7.0 EDSR 03-12-2007ITEM ~ 7.
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MEMORANDUM
TO: Economic Development Authority
FROM: Catherine Mehelich, Director of Economic Development/~
~~~~
DATE: March 12, 2007
SUBJECT: Update on Downtown Redevelopment Plan Taskforce
In October 2006 Commissioner Tviete was appointed by the City Council as the EDA
representative to serve on the Downtown Redevelopment Planning Taskforce. The
Taskforce recently held its fifth meeting on Monday, March 5`h. Commissioner Tviete is
asked to provide a verbal update at the EDA meeting.
In addition staff and Taskforce Chair Mark Urista will be providing an overview and update
of the Downtown Redevelopment Plan Taskforce at the City Council Work Session meeting
immediately following tonight's EDA meeting.
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Is the Market Ready for Speculative Development and the Pricing It Requires?
• Absorption tripled from first half but is still below record-setting 2005 figures
• Users taking more time to consider space options
• As the market tightens, users have fewer options and landlords will push rental rates on existing buildings
The Twin Cities industrial market remains strop evidenced b diminishin I I ~I 11 ~ II ^ i ~ ilk
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concessions fewer user-buildin sales which means more users are sta m i
in the multi-tenant leasing market), positive absorption and decreasing " ~~~
vacancies. While it has been a tenant's market for several years, the ~
pendulum swinging in the landlord's favor, as strong demand for space
continues and supply decreases.
Market Demand Remains Strong
Although demand for space could not keep up with 2005's staggering pace of
3.8 million square feet of absorption, the market boasted a strong finish at
year-end 2006 with 2.2 million square feet. This robust activity helped push
down overall vacancy to 13%, the lowest since 2000. Another 2.4 million
square feet of absorption is projected for 2007, which will further decrease
vacancy.
At year end, the Southwest reported the lowest vacancy at 10.5%, with
419,297 sq. ft. of absorption. Many users continue to eye this submarket.
Shakopee, which struggles with ahalf-million square feet of vacant space, is
expected to see stronger leasing activity as space in Eden Prairie, Edina and
Bloomington fills up.
The Northwest reported 10.7% vacancy and 689,235 sq. ft. of absorption at year end. Strong activity is expected to continue in
2007. A handful of larger technology companies, for example, are expected to be pushed out into the leasing market because
they're out of space. At year end, the Southeast reported 13.6% vacancy and absorbed 403,830 sq. ft. The Northeast reported
16.2% vacancy and absorbed 649,737 sq. ft.-the most of any submarket. Much of the activity in this submarket in 2006 came
from internal growth.
Shrinking Supply of Larger Blocks of Space
Bulk warehouse flexed its muscles, boasting 986,539 sq. ft. of absorption in the second half, which pushed vacancy down to 15%.
A lack of functional bulk exists across all submarkets, with only approximately 35 options larger than 50,000 sq. ft. More than half
of the Northeast's absorption was in bulk deals, including U.S. Tire & Exhaust and Diversified Graphics signing hefty leases at the
Roseville Distribution Center. Nearly 100% of absorption in the Southwest was in bulk, including Anchor Glass Container and
Murphy Warehouse combining to lease 300,000 sq. ft. at Eagle Creek Industrial Park in Savage. A drought of bulk product is
expected in the Southeast, which could result in some less-functional buildings landing leases.
Office showroom reported the lowest vacancy at 11.9%, with few available options larger than 25,000 sq. ft. This tightening led to
speculative development, as nine showroom buildings opened in 2006 and several more are underway or planned. Developers with
solid locations in the western suburbs are in a good position to deliver higher-end, speculative showroom in 2007-08. Office
warehouse reported 12.0% vacancy overall and is particularly tight in the Northwest, Southwest and Southeast, at 8.7%, 9.4%
and 9.9%, respectively.
Concessions Dwindling
Despite healthy demand, quoted rental rates remained relatively flat at $8.10 (office) and $4.48 (warehouse). However,
concessions are evaporating across all submarkets. Landlords whose portfolios are faring well are offering fewer concessions and
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holding closer to quoted rates. The higher cost of new construction will put upward pressure on rental rates across the board,
which we are starting to see in select instances.
