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HomeMy WebLinkAbout4.b. Project Updates EXECUTIVE SUMMARY Port Authority Meeting Date: November 20, 2018 AGENDA ITEM: Project Update AGENDA SECTION: Old Business PREPARED BY: Kim Lindquist, Deputy Director AGENDA NO. 4.b ATTACHMENTS: Retail Strategies Update APPROVED BY: LJM RECOMMENDED ACTION: Discussion ISSUE Over the last year there has been a “project updates” item added to the agenda, toward the end of the meeting. Often the item is rushed as other topics on the agenda take up more time. To address this comment, the updates are being shifted into the Old Business section of the agenda. The item will be more formalized with some written information, although as stated previously, often information is confidential upon the request of the business. The latest update sent to the Port is pasted below with some quick updates included: RETAIL Applebee’s: nothing new to report from last month. Multi-tenant Retail: Staff has received a revised concept for the multi-tenant space at the old Pizza Hut site. We continue to work with the owner on some of the site plan modifications. They will need to obtain a new approval as the approved CUP has lapsed. Warren’s property: Nothing new regarding the commercial sites. Merchants Bank site: I have confirmed that the Retailer continues to be interested in the site, however, there is no new progress on the site. Akron Ave: nothing new on retail prospects. MGM retail space: There has been some recent interest in a portion of the space now that it is being marketed as a smaller space. The realtor indicated that activity will start to diminish as we move into the holidays. 2 I am hoping to have some information about the Downtown redevelopment prospect this week. The developer has many projects already in the hopper and therefore, this project has slide on their schedule. INDUSTRIAL OPUS/UMore: nothing new Rosemount Business Park: nothing new Opus business park site: nothing new RECOMMENDATION Update and discussion item only. FALL 2018 STATE OF RETAIL REAL ESTATE REPORT Click on any article to directly link to that start page! NOW HIRING by Nate Ohme, Great Clips, Inc. – continued on page 2 NOW HIRING SIGNS ARE EVERYWHERE. You cannot miss them. They are unavoidable. Staffing hardships seem to have spared no one. Bus drivers, servers, baristas, construction workers, nurses, truck drivers, cashiers, sandwich artists, stylists. All are needed and needed now. According to the Minnesota Department of Employment and Economic Development, in August, Minnesota’s unemployment rate sat at 2.9%. There are less than 90,000 unemployed people in our state, the lowest number since December 1999, and according to the Bureau of Labor Statistics, 2.9% unemployment puts us at the eighth lowest in the country. The staffing challenges in Minnesota are real. Most employers know (or should know) what kind of person they want working for them, that is the easy part. But how do they get that ideal candidate to apply? How do they get them to show up for their interview? And most importantly, how do they get that person to show up for their first day of work? You would probably be startled to hear how often candidates are applying for jobs and then skipping interviews, or even accepting positions and failing to show up for their first day. With the high demand for labor, candidates have the luxury of accepting multiple positions at once, and deciding where they want to work later. Money is clearly one answer to the question and money will always talk. But in industries where there is competition on every corner and wages are already competitive, employers need to think outside the box. How can companies attract the candidates they need? Just as consumers have perceptions of the brands they choose to wear, candidates have perceptions of companies in their field. Consumers compile their experiences with stores and brands to develop opinions about products or services. The same goes for candidates. Candidates have perceptions of companies prior to ever filling out an application. They have already decided where a company ranks among places they would work. The challenge as an employer is to get the companies brand to the top of these rankings. IN THIS ISSUE Now Hiring .............................pg 1-2 Trends in Construction ............pg 2-5 Economic Update ...................pg 6-7 Retailer Update ......................pg 7-9 Storefronts as Places .........pg 10-13 Pop Up Shops and Specialty Leasing Within the Retail Evolution ............................pg 14-17 Development / Redevelopment Update ......pg 17-19 Retail Property Budgeting Checklist .................................pg 20 Midway Update .......................pg 21 Investment Update .............pg 22-24 FALL 2018 STATE OF RETAIL REAL ESTATE REPORT 2 NOW HIRING CONTINUED... Approximately four years ago, Great Clips, Inc. saw the direction staffing was heading. Although franchisees told us at the time that their salons were well staffed, Great Clips decided to place a greater focus on ensuring the Great Clips® brand was attractive to potential stylists and consumers alike. To be clear, Great Clips, Inc. does not own or operate any salons nor does it employ those who work in salons. Instead, every salon in the Great Clips® system is owned and operated by an independent third-party — a franchisee — who is solely responsible for hiring and developing its own staff and operating the salons. In fact, the sole goal of promoting the Great Clips® brand to potential stylists was (and is) to provide franchisees with a solid foundation to use as they develop and build their own recruiting strategies. Through the websites, YouTube, Instagram, Facebook and other social media, Great Clips, Inc. has been enhancing its brand within the hair care industry. Stylists from franchised Great Clips® salons, not actors, deliver candid messages about what it’s like for them to work in a Great Clips® salon. Through actual life stories, they cover material candidates cannot find on traditional job boards. They talk about career development within their own franchised organizations, collaboration, design teams, ongoing training, technology, community involvement, and the Great Clips® brand and culture, all with the intent of forming or changing the opinions of potential stylists. In a climate where everyone is hiring, being able to attract the candidate that you want is essential. Do not just advertise the job; share your brand in a way that grabs attention and engages candidates in content that helps them connect with your company. These messages should attract the candidates you want, not just the ones who need a job. n TRENDS IN CONSTRUCTION by Matt Server, Sever Construction Company When reflecting on the last decade in construction, most anyone will tell you there have been a lot of ups and downs. But with those highs and lows, the construction industry is flourishing greater now than in years past. This upturn yields advantages, and challenges, for many folks, including landlords, commercial real estate brokers and architectural firms. There are three areas where gradual change and positive transformation within the construction industry are taking place. These areas include construction labor and costs, tenant investments, and construction design. LABOR SHORTAGE AND RISING CONSTRUCTION COSTS SKILLED LABOR OUTLOOK Over the last year, stated in the September 2018 LinkedIn Workforce Report, “hiring was 4.1% lower in August 2018 than in August 2017. This is in correlation to a skills gap – which is a mismatch between the skills employers need and the skills workers have.” In reviewing the report, Project Management ranked at the top (6,659 people) of the skills surpluses in Minneapolis-St. Paul, but not one single trade skill made the list. Workspace Property Trust’s VP Regional Director, Bradley Butler notes that the, “unemployment rate in Minnesota in August was 2.9% with no secret that hiring is much more difficult than it was five years ago in all industries.” There is a large demand of construction projects with a low supply of skilled labor. This doesn’t alleviate any pressure for contractors who are trying to complete more work in less time given the lack of proper resources. Since construction companies are challenged with filling skilled trade positions, owners and tenants can come to expect longer project schedules. If the current expectation is to build ‘XYZ’ project in 30-days, owners and tenants should allow for a 45- to 60-day timeline. This shortage in supply causes contractors to be more selective on the jobs they bid and contract. A contractor will typically gauge a few critical factors prior to releasing a final bid. These factors include accurate plans and specific project start dates. Without a solid project plan or start date in mind, contractors are disadvantaged at providing real construction timelines and material costs. – continued on page 3 FALL 2018 STATE OF RETAIL REAL ESTATE REPORT 3 What are the causes of the labor shortage? The industry is simply losing much of its labor to aging. The well-seasoned labor is exiting the market and entering retirement. Unfortunately, the next generation in line doesn’t have much interest in the vocational or trade school careers. Their interest lies in degrees like business, biomedical engineering, public health, information technology and finance, according to www.bestdegreeprograms.org. Let us not forget that The Great Recession in the late 2000s and