are some significant constraints to growth in the area. As a result, competition for prime retail locations is often intense. Some knowledgeable retailers are aggressively locking up key locations as they become available in anticipation that the local market will grow to meet their business needs.

Regional mall vacancy rose a percentage point over the first half, from the year-end 2.8% to 3.8%. Absorption dropped to a negative (33,116) square feet for the category. Rental rates in regional malls rose an average of $2.14 per square foot over the first half of the year, from $58.92 per square foot at year-end to $61.06 at mid-year. A majority of the Twin Cities regional malls have done a good job of repositioning and retenanting themselves over the past few years, adding more entertainment options and more stores that appeal to younger teenage shoppers such as teenagers and the 18-29 year-old demographic group.

Specialty Retailers Thinking Outside The Mall Box To Reach Customers

There is growing evidence that the appeal of the mall is diminishing for many consumers; however, a number of specialty retailers, such as Talbots, Abercrombie & Fitch, Banana Republic, Williams Sonoma, Brooks Brothers, Ann Taylor, Coldwater Creek and J Jill are foregoing their traditional home bases in regional malls for locations in town center developments and lifestyle centers such as Maple Grove’s The Shoppes of Arbor Lakes, which is opening in September.

Demand for traditional specialty retail space also remains high in the Twin Cities, with the mid-year vacancy rate of 1.6% matching that of six months ago. Although space is at a premium in most Twin Cities specialty centers, there is currently a retail opportunity available at the Galleria in Edina due to Stroud’s liquidating all of its operations nationally and thus closing its Galleria location.

Retailers Treading Water In Central Business Districts While Awaiting Hiring Rebound By Downtown Employers

Neither of the two Central Business Districts has experienced much of a retail rebound over the past six months, although the vacancy rate in the Minneapolis CBD did decline 2.1% from 12.4% at year-end to 10.3% today. Vacancy in the St. Paul CBD climbed 3.7%, from 18.7% at year-end to 22.4% at mid-year. The retail markets in both CBDs are stifled by the continuing lack of job growth among downtown employers following some fairly hefty job decreases in both downtowns during the past two and a half years. Even so, there is a sense of optimism for the future of retail in both cities given the continuing strong growth in downtown residential markets.

Outlet malls remain polarized between the healthy threesome that includes the Outlets at Albertville, the Medford Outlet Center and Tanger Outlets in North Branch and the struggling Prime Outlets of Woodbury mall. A proposal put forth by Madison Marquette Realty Services of Washington, D.C. to redevelop the Prime Outlets of Woodbury fell through when Madison Marquette withdrew its offer in June to purchase the property.  Robert Muir Co. has the property under contract and has announced it is likely to put big box retailers on the site.

THE OUTLOOK

As metropolitan regions go, the Twin Cities has established itself as one of the most desirable spots for national retailers. Retail has continued to do well in the metropolitan area throughout the unsteady economic period of recent times, and there’s no reason to believe that the trend won’t continue. For one, the region is a magnet for consumers from throughout the five-state upper Midwest region, including Iowa, western Wisconsin, North and South Dakota as well as Greater Minnesota.

According to Sales & Marketing Management’s 2002 survey of Buying Power, the Twin Cities metropolitan area ranked 13^th in population and 11^th in total retail sales. Retail segments in which the Twin Cities ranks in the top 10 nationally in sales are furniture and home furnishings stores (5^th), building materials and supply stores (6^th), sporting goods, hobby, book and music stores (6^th), electronic and appliance stores (6^th), general merchandise stores (9^th) and health and personal care stores (10^th).

The grocery store segment will be worth watching in coming months, as Roundy’s makes its presence felt through its Rainbow Foods stores. Although many of the national grocers such as Kroger’s and Safeway have shied away from the Twin Cities market, there is the possibility of another national chain entering the market as well. Super-Walmart is also moving ever closer to entering the Twin Cities market, with Super-Walmarts now established in several smaller cities just beyond the reach of the metropolitan area. With SuperTarget already having a well-established presence in the Twin Cities, the chess game that will be played between the two discount store leaders will be one of considerable interest to retail watchers.