Tenants Moving Cautiously
Companies are taking more time to assess the market before making space decisions, primarily due to higher rates on new
construction, which are in the $12 (office) and $6 (warehouse) range. Some users are signing short-term renewals. This is
especially true in the western suburbs. Tenants need additional space, but they are waiting until they're more confident in the
economy. Many landlords currently can't pressure tenants to sign longer-term leases. By second-half 2007-as vacancies continue
to tighten-landlords will be in a better position to push longer-term leases or wait for the next deal.
Landlords in the Northwest, however, have maintained strong rates with few concessions on renewals, and in some cases they
have pushed rates. This is likely because their rates are still lower than newer, higher-image buildings.
Eventually, however, growing companies will need more space and thus will have to pay new construction rates, do a build-to-suit
or settle for less-functional space. Once tenants are willing to pay the higher rates needed for new construction, more pending
speculative development will move forward.
Repositioning Properties
An ongoing trend, particularly in the Northeast, is single-user buildings being converted to multi-tenant buildings. Aurora Industrial
Center in Roseville was acquired by AMB Properties, which undertook extensive renovations to reposition it as multi-tenant. The
building is being marketed toward distribution users to take advantage of the tight bulk market. Other single-user properties being
repositioned include Royalston Business Center and the American Importing Building, both in Minneapolis.
The Outlook
Another 2.4 million square feet could be absorbed in 2007. The Northwest is expected to lead absorption and could report single-
digit vacancies next year. As the market continues to tighten, landlords will push rental rates. Rate increases are expected across
the board with fewer concessions on all product types. Users will continue to evaluate limited options and determine how to deal
with decreasing supply and increasing rates. Functional bulk product will continue to be scarce, leading to leasing activity at more
obsolete bulk buildings. Large office showroom space is difficult to find, which is why speculative showroom development has
taken off.
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Vacancy
Absorption
Rental Rates
Highlights
Continues to improve
Substantial increase over first half
Flat
• The Northwest industrial market, consisting of 295 buildings totaling nearly 25.6 million square feet, continues to move in
the right direction and continues to chip away at its vacancy, which was a respectable 10.7% at year end, an improvement
over 11.3% at mid-year.
• Two-thirds of the positive absorption in 2006 occurred in the second half of the year, and it was spread out fairly evenly
among bulk (213,605 sq. ft.), office warehouse (118,503 sq. ft.) and office showroom properties (100,202 sq. ft.). The
submarket reported 423,310 sq. ft. of positive absorption in the second half for a total of 689,235 sq. ft. for 2006-the
highest of any submarket.
• A number of leases greater than 40,000 sq. ft. were signed in the past six months; several were by high-tech, med-tech
companies. For example, ATS Medical renewed 57,000 sq. ft. and expanded by 6,400 sq ft. at Plymouth Business Center in
Plymouth. Gyrus Medical Inc. signed a lease for 50,000 sq. ft. of office warehouse space at Wedgwood Commerce Center
XI in Maple Grove and also took 23,000 sq. ft. in another building in the Wedgwood business park.
• In other leases, InterNet Inc., a supplier of plastic netting and precision metal mesh, took 72,000 sq. ft. at Crosstown
North XII, a bulk distribution building in Brooklyn Park. (The company sold its 207,000-sq.-ft. facility in Anoka to Graco
Inc. for $6.4 million. See sales below.)
• Pratt Industries, a paper and packaging company, signed for 92,000 sq. ft. at the Plymouth Distribution Center in
Plymouth. The company is from the Midway area of St. Paul.
• One trend in the Northwest is the continued lack of larger office showroom properties. The showroom's vacancy is 12.6%,
down from 14.1% at year end. For the higher-tech, medical life-type companies that need larger showroom space, there
are really only a couple of available options.
• New construction was limited in 2006 in all sectors. The only new building to be delivered in the past six months was the
80,000-sq.-ft. 610 Business Center in the Highway 610 corridor in Brooklyn Park. It is an office showroom property
developed by Ryan Companies US Inc. No leases have yet been announced. The building will be part of a 600,000-sq.-ft.
mixed-use project.
• In planned development for 2007, Ryan plans to break ground on the 96,166-sq.-ft. Crystal Bay office showroom project
at 2725 Wayzata Blvd. in Long Lake. Also, Duke Realty Corporation is planning to break ground in first-quarter 2007 on a
150,000-sq.-ft. office warehouse building in a new industrial park called Gateway Business Park in Otsego, Duke intends to
build up to 1.4 million square feet of industrial space in this new 120-acre industrial park. The site is north of Interstate
94, along the east side of Highway 101. It could take five to seven years to build out the entire park. Otsego is the next
logical step out from Rogers for industrial development.