early 2010s left a gap of skilled workers as well, because there were former projects for younger workers to gain experience. Tradesmen International article points out, “…with increased work, the construction industry will have a higher employment rate than the overall economy. Construction has a 4.5% projected growth rate over the next several years, making construction staffing the leading industry in wage and employment growth.” Nick Sanfilippo, SVP of project management for Franklin Street, a fast-growing full-service southeast CRE firm, was recently quoted in www.Bisnow.com stating, “there is a lot of perception of the industry as not being a very attractive field, but there is a lot of money to be made. Once the younger talent sees the gold mine, their interest will shift to it.” To mitigate negative construction perceptions, Dunwoody College of Technology assures their students that there are options within the industry to pursue such as renewable energy or socially responsible positions. Students enrolled in the Dunwoody Construction Sciences program find the field to be rich with opportunity, as students are receiving on average nine job inquiries at the time of graduation with starting salaries ranging from $45K to $75K. Listed on www.bls.gov, the annual mean wage for a Carpenter in Minnesota is $50,890, plus overtime and benefits. The annual mean wage for a Construction Manager in Minnesota is $102,090, plus profit sharing, bonuses and benefits. Compare that to a Financial Analyst who makes an annual mean wage of $91,420, or an Information Systems Manager who makes an annual mean wage of $140,940. CONSTRUCTION CODE CHANGES It’s true – construction code changes increase construction costs. Across the U.S., code books are published every three years with new codes and/or code clarifications. Todd Dankert, owner of Gator Electric, shares that, “the biggest change as of January 2017 was Minnesota adopting the new energy code, which adds about 10% cost to an average construction project.” This code requires a maximum of 0.9 watts of electricity per square foot prompting designers, electricians and building owners to innovate their lighting layout and selections. The new Minnesota energy code also requires offices and open workspaces to have motion and occupancy sensors. A standard light switch runs about $80 a switch. A motion sensor is about $120. This calculates to a $40 upgrade charge per switch within each plan. Additionally, electrical construction costs have increased 3 to 8 percent due to 2017 code changes; separate from the energy code. For example, there is a new code for conference rooms that requires an outlet to be installed in the center of each room and must contain a wall outlet every six-feet of wall space within that same conference room. This code is required regardless of the AV expectations and can easily run anywhere from $800 to $1,500 per floor outlet. TRADE WAR AND TARIFFS The full impact of the March 2018 tariffs has been slower than expected in making an impression – as it relates to construction. The rising prices on raw materials continue and are not expected to taper off any time soon, as the tariffs have had longer to take effect and the market continues to boom. Manufacturing and fabrication companies, such as Linco Fab, Inc., located in Saint Michael, Minnesota, have been affected by the tariffs. Brian Schmitz weighed in on the matter, sharing that, “steel is a commodity – and, like fuel – it goes up and down based on macroeconomic motives. Since July 2018, prices have significantly increased. Tube steel has gone up about 50% since March and it’s directly related to the tariffs.” TRENDS IN CONSTRUCTION CONTINUED... – continued on page 4 FALL 2018 STATE OF RETAIL REAL ESTATE REPORT 4 TRENDS IN CONSTRUCTION CONTINUED... Oversea factories who planned for the tariffs would not ship steel to the U.S. market forcing a domestic market. In theory, this can be a good thing, but it raises the cost of production. Schmitz stated that he “expects to see the market plane out.” He doesn’t imagine many decreases will occur due to the tariff – but he does not foresee any more increases either. He goes onto share that, “we’ve hit an equilibrium for supply and demand.” WAYS TO COMBAT THE LABOR SHORTAGE EARLY ADOPTION PROGRAMS Contest the industry’s labor shortage by supporting local organizations who have outreach programs that target high school and post-secondary students. Engaging the younger crowd early on will increase industry awareness and breakdown negative perceptions. In the Twin Cities, the TwinWest Chamber of Commerce has created a program called Opportunity Connect, a new technology platform seamlessly connecting and supporting business through education with career connected learning experiences in response to urgent talent needs. Construct Tomorrow is an organization who aim to bring awareness of the variety of opportunities available in the Building and Construction Trades. Dunwoody Technical College partners with Girl Scouts River Valleys each year at their Power Girls Camp to spark interest in the construction trades for young girls. Additionally, Dunwoody’s Construction Sciences program has 511 students enrolled, which is up about 50 students (11%) from last year. This program aims to prep students for all types of construction jobs. Hennepin Technical College (HTC), the largest technical school in Minnesota, “maintains strong partnerships with area school districts to provide educational pathways for high school students interested in pursuing careers in technical fields.” Currently, HTC offers over five community engagement programs including GEAR UP (Gaining Early Awareness and Readiness for Undergraduate Programs), a federally funded grant program by the U.S. Department of Education. Several general contractors of all sizes partake in college recruitment fairs and hire former intern’s post-graduation as FTE’s for both field and office positions to strengthen the industry. Some general contractors also present to high schools, tech schools and colleges to build industry awareness and develop diversity programs which attract workers from all ethnicities. J.E. Dunn Construction Company hosts Work Days to engage middle school and high school students to on-the-job project site and office workplace environments. They have also developed a program encouraging field employees to volunteer their time and talent alongside high school Shop Class students for hands-on building experiences. REDUCING CONSTRUCTION COSTS WITHOUT SACRIFICING DESIGN TENANT SPEND EXCEEDING ALLOWANCE On average, 8 out of 10 commercial building tenants spend anywhere from 20–45% over their allotted allowance. And, these are out-of-pocket investments rather than through amortization. This phenomenon is exciting for landlords, contractors performing the scope of work and for architectural firms. CRICKET WIRELESS AMALI TALLI – continued on page 5 FALL 2018 STATE OF RETAIL REAL ESTATE REPORT 5 TRENDS IN CONSTRUCTION CONTINUED... The desire to attract and retain both consumers and employees influences retail trends and designs. JLL has outlined in its recent Retail Development Profile leanings in the retail sector, which include the push to build a great brand experience, evolving consumer buying habits, and industry innovations spurred by an upswing in retail renovations. The top ten retail design trends that are becoming common characteristics, as shared by Bisnow, include sustainable design, outdoor green space, buzz-making destinations, reinvention of underutilized space, affordable luxury, urbanization and mixed- use buildings. BID ALTERNATES AND VALUE ENGINEERING An effective way to manage the cost of construction is to select a contractor who incorporates bid alternates and value engineering. These practices are becoming more common and are invaluable options. For example, selecting quartz countertops, painting the existing ACT, or salvaging on-site equipment like HVAC or plumbing when possible. These types of selections can save a lot of dollars on the overall project budget. PRE-SELECT A GENERAL CONTRACTOR Minneapolis architect and design firm, bdh+young, recommends that pre-selecting a general contractor is, “the best way to manage a construction budget while maintaining design integrity.” One of the firm’s partners, Megan Duffy Sananikone, continued to share that, “having a general contractor on the team during the design development phase can lend critical feedback as design elements take shape. To better communicate design concepts, request 3D visuals from your design firm. If an alternate solution is suggested to save on cost, the design firm can update the visual, exposing any impacts to the client early on.” Furthermore, initial site layout and walk-throughs with all key players present will mitigate a flurry of change orders throughout the project. The more upfront collaboration and transparency initiated at the get-go, the smoother sailing along the duration of the project. IN CONCLUSION It will be important to bring awareness to younger generations of the construction industry as the shortage in labor is expected to amplify. It will take time to backfill the voids of well-seasoned labor who are currently exiting the market. Tenants are spending 20–45% over most allowances. This creates positive impact on the retainage, maintenance and re-lease of properties. As this popular trend gains more traction, contractors and key players can come to expect larger scopes and more project pipeline. Lastly, there