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