• There are another half-dozen or more developers in the Northwest with land and approvals; however, many are waiting
for preleasing.
• Rates have been stable at $4.59 per square foot for warehouse and $8.20 for office. There have been a couple projects
that have slightly increased rates, but that is only occurring in pockets-it is not across the whole market yet.
• Tenant renewals are a major trend in the Northwest. Many companies are staying in their existing locations and expanding
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if space is available rather than relocating. Landlords have been fortunate in maintaining fairly strong rates with no
concessions in these renewal deals, and in some cases, they have pushed rates. One major reason that landlords are able
to hold their rates on these renewals is because their rates are still lower than the newer, higher-image buildings. Also, the
expense and headache of moving, especially for tech companies, can be avoided by renewing.
• A fair number of companies are taking a look at the Northwest submarket. While some will renew and/or grab expansion
space where they are, most are considering all of their options, including relocation. There should be a handful of larger
tech companies that are pushed out into the market by late 2007, simply because they are out of space and there's no
room to expand at their current location.
• Options for larger spaces are becoming limited, however. If a tech company needs 50,000 sq. ft. and it looks from
Highway 12 up into Brooklyn Park, there are just three or four good options. Also, sticker shock is an issue with new
construction, especially for high-tech users, because new construction can cost $2 to $3 per square foot more than
existing space, depending on finish level. Another option for users is to split operations, and we are seeing a few examples
of high-tech companies doing that.
• The user-building sale market in the Northwest has been relatively strong-not like it was two or three years ago because
there is less inventory-but it is still having an impact on the multi-tenant universe. There were at least six sizeable user-
building sales in the past six months. The largest sale was O'Reilly Automotive (Midwest Auto Parts) purchasing the
300,000-sq.-ft. Broadway Distribution Center in Brooklyn Park from First Industrial Realty Trust. O'Reilly Automotive is
relocating 300 jobs from amulti-tenant building St. Paul.
• In other user sales, The Nuaire Group, a ventilation product manufacturer, purchased the 90,000-sq.-ft. former Gordon &
Ferguson Company building in Plymouth for an expansion. The company will take occupancy by year end.
• Graco Inc. acquired InterNet Inc.'s 207,000-sq.-ft. facility in Anoka to for $6.4 million. It is an expansion for Graco, which
has a large facility in Rogers.
• Minnesota Mortgage purchased the 60,000-sq.-ft. North Point Corporate Center in Plymouth. It is occupying 45,000 sq. ft.
and has leased out the remaining space to users.
• Also, Water Heaters Only Inc. acquired the 22,000-sq.-ft. Premier Restaurant Equipment building in Golden Valley for
$2,090,000, or $95 per square foot.
The Outlook
The Northwest should be below 10% vacancy by the end of 2007.
This submarket could see 600,000 to 800,000 sq. ft. of positive absorption by the end of next year, with the majority occurring in
office warehouse product.
Rates will start to tick upward, with owners probably starting to raise rates in the next six months by 25 to 50 cents across the
board.
There are six to eight developers in the Northwest with land and approvals. While a couple of developers will likely pull the trigger
on new spec projects-including Duke in Otsego-many will wait for preleasing.
There should be several larger tech companies that are pushed out into the market by late 2007 because they are out of space
and have no room to expand in their current facilities.
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Retail Pipeline Still Strong, Market Increasingly Affected by Housing Slowdown
Retail absorption remains strong, and fierce competition among big-box retailers continues; however, small-shop retail
demand in outlying markets is slowing due to the residential slowdown
• Reacting to pent-up demand, big-box users are pursuing highly sought-after redevelopment, infill development sites
• Developments are taking longer as cities and neighborhood groups become more discriminating when reviewing proposals
and there are more levels of bureaucracy
The Twin Cities retail market experienced yet another record-setting year in new construction and absorption in 2006. The market
reported approximately 3.1 million square feet of absorption in the past 12 months, and the vacancy at year end was 5.8% (6.3%
with sublease space).
Big box-anchored community centers once again were the driving force, reporting 1,901,280 sq. ft. of absorption in the second
half alone-twice that of 12 months ago. Community centers finished the year with 2,556,844 sq. ft. of absorption; no other retail
product type even came close. This strong activity is reflected in community centers'vacancy rate of 2.9%, possibly the lowest
historical vacancy ever. Seven community centers totaling 2.34 million square feet are under construction with another 1.37 million
square feet planned.