are several tactics that can be employed to reduce construction costs without sacrificing design. A few of those strategies include selecting contractor bid alternates, value engineering, 3D visuals, thorough site layout and project site walk- throughs. n ACE HARDWARE DON’T FORGET TO CHECK OUT THE MEMBERS ONLY RESEARCH PAGE AVAILABLE ON THE WEBSITE! Log on to www.msca-online.com, under Resources click Research, log in and then select from the sub-menu on the left hand side. The available features are the MSCA State of Retail Reports, Member Reports and Other Industry Data. MEMBERS ONLY FALL 2018 STATE OF RETAIL REAL ESTATE REPORT 6 ECONOMIC UPDATE by Dan Gilchrist, Gilchrist Law LLC JOB GROWTH AND UNEMPLOYMENT: Job growth remains robust, but the pace slowed in August. Minnesota added 50,904 jobs over the year ending August 2018, up 1.7% jobs over the year. The private sector added 46,001 of those jobs, up 1.8%. (By comparison, U.S. employment numbers rose 1.8% for all payroll jobs and 2.1% for private sector payroll jobs.) The sectors adding the most jobs in Minnesota over the year ending August 31 were: LEISURE & HOSPITALITY up 11,802 jobs (+4.1%); EDUCATION & HEALTH SERVICES up 8,024 jobs (+1.5%); MANUFACTURING up 7,439 jobs (+2.3 %); and TRADE, TRANSPORTATION & UTILITIES up 8,328 jobs (+1.5 %) All of Minnesota’s Metropolitan Statistical Areas (MSAs) registered unadjusted over-the-year growth (ending July 2018). The highest growth rate came from Mankato (+6.9%), followed by Minneapolis-St. Paul (+2.2%). Others include: St. Cloud MSA (+1.9%), Duluth-Superior MSA (+1.4%), and Rochester MSA (0.3%). Unemployment in Minnesota fell to its lowest point in 19 years. In August 2018, the rate was at 2.9% (seasonally adjusted), down from 3.4% in August 2017. The national unemployment rate was at 3.9% (seasonally adjusted) in August 2018 and it dropped to 3.7% (seasonally adjusted) in September 2018. (Source: Minnesota DEED; https://mn.gov/deed/data/current-econ-highlights/state-national- employment.jsp) CONSUMER EXPENDITURES: Consumer spending on retail and restaurants during the first half of 2018 has continued its strong pace, especially after April. The annual increases in May through July each exceed 6% over 2017. The chart below shows the year-over-year rate of growth in consumer spending at retail and restaurant establishments (which is the line on the graph), and the total amount of consumer spending in these establishments (the bars on the graph). (Source: U.S. Census Bureau; https://www.census.gov/retail/index.html) INFLATION: The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2% in August 2018 (seasonally adjusted), the same increase as in July. Over the 12 months ending August 2018, the – continued on page 7 FALL 2018 STATE OF RETAIL REAL ESTATE REPORT 7 ECONOMIC UPDATE CONTINUED... “all items” index rose 2.7% (before seasonal adjustment). Increases for shelter (0.3% monthly increase) and energy (1.9% monthly increase, mostly from gasoline) were the main contributors to the all items index. Some CPI indexes declined in August. Among them are: apparel, medical care, and personal care. The apparel index declined in August by 1.6%, its third consecutive monthly decline. The medical care index declined in August by 0.2%, the same decrease as in July. While the index for personal care fell 0.1%. The index for household furnishings and operations was unchanged in August. In conclusion, except for gasoline, U.S. retail consumers are not seeing widespread and systemic price increases at this time. (Source: U.S. Bureau of Labor Statistics; https://www.bls.gov/news.release/cpi.nr0.html) INTEREST RATES: Interest rates continue to creep upward due to increased economic activity and the Fed’s efforts to prevent inflation. Rates as of October 8, 2018: ∙ PRIME RATE: 5.25%, up from 5.0% in the previous month. ∙ 3-MONTH TREASURY BILL: 2.22%, up from 2.13% in the previous month. ∙ 10-YEAR TREASURY BOND: 3.19%, up from 2.90% in the previous month. (Source: StarTribune, October 8, 2018) n RETAILER UPDATE by Brady Whalen, Mid-America Real Estate – Minnesota, LLC THE RETAIL SECTOR CONTINUES TO SEE MAJOR CHANGE AS LARGE, BEHEMOTH RETAILERS LIKE SEARS, BON-TON, AND MATTRESS FIRM FILE FOR CHAPTER 11 BANKRUPTCY IN 2018. ALTHOUGH THE LOSS OF THESE RETAILERS PRESENTS A HUMUNGOUS DETRIMENT TO THE INDUSTRY, SHOPPING CENTER OWNERS IN MINNESOTA REMAIN OPTIMISTIC AS THERE ARE MANY RETAILERS THAT ARE ADAPTING AND OCCUPYING THE SPACE THAT IS LEFT BEHIND. PLEASE FIND A BRIEF UPDATE OF THE RETAIL ACTIVITY IN THE MINNESOTA MARKET BELOW: GROCERY Eden Prairie-based SUPERVALU, which has been acquired by grocery distributor United Natural Foods Inc., recently announced that they will be selling 19 of it’s 36 Shop ‘n Save stores in the St. Louis market to grocery chain Schnuck Markets Inc. Supervalu, owner of the Twin Cities’ largest grocery chain, Cub Foods, has been in the process of distancing itself from the retail business and transitioning more towards their wholesaling business for the past few years. However, there is no clear front-runner for the purchase of Cub Foods and it remains on the market. Moreover, they have not opened any new stores recently and have closed locations on St. Paul’s East side and in Plymouth earlier this year. Following a short break in expansion, HY-VEE officially opened its ninth Twin Cities location on September 18th, replacing a former Rainbow Foods and the historic Terrace Theatre in Robbinsdale. At 86,500 square feet, the store is slightly smaller than Hy-Vee’s other metro locations, which typically range from 91,000 square feet to 101,000 square feet. According to Hy-Vee CEO, Randy Edeker, the decrease in size is a result of a new expansion plan that leverages labor, e-commerce, and digital shopping. Another 85,000 square foot Hy-Vee store is planned for Blaine near the Crescent Ponds neighborhood. – continued on page 8 FALL 2018 STATE OF RETAIL REAL ESTATE REPORT 8 – continued on page 7 SAC/WAC by Anna Cunningham & Mike Brandt, Kimley-Horn WHY DOES MSCA CARE ABOUT SAC AND WAC? There is a lot of misinformation and controversy around the infamous SAC (Sewer Availability Charge) and WAC (Water Availability Charge). For this reason, MSCA’s legislative committee gave an educational seminar on the topic. If you missed your chance to go, this article will provide a summary of what SAC and WAC are, how they are determined, why they can be confusing, and what MSCA plans to do about them. For this article, the focus will be placed on SAC since this fee can be especially confusing. DO YOU REALLY UNDERSTAND SAC AND WAC? Typically, when we hear “SAC and WAC,” we think “fees.” Well, that’s not too far off, with both of these acronyms ending in “charge”. SAC is a fee that is imposed by the Metropolitan Council of Environmental Services (MCES) as a way to fund the cost of meeting increased demand on the Wastewater Treatment Plants across the metro area. The fee is technically imposed on the municipality, but generally the municipality passes the fee on to the business owner or developer. These fees are charged to residential, commercial, and industrial users all across the MCES wastewater treatment system. To make things confusing, each municipality can charge additional SACs on top of the MCES SAC. Often, people don’t realize that SAC comes from two different sources— both MCES and the municipality. WAC is an additional fee that municipalities charge. This also varies greatly by municipality but is not affiliated with MCES. OKAY, BUT HOW DOES MCES DETERMINE THEIR SAC? Flows for commercial developments vary greatly by flow rate and strength of the wastewater, which impacts the wastewater treatment facility. Yet, the flow and strength data used for the design of wastewater treatment plants is really based on residential flow rates and strengths, since this is what state and federal regulations mandate. To correlate commercial flows to residential flows, MCES developed the SAC program. A SAC unit represents 274 gallons of maximum daily wastewater capacity available. This number comes from the average number of people per household in the metro (which is 2.74 people) at a flow rate of 100 gallons per capita per day. SAC units are based on usage. During the past several years, the Metropolitan Council has studied and collected data such as fixture units, use type, and measured flow rates for different developments and uses. From this data, the Metropolitan Council established standard determination criteria based on seat count, net square footage, showers, and other criteria. They review development plans and compare the new project to the standard criteria to determine the applicable SAC units for the project. The current rate per SAC unit is $2,485. Although there are some discrepancies/controversies of how SAC units are determined, the SAC fee from MCES is typically fair and consistent with the money going towards a clear purpose—funding our wastewater treatment facilities.1 The Metropolitan Wastewater Treatment Plant in St. Paul, MN discharges to the Mississippi River and serves 1.8 million people. This is funded by SAC.2 SACs are a one-time event for a building, business, or property. When a new project, tenant, or redevelopment of a project occurs, a SAC determination form/application is required. The Metropolitan Council looks at the existing property and compares the SACs the property may have already been charged to the SAC value the new project or tenant will use. If the new use will have less impact on the wastewater system, a credit is given to the property RETAILER UPDATE CONTINUED... Edina-based LUNDS AND BYERLYS opened a new 47,000 square foot store in the White Bear Lake/Vadnais Heights area on October 4th. It features a small in-store café, a Caribou Coffee, a liquor store, and a Bachman’s floral shop. German discount grocer, ALDI, now has 59 stores in Minnesota with plans to open stores later this year in the former Rainbow Foods in the Longfellow neighborhood of Minneapolis as well as Princeton, Virginia, and Marshall. In the first half of 2019, Aldi will open in Cloquet, Chaska, Lakeville, and Uptown. Additional stores in Chanhassen and St. Paul will bring their Minnesota store total to 70 by the end of 2019. Once having more than 35 stores in Minnesota, Minnesota’s last existing RAINBOW FOODS closed in Maplewood on September 17th. JUNIOR/BIG BOX SEARS has announced another 142 store closures as part of its Chapter 11 bankruptcy, including Minnesota’s Ridgedale Center and St. Paul locations. Following the announcement, the company officially has 687 stores remaining (including Kmart locations). It is possible that more stores could close if the company fails to reach a viable restructuring agreement in bankruptcy. The city of Eagan has approved a 167,000 square foot COSTCO WAREHOUSE to be constructed on the southeast corner of I-494 and I-35E. The city anticipates the store will open sometime in the Fall of 2019. Chanhassen-based LIFETIME FITNESS recently signed a 3-year lease at the former Vikings’ practice facility, Winter Park, for its new Lifetime Sport concept. The idea is to create an indoor space for children and adults alike to play soccer at their leisure, very similar to their basketball offerings that you can find at their current clubs. Lifetime debuted this concept in Lakeville and the Winter Park location plans to open in October 2018. They will continue to grow the concept if it takes hold. As off-price retail continues to grow, HOMEGOODS, a subsidiary of TJX Companies, will be opening at least three new locations in Minnesota in 2019. The first to open will be a side-by-side location with TJ Maxx at The Grove in Cottage Grove. The second to open will be a HomeGoods-only location at Timbercrest shopping center in Lakeville in the Spring of 2019. The most recent deal was made for a portion of the former Sear’s box in St. Cloud and is anticipated to open sometime in 2019. VON MAUR opened its second Minnesota location on October 13th at the Rosedale Center in Roseville. The family-owned and Iowa-based department store is 140,000 square feet and has been under construction since 2016. During the store’s grand opening, President of the company, Jim von Maur, said that he believes the Twin Cities can be a multi-unit market for their business and he hopes to open more stores soon. SMALL SHOP Chicago-based quick serve restaurant ROTI MODERN MEDITERRANEAN opened its first Minneapolis location at IDS Crystal Court in downtown Minneapolis one year ago. Due to its success, Roti has three more on deck for the Twin Cities. Their St. Louis Park location opened in mid- September. They have two more high profile openings scheduled yet this year. The first is in – continued on page 9 FALL 2018 STATE OF RETAIL REAL ESTATE REPORT 9 – continued on page 11 SAC/WAC by Anna Cunningham & Mike Brandt, Kimley-Horn RETAILER UPDATE CONTINUED... Edina, located kitty-corner from the Galleria, and the second will be opening at the Hub in the Stadium Village neighborhood at the University of Minnesota. Falling victim to increased competition and a surplus of stores, MATTRESS FIRM, the nation’s largest mattress seller, has filed for chapter 11 bankruptcy. With this, they have announced hundreds of store closures across the country, including 6 in Minnesota: Blaine, Eden Prairie, Maple Grove, Roseville, Hennepin Avenue and Willmar. In the wake of this crisis for Mattress Firm, New York City- based Casper Mattress has announced that they plan to open over 200 stores across North America. No locations in Minnesota have been identified, though it is assumed they will make a push into the market to challenge direct competitor, Select Comfort. VIVERANT, a Minneapolis-based physical therapy and nutrition clinic, has growth plans for the Twin Cities. They opened four new locations in 2018 bringing them to a dozen total units in their home market. Their new Edina location features a blend of traditional physical therapy with best-in-class services that include Pilates reformers and chairs, as well as trapeze services. Their Chanhassen, St. Paul, and Lakeville locations are expected to be open before the end of 2018. LOCAL BUSINESSES FARIBAULT WOOLEN MILLS, the Minnesota-based textile manufacturing company, recently opened a permanent retail location in Minneapolis’ North Loop neighborhood after seeing success with pop-up locations at the Mall of America. They offer woolen products of all kinds, such as blankets, pillows, scarves, and other accessories. Another popular local brand, LOVE YOUR MELON, opened it’s first brick and mortar space in the North Loop this Fall. Love Your Melon, maker of stocking hats and other fashionable apparel, donates half of its after-tax profits to pediatric cancer research. Their store will serve as a space for media content creation and a brick & mortar retail space for product launches to the public. Their store hours will be limited. After seven years of primarily e-commerce business, SOTA CLOTHING, known for its state of Minnesota branded apparel, recently opened its first brick and mortar store in St. Louis Park on Walker & W. Lake Street. Sota gained popularity at its pop-up shop at the ‘North Local Market’ during Super Bowl 52 in Minneapolis. Joining Von Maur, a new retail concept called ROSE & LOON has opened its doors at Rosedale Center. Similar to Love From Minnesota, Rose & Loon serves as hub for local product makers and brands to showcase their merchandise. The 4,000 square foot shop will feature products from Cambria, Minnesota Made, Minnetonka Moccasins, and many other local/regional businesses. n MSCA RESEARCH COMMITTEE IS ALWAYS SEEKING ARTICLES FROM TALENTED WRITERS. IF YOU HAVE AN ARTICLE OR GREAT TOPIC FOR AN ARTICLE, PLEASE SUBMIT YOUR IDEAS TO KARLA AT KTORP@MSCA-ONLINE.COM. WE WELCOME NEW IDEAS AND ARTICLES! FALL 2018 STATE OF RETAIL REAL ESTATE REPORT 10 This article and the images within are adapted from The Musicant Group’s free Friendly Storefronts Toolkit. For receive a free electronic version of the toolkit email info@musicantgroup.com STOREFRONTS AS PLACES In a world where more and more purchases happen online, and bricks and mortar retailers are creating heightened in-store experiences – does the literal storefront still matter? The short answer is yes! The storefront is the border that ushers the customer between the public worlds of sidewalks and common areas to the goods, services, employees, and owners within the store itself. Just as a human face communicates a dynamic array of information, reflecting our constantly changing feelings, so does a storefront reflect the values, personalities, and businesses within. What does your storefront and the storefronts of your shopping center or downtown communicate? Do they reflect a sense of invitation, respect, and vitality? Or do the storefronts make one feel like a commodity, merely a “consumer”, someone to transact but not form a relationship with? Just as a smiling face invites conversation, does your storefront call potential customers to community and commerce within? No matter where you or your shopping center falls along this spectrum, the practice of placemaking can serve as a guide to creating storefronts that foster commercial and social activity. THE CUSTOMER JOURNEY If we think about the journey of potential customers to your storefront today… Why play the same game as online retailers? Compete by maximizing your business’, shopping center or downtown’s unique competitive advantages that they can’t touch, — starting with you! STOREFRONTS AS PLACES by Max Musicant, Founder and President of The Musicant Group – continued on page 11 image from Friendly Storefronts Toolkit by The Musicant Group 1. Mobile technology allows people to do whatever they want, when they want and where they want. 2. Since people no longer HAVE to travel to shop, be entertained, get information and more, they end up only going to places where they WANT to go. 3. People are choosing and seeking out places that make them feel good, that are inviting, that deliver a compelling experience, and that foster social connections. 4. Your competitive advantage against big box and online retailers is to have your storefront be one of these places. FALL 2018 STATE OF RETAIL REAL ESTATE REPORT 11 STOREFRONTS AS PLACES CONTINUED... COMPETITIVE ADVANTAGES 6 STEPS TO CREATING A VALUE CREATING STOREFRONT Through our work with individual small businesses, suburban shopping centers and traditional main streets, we have developed six steps to creating a storefront that will make your business come to life! Each is a critical moment and place for your customer—celebrate and enhance them with color, decor, and sensory elements! – continued on page 12 1. FOLLOW THE DESIRE LINES How do people get to your store? What are the paths they take on foot and what are the paths they would like to take? Find and enhance the (often diagonal or curved) desire lines into your front door. 2. A PLACE TO SIT If people can’t sit, rest, and wait comfortably in and near your store, they won’t stick around very long. Whether it’s a yoga studio or a drug store, outdoor seating increases your customer’s engagement by: 1.) Providing those who accompany customers a place to comfortably wait (allowing the shopper more time and peace of mind) and 2.) Communicating to the outside world that people patronize your store, creating a center of social life. 3. SURPRISE AND DELIGHT Get creative, get noticed and get people talking! Stand out on the street with fun and relevant street engagements; a skeleton mascot in front of a chiropractic business, a fanciful little letter drop for a toy store, or a dish with water for dog walkers. The possibilities are endless! 