Big Boxes Fuel Growth
Development is being fueled by big-box users (some with their "super" concepts)-including Target, Wal-Mart, Lowe's, Cub Foods
and Home Depot-seeking to gain strategic positions in the marketplace. While intense competition among big boxes will continue
throughout 2007, demand for small-shop retail construction in outer-ring markets will soften as small-shop tenants feel the impact
of the residential slowdown. As big boxes push further out to compete for market share, there's not yet enough daytime
population in some outlying markets to support small shops. Prudent developers will scale back small-shop space.
Retail Market Correcting Itself
As a result of the housing slowdown, the retail market will undergo a correction from the past four years of record-setting
construction and absorption. It will "normalize." While it has been alandlord/developer's market, there will be an equilibrium shift
and retailers will gain some leverage.
Redevelopment Remains Hot
While the housing slowdown will curtail some "cornfield" development, inner-ring redevelopment is attractive as retailers seek to
penetrate desirable, densely populated markets. Target is redeveloping its Midway store and acquired the Four Seasons Sheraton
in order to build a SuperTarget. Target also did "scrapes," where it demolishes existing stores to build SuperTargets, in West St.
Paul and Roseville and has plans in Edina and Burnsville. Tri-Land Properties acquired two well-positioned, yet outdated Cub Foods
stores in Fridley and Burnsville and likely will raze them and build new Cub stores or use existing structures. Cypress Equities plans
to raze a movie theater in Edina to build retail and condos pending a court hearing. Haugland Company is redeveloping the
southwest corner of 50th and France in Edina into retail and condos and scraped existing buildings. Plans in Eagan call for
demolishing several buildings, including Cedarvale Mall, to develop retail, entertainment and offices.
Development Is More Difficult, Time-Consuming
While it's common knowledge that redevelopment is complicated, expensive and time-consuming, even developing conventional
sites today is taking twice as long. Discriminating cities, vocal neighborhood groups and more layers of governmental agencies are
complicating the process. One example of a development impacted by a neighborhood is Diffley Marketplace in Eagan where
Reliance Development planned to build agrocer-anchored center. Although the City Council approved the plan, it was met with
strong resistance from neighbors with traffic concerns. The city then approved the plan with a condition that prohibits access to
the development from a residential street called Daniel Drive. Dakota County will not approve the plan without this access point, so
Reliance's hands are essentially tied.
Franchises Experience Slowdown
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A slowdown among some franchises is impacting community and neighborhood centers as fewer franchises are being built and
fewer new concepts are coming to the market. Part of it may be the improving economy-fewer people need to "buy themselves
jobs" by opening franchises. Where in the past there may have been three or four sandwich shop franchises competing for a site,
today there may be just one.
New Stores, Restaurants Scout Area
Attracted to the Twin Cities' diverse economy, national retailers are searching for locations. New players that landed include LA
Fitness, Trader Joe's and Dave & Buster's. Players looking include Staples and Salad Creations.
Sit-Down Restaurants Retool
Several sit-down restaurants are looking to compete with "fast casual,"quick-serve restaurants for time-crunched consumers, so
they're pushing up their sleeves and retooling. They're changing their menus by adding take-out items, lowering some prices and
offering curbside delivery. Examples include Ruby Tuesday, Applebee's, Chili's, and TGI Fridays.
Regionals See Activity
Regional malls continue to look for ways to reinvent themselves to stay fresh and attract shoppers. One way is adding open-air,
lifestyle components, which combine the feel of an urban town square with the convenience of suburban parking lots. Rosedale's
$40 million lifestyle component is open and includes an AMC movie theater, Ann Taylor Loft, Sephora and Talbots. Discussion
regarding a lifestyle conversion at Southdale remains on hold while the fate of owner Mills Corporation is determined (the company
could be sold or restructured). Meanwhile, weaker malls continue to "think outside the box" by adding nontraditional retailers.
Northtown landed LA Fitness and Home Depot, and Brookdale is working with a general merchandise retailer.
2006 is the "year of the department store," as sales increased 4.4% from the same period last year, according to the International
Council of Shopping Centers (ICSC). Shoppers are looking to department stores for service. Plans are moving forward on Mall of
America's expansion, which includes Bass Pro Shop and the luxury Klimpton Hotel. Mall officials say it will be more of an
entertainment complex than a shopping mall. Construction could begin in mid-2007 if they get their financing.