4. ENGAGE THE FIVE SENSES Humans have five senses—appeal to them all! Have your storefront more than look good; have it sound, smell, feel and even taste good too. Tap into and create new positive associations with customers by creating a multisensory storefront experience. 5. INVITING TRANSITIONS People need to slow down from the public life of the street in order to enter the more private life of your store. Create semi- enclosures, like the eddies along a stream, to pull people in. Outdoor merchandise, seating nooks, and slightly recessed doorways… the possibilities are endless! 6. BORDERS THAT BIND Just as a beach binds the water to the land, a porch binds a house to the yard, how can your storefront create a meaningful bond with your community and customers? You can do so by celebrating and enhancing the places where two things meet: sidewalk to storefront, pathway to doorway, outside air to window, seating area and shopping aisle. FALL 2018 STATE OF RETAIL REAL ESTATE REPORT 12 WHAT A FRIENDLY STOREFRONT LOOKS (AND FEELS!) LIKE So, what does a Friendly Storefront look and feel like when the six elements are in place? The answer is… it depends! In 2017 we developed and tested how the six steps could be delivered with low cost improvements with businesses in downtown Hopkins with support from the City of Hopkins and Hennepin County. GOOD VIBES YOGA Karen and Andy owned a yoga studio one block off Mainstreet in Hopkins, Minnesota. Since moving into the space, they made many improvements to the space to make their studio as welcoming and inviting as possible to students and passersby. Prior to starting their project, Karen and Andy had mostly thought about improving their studio room to create a more relaxing and welcoming environment but had paid little attention to the storefront courtyard and the value it could bring to their business and community. They properly identified two of the major opportunities, or “windows” to enhance their storefront experience: 1.) A place to sit 2.) Engage the five senses. By focusing on creating more comfortable edges to their storefront through moveable seating they were able to turn was a nice-looking space into one that allowed people to socialize, share class info and hear of new offerings. KIDDYWAMPUS TOY STORE Kiddywampus toy store was looking for a way to take advantage of an empty storefront wall along a busy intersection, just across the street from a busy community arts center. They added Surprise and Delight by converting an empty wall of their building into a whimsical mail drop to engage kids (and their parents). This fostered more face-to-face time with regular customers and opportunities for deeper engagement through conversations about upcoming programming and events at the store. Toy store Kiddywampus was located just across the street from a performing arts center sits. One problem they faced was that their side frontage towards the arts center was plain and not engaging. In walking the site with the owner, we noticed a papered-up door that was no longer used, which also had a vacated mail slot. We got to thinking – how can we create an interactive experience that 1) raises awareness for the store 2) engages with visitors 3) gets people to visit the space more than once and 4) increase the likelihood of visitors coming into the store. – continued on page 15 STOREFRONTS AS PLACES CONTINUED... “The day they went in, we walked in and customers were out there hanging out, chatting.” Andy, owner of Good Vibes Yoga BEFORE AFTER FALL 2018 STATE OF RETAIL REAL ESTATE REPORT 13 The owner said people are always asking her what a “wampus” was, so we came upon the idea of using the unused mailbox as a way to “ask the wampus”, upon which the wampus would respond to children’s letters once a month within the store. Now new memories and rituals are formed that support the commercial life of the business and the social life of the community. HEALTHSOURCE CHIROPRACTIC HealthSource Chiropractic had moved to town a few years ago. Business had been ok, but it was struggling with awareness, being on the end of Main Street in a storefront set back from the street. In talking with the owner, we came upon the idea of taking an iconic medical prop – the skeleton – and bringing it outside to engage the street. The owner took it and ran with it, dressing “Bones” up in seasonal costumes outside her storefront. Now everyone in town knows where she is at, and if they hear of someone in need of chiropractic services, they know where to refer them too. RESULTS Participants in the Hopkins storefront project reported: • 45% saw an increase in the amount of people who stopped and noticed their storefront • 33% reported new conversations with their customers • 33% reported people spending more time within their store or facility • 89% of participants would recommend this program to a fellow business owner WHAT ARE YOU WAITING FOR? The world of retail is rewarding those who can provide a dynamic social experience – no matter what one is selling. Is your storefront doing all that it can to deliver what today’s customers are looking for? Whether it’s a business, shopping center, or downtown there is value to be had by applying the 6 steps to any storefront. So, go forth and get to it! n STOREFRONTS AS PLACES CONTINUED... NEVER BE AFRAID TO FAIL. BE AFRAID OF NOT LEARNING FROM MISTAKES. W. BRETT WILSON FALL 2018 STATE OF RETAIL REAL ESTATE REPORT 14 – continued on page 15 POP UP SHOPS AND SPECIALTY LEASING WITHIN THE RETAIL EVOLUTION by Kris Brandt, Cypress Equities/Eden Prairie Center and Anne Mezzenga, COO + Chris Walton, CEO of Red Archer Retail and OmniTalk.blog The rapidly changing world of retail in both the local and national market, has resulted in many unique business challenges, especially for retailers and retail landlords. Many national retailers are closing some or all of their locations, leaving vacancies in large malls to local strip centers. Some are finding solutions in short term retail. Enter the pop-up shop, which offers landlords an opportunity to fill vacant space and consumers an opportunity to buy unique and often locally-produced products. As Co-Founder of Red Archer Retail, a company working with brands and retailers thinking about the future of retail, Anne Mezzenga, along with her partner, Chris Walton, are often approached by clients looking to build out these pop-up retail spaces. Kris Brandt, industry veteran and specialty leasing manager at Eden Prairie Center, sat down with Anne to discuss specialty leasing, the rise of pop up shops, and the flexibility required of the industry to survive and thrive in this new and constantly evolving world of retail. HISTORY OF SHORT TERM LEASING: Red Archer Retail (RAR): Kris, you’ve been working on specialty leases before the pop-up shop was an international phenomenon, can you tell us how these leasing agreements came about and what they look like today? Kris Brandt (KB): At its inception several decades ago, specialty leasing in Minnesota shopping centers was focused on merchandise carts in the common area during the annual Christmas holiday period, and it was rare to find temporary users at other times during the year. Over time, it became apparent to retail landlords that specialty retail revenue, especially from those tenants who stayed longer than 12 months, could significantly contribute to the shopping center’s annual revenues. As a result, more attention was paid to specialty leasing as a year-round program, reminiscent of a European market, with the hopes that they’d eventually become permanent inline tenants. WHO’S A LIKELY POP UP TENANT AND WHY? RAR: We’ve found our retailer/maker clients look to the pop-up concept because it allows them to test an offline, physical experience, in some cases without investing the upfront capital involved in a traditional retail lease. What are the reasons you’ve found tenants explore specialty and pop up leases? KB: Unlike the relatively small number of holiday specialty retailers that existed during the infancy of temporary leasing, specialty tenants now range from one-owner small businesses to national and even international businesses – think Go Calendars and Hickory Farms. In the case of the current hot trend of pop-up shops, the participants in our Minnesota pop-ups could very well be local individual artisans and makers all looking for an opportunity that is temporary in nature. There are many reasons for a temporary lease, but typical examples include: • The operator is a holiday-only business. • The operator is a start-up and may not have established credit history or be able to sign personal guarantees and who wants to start slowly and more economically than what a longer-term agreement would entail. • The operator is an established small business, but cannot afford the cost of a long term lease, so is willing to take FALL 2018 STATE OF RETAIL REAL ESTATE REPORT 15 – continued on page 16 the risk of relocation or termination if forced out of its space in order to accommodate a permanent tenant. • A group of businesses or individuals, particularly in the case of local makers, wants to pool their efforts to host a short term pop up shop; makers typically cannot commit to long term because hiring staff is cost prohibitive, and they can’t staff the locations at all hours by themselves, as it would take away from their production time. • In the case of the local market, once a temporary tenant has established itself at a particular center, such as having been a holiday tenant more than once, they tend to keep returning, as they become comfortable with a certain location and know that they can expect a certain level of sales from that location. RAR: It’s not just the retailers driving the increase in specialty leasing, but industry trends show shopping center visitors are clearly demanding that kind of experience. This requires a pretty significant shift from traditional retail leasing models. How do you feel the commercial real estate industry will need to shift in order to accommodate it? KB: We’re already somewhat there. Traditional retailers have left vacancies in many malls and specialty retail has become an established and expected revenue source in a majority of larger shopping centers. Individual shopping centers have removed many boundaries as to what products or services can be considered for short term leasing. Additionally, the term of a license agreement is no longer limited to a short four to six-week holiday season, but can extend for up to three years. If an inline specialty retailer has an agreement with a term in excess of one year, it is not uncommon for that square footage to be included in the total occupancy percentage of the center. This lessens the sting of a high vacancy percentage that could potentially trigger contingency clauses in permanent leases, allowing those tenants to reduce rent or even vacate. POP UP DEAL STRUCTURE: RAR: We know every deal, on every property, in every location is different, but are there any consistencies in how a pop-up deal might be structured? KB: Generally, specialty leases range anywhere from 30 days to three years and specialty retailers can expect to pay roughly one- third of longer-term permanent leases. A typical license agreement requires a base monthly license fee (the same thing as rent), plus payment of percentage rent once an established sales breakpoint is achieved. A successful specialty leasing program in the current retail climate often requires a lot of creative deal structuring due to intense competition between property owners for specialty tenants. In the current climate, a license agreement could be structured to contain the typical base monthly fee, plus percentage over an established sales breakpoint, or instead, it could require a gross monthly sum, or else, a percentage of sales. Utilities and trash removal may or may not be included in this agreement. The bottom line is that a successful deal is one that will help the licensor reach its revenue goals and the licensee to reach its sales goals. RAR: It’s also important for a brand or retailer to clearly define their goals, beyond sales, when doing a temporary lease. Much of our work with clients is to help them develop the strategy behind the pop-up. For some, it’s a short term event to raise awareness, but others are testing a physical storefront with the intent to scale. Even though the lease is short term, all the operations of a physical store still need to be put in place, especially if the brand/retailer’s goal is to scale. Large things like buildout, Point-of-Sale and inventory management systems still have to be developed, but also fixtures, signage, etc. and those things add up quickly. POP UP SHOPS AND SPECIALTY LEASING WITHIN THE RETAIL EVOLUTION CONTINUED... FALL 2018 STATE OF RETAIL REAL ESTATE REPORT 16 POP UP SHOPS AND SPECIALTY LEASING WITHIN THE RETAIL EVOLUTION CONTINUED... KB: Agreed. Storefront signage and fixturing costs, if the licensee does not own its own fixtures, which is true for many smaller, local makers, are a major consideration for both sides and can cost thousands of dollars. These types of costs can be used as bargaining chips for landlords when negotiating license fees. A licensor may, for example, be willing to absorb the cost of the storefront sign or the cost of installing slat wall in a space, in exchange for the licensee agreeing to pay a higher license fee than it otherwise would consider acceptable. We’ve even brought in visual merchandisers to work with licensors, which is a win-win. The local retailer gets the help they need merchandising their product, and the shopping center owner can ensure the aesthetic of the space is consistent. POP-UP TENANT SOURCING: RAR: We’ve found from our commercial real estate clients, that sourcing pop-up retailers is becoming a new, more time-consuming function of a leasing manager’s job. We’ve helped connect them with technology platforms like Storefront, which acts as a “Tinder for vacant retail spaces” to manage some of this workload. What have you found to be the best recruitment methods for specialty retail tenants? KB: I’m constantly on the hunt for new and innovative specialty retail opportunities, which involves going to local craft fairs, art fairs, expos, street front retail, etc., along with reviewing new retail concepts in other markets. In addition, we, and other centers like us, have a significant amount of repeat and referred business from specialty tenants who have enjoyed success at our property. IN-MARKET EXAMPLES OF POP-UPS: RAR: We’ve got some great examples locally of shopping center owners and retail real estate developers that are moving their business model from a focus of filling vacant retail spaces to creating them. The Mall of America has hired a team to produce the second year of their RAAS “Retail as a Service” store, which is a collection of several vendors that originally started in a vacant Williams Sonoma store. The RAAS team seasonally curates the vendors who are offered temporary space in the experience. The vendors pay a share of revenue as “rent.” The hope is that without the hassle of signing a traditional lease and the cost of a buildout, the vendors can get a taste of what their own storefront would look like, and eventually become an inline tenant of the mall, filling the previously mentioned vacancies. There’s also the new “Keg & Case Market” in St. Paul where owners sourced and built out spaces for over 25 one-of-a-kind food, retail and service vendors. Vendors in these spaces pay rent and sign longer leases (12 months or more) but benefit from shared marketing, buildout costs and common areas. Not a small fete, but if the opening weekend was any indication, it’s something that is very well received by today’s generation of consumers. A national example to call attention to, having recently been acquired by Macy’s, is STORY. STORY is a concept store in Manhattan that rotates its entire inventory roughly every 30 days, featuring new product around a curated theme, or “story”. It gives visitors a reason to make repeat trips because each time they can get access to products they may not have known about or that weren’t there just a few days ago. In an era where the only reason people need to go to a physical space are for tactile experiences (touching, feeling, trying things on) and the memory and delight – continued on page 17 FALL 2018 STATE OF RETAIL REAL ESTATE REPORT 17 POP UP SHOPS AND SPECIALTY LEASING WITHIN THE RETAIL EVOLUTION CONTINUED... of being somewhere, shops like RAAS, Keg & Case, and STORY are what we believe are the future of successful retail experiences. ARE THERE OTHER EXAMPLES LOCALLY OR NATIONALLY YOU’VE SEEN THAT PIQUE YOUR INTEREST? KB: Rose & Loon just opened at Rosedale Center. This concept is similar to the previously noted RAAS store at Mall of America, in that it is comprised of a collection of several local makers/ vendors. However, Rose & Loon is unique, in that the store manager and staff have been hired by Rosedale Center management, and there is one POS system. The collection will rotate from time to time, and the store also includes an “entertainment” element, in that individual makers will appear occasionally to demonstrate how their wares are made. FUTURE OF SPECIALTY LEASING: RAR: Specialty leasing and pop-ups promise to keep the retail landscape of the next several years interesting. Based on the trends and transitions you’ve seen the last several years, what would be your advice for retailers and brands, as well as retail property managers and developers? KB: Temporary pop-ups are wildly popular right now, both locally and nationally, from the strip center in a small town, to the largest shopping centers. Because of this, there is always the danger that there will be too few retailers or makers to offer new and unique products. There’s also the challenge for building owners and managers to offer space that will appeal to a critical mass of temporary retailers on an ongoing basis, rather than offering them “just another empty space.” What appeals to one type of retailer may not be universal; the appeal could be the walk-by traffic, a location in a densely populated area of town, or even the co-tenancy in a shopping center location. In summary, specialty leasing is definitely not one size fits all, and property owners need to figure out