The Outlook
Absorption will be strong in 2007, but less than 3 million square feet. Vacancies will creep up since not all of the space is
preleased. The market is returning to more normal levels. The big guns, like Target and Lowe's, will continue to get out in front of
the market, but developers will hold off on small-shop space in outer-ring pockets. The vacancies in existing small-shop space may
lead to future concessions.
Land prices in outer rings will start to drop due to less competition from housing developers. We will see continued redevelopment
in inner rings.
A second Nordstrom could be announced in 2007. The company is looking at Ridgedale, Southdale and Maple Grove. Southdale
will a get a new owner or new capital sources and some much-needed repositioning.
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Vacancy Remains arecording-setting low
Absorption Doubled from 12 months ago
Rental Rates Fairly flat
Highlights
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• Absorption continues to be the big story for Twin Cities community centers. These big-box-anchored centers experienced
1,901,280 sq. ft. of positive absorption in the second half of 2006 alone. That is nearly three times the absorption at mid-
yearand double the absorption from 12 months ago. Community centers finished the year with 2,556,844 sq. ft. of
positive absorption. No other retail product type even came close. There are 110 community centers totaling 27.4 million
square feet in this market.
• This record-setting activity is reflected in community centers' vacancy, which is 2.9% (3.2% with sublease space), the
lowest historical vacancy in at least the past decade and possibly the lowest ever.
• Much of the activity in community centers is continuing to be fueled by big-box anchor tenants, including Target, Wal-
Mart, Lowe's Home Improvement Center, Cub Foods and Home Depot, which are seeking to gain strategic positions in the
marketplace. These anchors are driving community center construction.
• New construction is accounting for the majority of the new absorption, with 730,000 sq. ft. reported at the new Fountains
at Arbor Lakes in Maple Grove, anchored by Costco, Lowe's, Dick's Sporting Goods and Marshall's. Developed by Opus
Northwest, the 800,000-sq.-ft. center celebrated its grand opening in September. It is the final stage of a 2.2-million-
square-foot development. Also, the 200,000-sq.-ft. Clydesdale Marketplace, anchored by Target, opened in Medina,
accounting for 180,000 sq. ft. of absorption.
• Target remains a very strong anchor and continues to expand and seek market share. The Target near Knollwood Mall in
St. Louis Park was recently expanded, and that store is doing well. In addition to the new Target at Clydesdale
Marketplace, a new Target opened at Oakdale Marketplace in Oakdale and three SuperTargets are under construction at
The Grove in Maple Grove, Union Crossing in Monticello and Cedar Point Commons in Richfield. More SuperTarget stores
are planned, including one in Apple Valley proposed by Ryan Companies at the west end of Cobblestone Lake on Pilot
Knob Road. SuperTargets are approximately 180,000 sq. ft. and include a full grocery.
• Target also has been undertaking "scrapes," where it demolishes smaller Target stores and develops its larger SuperTarget
format. A scrape is underway in St. Paul's Midway where Target will raze its existing Target store at University and
Hamline avenues after the new store is built on the former Four Points Sheraton site. It will be the discount retailer's first
urban SuperTarget, and it's expected to open in 2008. Both Target and Wal-Mart continue to seek attractive inner-ring
sites, which typically require this type of redevelopment.
Also, Target received city approval to go "super" in Edina, where it will re-develop a 196,000-sq.-ft. SuperTarget at its
existing site at 7000 York Ave. S. In Burnsville, Target will undergo a similar redevelopment of the existing store at
Burnhaven Mall and re-open as a SuperTarget in October.
• Wal-Mart is also looking to do its expanded "super" format, which offers a full grocery, and is going "super" where it has
land available. Although no new Wal-Marts opened in the past six months, the retailer is planning to expand stores in
Vadnais Heights and Oak Park Heights and convert them to Wal-Mart SuperCenters.
. Also adding to the absorption in community centers was the opening of new locations for Lowe's, a retailer that is
aggressively expanding in the metro. In addition to the new Lowe's at Fountains at Arbor Lakes, locations opened at Oak
Park Commons in Oak Park Heights and freestanding locations in Rogers, Blaine, West St. Paul and Shakopee.
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• Competitor Home Depot also has been active with a new store in Union Crossing in Monticello and stores under
construction at The Grove in Maple Grove and Cedar Point Commons in Richfield.
Demand for community centers continued to outpace supply during the past six months. Seven centers totaling Z.34
million square feet are under construction (some have portions already open), so a large chunk of space is set to come on
line in late 2006/early to mid-2007.