the best temporary uses for a given property. n DEVELOPMENT / REDEVELOPMENT UPDATE by Christopher Moe, H.J. Development, Inc. Development activity in the Twin Cities and outstate markets of Minnesota has remained limited by historical standards. Much of the new development that has taken place has been smaller developments under 10,000 square feet consisting of two to four tenants that are able to step up and pay high rents that are now needed to justify a small-scale project. In talking recently with tenants and brokers, it seems the tenant demand for these high dollar deals is falling off as we move into 2019. Junior box development is even more limited as tenants in that category typically cannot pay the rents required to make new construction feasible. Rising interest rates have not helped, nor has the reduction of options in each category within the space. Developers need to get creative with how to structure deals and how to physically construct the buildings in order to make these projects work. Much of the activity in this space moving forward will likely be the demising of existing boxes acquired at a low coast so mid double-digit rents can be justified for the landlord/developer. – continued on page 18 FALL 2018 STATE OF RETAIL REAL ESTATE REPORT 18 DEVELOPMENT / REDEVELOPMENT UPDATE CONTINUED... BELOW YOU WILL FIND SNAPSHOTS OF CURRENT DEVELOPMENT/REDEVELOPMENT PROJECTS IN 2018. – continued on page 19 ELEVATE AT SOUTHWEST STATION 12900 & 12950 TECHNOLOGY DRIVE EDEN PRAIRIE GLA 214,929 Tenants: Mixed-Use apartment building with bottom floor retail N/A 1110 HAZELTINE BLVD, CHASKA GLA 27,700 Tenants: Aldi, Starbucks, Chipotle COMMONS PLAZA 700 COMMONS DRIVE, WOODBURY GLA 12,942 Tenants: Sleep Number, Wellhaven Pet Healthcare & Daycare, Raising Cane’s SPIRIT POINTE 16106 PILOT KNOB ROAD, APPLE VALLEY GLA 13,000 Tenants: Dunn Bros, Club Pilates, MN Ortho, Genisys Credit Union, Pilot Knob Dental Care N/A 12730 ELM CREEK BOULEVARD, MAPLE GROVE GLA 11,097 Tenants: Crave, Bank of America TOP-GOLF 6420 CAMDEN AVENUE NORTH, BROOKLYN CENTER GLA 85,240 Tenants: Top-Golf FALL 2018 STATE OF RETAIL REAL ESTATE REPORT 19 DEVELOPMENT / REDEVELOPMENT UPDATE CONTINUED... RICHFIELD PLAZA 1601 66TH STREET EAST, MINNEAPOLIS GLA 10,448 Tenants: Caribou & Einstein, Jersey Mike’s, Orange Theory, Taqueria La Hacienda N/A 17599 KENWOOD TRAIL, LAKEVILLE GLA 8,700 Tenants: Chipotle, Bank of America, AT&T PORTILLO’S 1800 COUNTY ROAD B2, ROSEVILLE GLA 7,459 Tenants: Portillo’s WOODBURY PLAZA RETAIL 530 WOODBURY DRIVE, WOODBURY GLA 6,955 Tenants: Subway, Amazing Lash Studio, Orange Theory N/A 3901 WEST 7TH STREET, EDINA GLA 6,702 Tenants: Roti, E-Trade N/A 5500 BROOKLYN BLVD, BROOKLYN CENTER GLA 4,700 Tenants: Sprint, Tim Hortons FALL 2018 STATE OF RETAIL REAL ESTATE REPORT 20 THE LEAVES ARE CHANGING, TEMPERATURES ARE GETTING COOLER, IT CAN ONLY MEAN ONE THING… BUDGET SEASON. As a property manager, whether you live to crunch the numbers or dread the thought of a five year capital projection, you are probably in the middle of budget season. In this season, a budget that is carefully considered lays out the plan for accomplishing both big ideas for the property and necessary maintenance; and the financial means needed. Crafting the best budget possible sets forth the task of each member of the property ownership team and what the property owner can expect. HERE ARE A FEW TIPS TO HAVING WELL THOUGHT OUT AND ACCURATE BUDGETS. • WHAT IS THE STRATEGY? Make sure you understand the current ownership strategy. Is the building a long term hold, or should you be prepping the building for a sale? • MEETING EXPECTATIONS. Understand the information your owner is going to find valuable and the level of detail they may want to see. • A WISH LIST. Throughout the year, keep a file with bids you’ve gathered for next year’s wish list. • COMPILE YOUR THOUGHTS. Keep a printed copy of your current year budget. When you code invoices for your weekly check runs, make notes on that current year budget. Refer to these notes when you begin your new budget. • GIVE YOURSELF A RUN WAY. Start at least one month before your first draft is due. This will allow time for bidding and allow your accountant time to be accurate as well (if you’re working with one). • TAKE A HARD LOOK. Start with a complete property inspection and don’t forget your camera. Walk the roofs, every hallway, mechanical room and sidewalk. Write down what doesn’t look good and assign a time frame (perhaps a one year, two year, three year, etc until it needs to be addressed). • KNOW YOUR COMPETITION. Refresh your understanding of the market. What is the vacancy rate in the building’s submarket? What is the occupancy of the competitive buildings? What advantages do the competitive buildings have? Can you price out and budget to add any competitive advantages? Understand what the per square foot operating expense, insurance and taxes are for the buildings similar to yours. • TEAM MEETING. Make sure it is a group discussion when it comes to the leasing assumptions. Create a spreadsheet that covers all anticipated renewals and new leasing, and associated costs with both. This should be a thoughtful conversation between the leasing agent, building owner and property manager. • PROPERTY EXPOSURE. Marketing plans can be as detailed as needed. It should consider things like: what and where will you be marketing the building, tenant or business associations that may exist, are you going to host a broker open house in the coming year? Will you be having that Santa event again next year? • EXPERT ADVICE. When forecasting taxes, discussing with a real estate tax advisor may help you be as accurate as possible. RETAIL PROPERTY BUDGETING CHECKLIST by Emily Becker, RMA Real Estate Services, LLC WITH THESE BUDGETING FUNDAMENTALS (AND A FEW PUMPKIN SPICE LATTES) BUDGET SEASON WILL BE A BREEZE. FALL 2018 STATE OF RETAIL REAL ESTATE REPORT 21 Over two years ago, Bill McGuire, the owner of Minnesota United FC, unveiled a MASTER PLAN for the 35-acre “SuperBlock” in Saint Paul’s Midway, incorporating the future Major League soccer stadium. ALLIANZ FIELD, designed by Populous, will be the new home to our very own Minnesota United FC! The 346,000 square foot facility will offer seating for 19,400 fans including 25 suites, 38 semi- private loge boxes, and four Hospitality Club rooms while also incorporating the latest amenities and technology designed to minimize environmental impact and energy usage. M.A. Mortenson Co., the builders of Allianz Field, will also be the master developers for the entire SuperBlock. The site is currently a mix of the existing Midway Shopping Center, the stadium and the vacant land surrounding. The objective of the master plan is to “create a civic space that enhances game day experience and adds vitality to the village during events and non-event days.” In years to come we hope to see an integration of day and night life that includes office, retail, residential, entertainment, hotel, and open green space. The proposed plan will have a 7.9 acre Stadium, 8 acres of streets, 7.1 acres of open space and a remaining 11.4 acres of future land development. As of late, there has been little activity surrounding the new stadium. However, some tenants are relocating from Midway to other locations in the area, while other retailers are staying put for the time being. For example, Pearle Vision will be relocating to Hamline Station while Dollar Tree, Sally Beauty and others have decided to wait to make any moves. With the trifecta of creating a new mixed-use neighborhood, incorporating four season uses, and being located at the cross of both the BRT A Line and the LRT Green Line, there is significant potential to foster real estate growth and yield a highly walkable locality. It will be exciting to see the how the project unfolds over the next three to seven years and how the city builds on the momentum from the construction of Allianz Field in the surrounding area. To see what’s going on at the site today, CLICK HERE, or check their MONTHLY NEWSLETTER for updates on the project’s progress. MIDWAY UPDATE by Laura Castagna, Mid-America Real Estate, Minnesota ALLIANZ FIELD MASTER SITE PLAN FALL 2018 STATE OF RETAIL REAL ESTATE REPORT 22 INVESTMENT MARKET UPDATE by Matt Hazelton and Liam Hansmeyer – Northstar Retail Group of Marcus and Millichap While some U.S. retailers have REBOUNDED from their dismal state just a year ago, Amazon, which just recently peaked at a market cap of over $1 TRILLION, continues to be a major threat going forward due to its e-commerce strength. This new competition has been forcing retailers to close stores due to too many locations and too high of square footage. Because of this, many investors are searching for properties with service-based tenants that are less influenced by shifts to internet purchasing and buyers are now more willing to expand their geographic and size parameters to locate assets for purchase or exchange to find properties with this tenant base. Corporate transitions are producing changes in the Minnesota retail landscape. The bankruptcy of Bon-Ton Stores resulted in the closure of five metro Herberger’s and another 15 locations statewide. Although all the stores were closed by the end of August, the Herberger’s website indicates that some of the locations will reopen as new ownership takes over. Changes are also coming to the metro’s largest grocery chain. The PENDING SALE of Supervalu to United Natural Foods is likely to result in Cub Foods being sold. Ahead of the potential sale, the Cub store in Plymouth has been purchased by HyVee, which has been expanding heavily in the Twin Cities metro area and could be a potential buyer for up to almost 50 store that are expected to go up for sale. According to a Marcus and Millichap investment report, in the past four quarters, single-tenant cap rates dipped 20 basis points to an average of 6.9% due to a tight supply of for-sale listings. Multi-tenant cap rates edged up 20 basis points into the mid-7% in the past four quarters. Investors are moving towards multi-tenant assets as the supply of single-tenant assets dwindles. Multi-tenant transactions are up 16% in the past year while single tenant sales activity has declined 10% year over year as of March 2018 due to low supply. This lack of supply is moving investors further from the metro, with ex-suburban properties gaining interest. Older retail buildings in walkable, transit-oriented neighborhoods are continuing to be targeted for redevelopment opportunities and with the closure of many mall retailers in the past 12 months, there are plenty of redevelopment opportunities throughout the metro. While upward pressure on cap rates is widening the pricing gap between buyers and sellers, yield-driven multi-tenant buyers are heading to secondary or tertiary markets where cap rates lie above 8%. Minnesota’s robust economy and favorable retail demographic trends are also luring out-of-state- buyers, many from California, who are drawn in by the lower entry costs and higher yields. Quick-service restaurants with 10-15-year lease terms continue to be highly sought after and are selling at a cap rate range between 5.5-6.5% throughout the state. – continued on page 23 MINNESOTA URBAN/SUBURBAN MARKET CAP RATES • CLASS A: 6 - 6.5% • CLASS B/C: 6.5 - 8%+ MINNESOTA TERTIARY MARKET CAP RATES • CLASS A: 7 - 8% • CLASS B/C: 8 - 9%+ FALL 2018 STATE OF RETAIL REAL ESTATE REPORT 23 – continued on page 24 The Dow Jones U.S. Retail REIT Index has surprised investors and rebounded since March of 2018. While the index is still approximately even year-to-date, the INDEX is still significantly lower than where it peaked in the summer of 2016 at $350. Retail investors still have a reason for optimism mainly due to the ever-strong U.S. economy. The strengthening job market, attributed to an increase in hiring, low unemployment, and President Trump’s recent tax cuts, are all putting more spending money into the pockets of consumers and increasing store sales figures, which is partially why we are seeing a rebound in the retail market. Investors have been shifting away from big box center and enclosed shopping malls as supported by the retail sales volume showing the distribution of sales by price range. We attribute the decline in large $20M+ deals to this shift brought on by Amazon’s dominance in the market. Amazon is forcing retailers to rethink their strategies towards smaller spaces with tenants unaffected by Amazon such as coffee shops, service-based shops, and fast food centers to better appeal to the new age of shopping. Investors were happy to hear that the new Tax Cuts and Jobs Act (TCJA) preserved the popular 1031 exchange which is commonly used by investors to defer capital-gain taxes by reinvesting sale proceeds. Investors continue to utilize this tax provision to get out of management-intensive properties into those that require a more passive approach. Our retail group has seen an increase in 1031 buyers coming into retail from across different product types. For 1031 buyers with cash, the recent increase in interest rates is not affecting their ability to purchase new properties at strong prices. The TCJA also introduced TAX-CUTS for households which obtain income from pass- through businesses. While there are limits in place on upper-income tax payers utilizing this deduction, the deduction is expected to entice additional capital into commercial real estate, mostly through investors seeking passive income. As the Federal Reserve continues to lift interest rates due to a strengthening national economy, lenders are trying to tighten margins by absorbing cost increases to compete for loans. Despite these efforts, borrowing costs are rising, which is prompting investors to seek higher yields in secondary markets. However, strong economic growth and rising NOIs are leading to elevated sales prices, potentially widening the expectations gap. But even with these positive economic reports, the yield spread between two- and ten-year treasuries continue to tighten, which some use as a possible signal of an upcoming recession. Ten-year loan interest rates are ranging between 4.75% and 5.25%, depending on tenancy, location and sponsorship. The sector has become increasingly nuanced, with deals more scrutinized due to e-commerce competition. INVESTMENT MARKET UPDATE CONTINUED... FALL 2018 STATE OF RETAIL REAL ESTATE REPORT 24 INVESTMENT MARKET UPDATE CONTINUED... MAJOR RETAIL SALES IN MINNESOTA 3PENN AND AMERICAN Multi Property Sale in Bloomington - MN MAJOR TENANTS: Fresh Thyme, Red Robin, Which-Which, Fantastic Sams, AT&T SALE DATE: 7/20/2018 SALE PRICE: $19,000,000 GLA: 58,531 SF PRICE PER SQUARE FOOT: $325 BUYER: Sara Investment Real Estate Seller: United Properties 3PLAZA 66 New Development, Richfield - MN MAJOR TENANTS: Jersey Mike’s, Caribou Coffee SALE DATE: 4/19/2018 SALE PRICE: $5,870,238 GLA: 10,100 SF PRICE PER SQUARE FOOT: $581 BUYER: Flag Builders of Minnesota, Inc SELLER: Interstate Development 3PLYMOUTH STATION SHOPPING CENTER Plymouth - MN MAJOR TENANTS: Hy-Vee, Caribou Coffee, Starbucks, National Karate School SALE DATE: 8/29/2018 SALE PRICE: $18,100,000 GLA: 68,244 SF PRICE PER SQUARE FOOT: $265 BUYER: Slate Asset Management SELLER: Plymouth Station, LLC CRYSTAL SHOPPING CENTER4 (Multi Property Sale), Crystal - MN MAJOR TENANTS: Michaels, Planet Fitness, Subway, Famous Footwear, Quick Service Restaurants SALE DATE: 8/6/2018 SALE PRICE: $27,650,000 GLA: 202,608 SF PRICE PER SQUARE FOOT: $136 BUYER: MN-Crystal Center-HA, LLC SELLER: Paster Properties VILLAGE TEN CENTER AND SHANNON SQUARE SHOPPES4 (Multi Property Sale), Coon Rapids/Arden Hills - MN MAJOR TENANTS: Cub Foods, Erik’s Bike Shop, Lifetime Fitness, Caribou Coffee, Dollar Tree SALE DATE: 7/11/2018 SALE PRICE: $41,700,000 GLA: 305,765 SF PRICE PER SQUARE FOOT: $136 BUYER: Sterling Organization SELLER: IRC Retail Center, Inc We make retail happen. CHICAGO ICSC 2018 AND OTHER RETAIL RECRUITMENT UPDATES •National Hamburger QSR –We met with the Real Estate Director in Chicago and discussed Rosemount. They told us that they would be interested in seeing sites in Minnesota so we have shown them the market and sent them options for sites. They are reviewing the information. •National Sporting Goods Store –Our team met with Dunham’s in Chicago and they will consider going into markets that don’t have a Dick’s, however they normally only take second generation space and at this time we don’t have a location to put them as they need at least 30,000 sf. •National Gym –We met with the Real Estate Rep for them and they are expanding but just like the group above prefer to backfill and at this time we don’t have an existing space large enough for their footprint. We will keep this in mind if we have any closures in the market. •National Hotel Chain–We met with this hotel group in Chicago as well and are looking to expand. They need 2 acres and are looking at all markets across the country to expand some of their flags. •Regional Pizza Restaurant –We reached out to their representative to see what their expansion plans are and showed them the old Applebee’s location. They seem to be close to a deal here but we continue to show it until that deal is officially done. •Regional Breakfast Restaurant–Our team has contacted them and they are currently reviewing the information we sent. They would be a fit for the vacant Applebee’s as well. •National Convenience Store -In conversations with this group about another market, they saw Rosemount on our client list. They let us know that the site was approved back in April however growth has been slow for the past 6 months, so not many sites have been put under contract. They see that changing in the near future as the executive team is planning to visit the site soon. ROSEMOUNT, MINNESOTA BETH MILLER PORTFOLIO DIRECTOR 205.314.0385 beth@retailstrategies.com October 2018 We make retail happen. CHICAGO ICSC 2018 AND OTHER RETAIL RECRUITMENT UPDATES •Multiple QSR’s and Coffee Users –Earlier in the month we made a large push to market some of the available properties on the corner of Hwy 3 and City Rd 42. We have sent these sites, with market information and pricing to all of these groups and are awaiting review. We continue to follow up with all of these groups. •National Mexican QSR -We also reached out to their real estate director and they forwarded the information to their local franchisee. They have already gotten back to us and have passed on the site as they feel it is too close to an existing location. •Warren Israelson –We reached out to Mr. Israelson about his property and Hwy 3 and City Rd 42 to gather more information and let him know about our current outreach for his property. We are waiting to hear back from him now. •Cerron Properties –We have reached out to Bruce Rydeen as well who is the broker for the above properties. We have exchanged messages and are working to make contact. ROSEMOUNT, MINNESOTA BETH MILLER PORTFOLIO DIRECTOR 205.314.0385 beth@retailstrategies.com October 2018