• In addition, another nine centers totaling 1.37 million square feet are planned with anticipated start dates in 2007.
Approximately 70% of these centers are being developed in outer-lying areas. There is still a lot of activity in Maple Grove,
and other strong markets include Woodbury, Lakeville, Blaine, Rogers, Monticello_ and Coon Rapids. The remaining 30% of
construction is inner-ring redevelopment and infill development as a response to pent-up demand.
• While intense competition among big-box retailers will continue throughout 2007, demand for small-shop retail
construction-particularly in outer-ring pockets-may begin to soften mid-year as small-shop users feel the effects of the
residential slowdown and lighter daytime population.
• A slowdown among some franchised concepts is impacting community and smaller neighborhood centers. Part of it may
be the improving economy as fewer people are "buying" themselves jobs by opening franchises. Where in the past, for
example, there may have been three or four sandwich shop franchises competing for a new retail center, today there may
be just one.
• Anew concept hitting the market is full-service health club LA Fitness, which is approximately 70,000 sq. ft. It is in the
process of completing deals at Park Place Promenade in Brooklyn Park and Brighton Village in New Brighton, and it's under
contract to acquire an old industrial site in Roseville, near Cleveland Avenue and County Road 62, The company is also
negotiating to take a former anchor space at Northtown Mall.
• Dave & Buster's, a large restaurant, bar and entertainment center, has opened its first Minnesota location at Fountains at
Arbor Lakes in Maple Grove. The restaurant is looking at other metro sites for locations, which are 50,000 to 60,000 sq. ft.
• Also looking at the metro is office supplies retailer Staples. The retailer has outstate locations in Rochester, Austin and St.
Cloud. The stores are approximately 20,000 to 25,000 sq. ft. They need 12 locations secured before they come to a
market.
• An active restaurant in community centers is Granite City Food & Brewery, which has locations in Eagan, Maple Grove,
Rosedale Mall in Roseville and St. Louis Park.
• Community banks have been very active opening new branches in community centers and neighborhood centers.
In future development, Ryan Companies US Inc. is working toward redeveloping the former Twin Cities Army Ammunition
(TCAAP) site in Arden Hills into a huge, mixed-use project. The Arden Hills City Council approved a resolution to purchase
585 acres of the former TCAAP site for $45 million for amixed-use development. The city plans to acquire and redevelop
the site in conjunction with CRR, a partnership between Ryan and Glenn Rehbein Cos. Plans for the site, which the city
approved last year, call for 2,400 residential units, 3.3 million square feet of commercial space, public developments and
parks.
• Chicago-based Tri-Land Properties Inc. acquired two well-positioned, yet outdated Cub Foods stores in Fridley and
Burnsville. The developer will either raze both stores and redevelop the sites into new, updated Cub Foods stores or use
the existing structures.
The Outlook
With 2.34 million square feet under construction and 1.37 million square feet planned with construction dates set for 2007,
community centers will continue to be the retail market's big growth engine. Big-box retailers will continue to drive new
development, both in outer-ring suburbs and inner-ring redevelopments. However, demand for small-shop retail construction may
begin to soften mid-year, as small-shop retailers feel the impact of the residential slowdown.
Although landlords and developers have not reached the point of offering concessions on unleased small-shop space, this may
occur in the future. Net rates remain flat at $18.22 per square foot.
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Vacancy Inched up
Absorption Dropped off dramatically
Rental Rates Fairly flat
Highlights
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• Neighborhood centers, typically anchored by a grocer or drugstore, saw a major drop in absorption in 2006, as only
288,249 sq. ft. was reported for the year (88,446 sq. ft. in the second half)-a significant drop from 832,807 sq. ft. one
year ago. This played a role in pushing the vacancy up slightly to 6.8% (7.7% with sublease space) from 6.5% at mid-
year. There are 286 neighborhood centers totaling 18.3 million square feet in our universe.
Rental rates were fairly flat at $16.41 per square foot.
Only two neighborhood centers are under construction. H.J. Development is building a 25,000-sq.-ft. cen in Elk River
which should open in first-quarter 2007. Tenants include Chipotle, Fed Ex/Kinko's and M&I Bank. Also, CSM Corpora ion is
developing a $20 million retail center and Residence Inn by Marriott hotel in Plymouth, adjacent to the West Health
Campus. The 27,500 sq. ft. of retail will include restaurants Cosi Deli and Caribou Coffee.
• Meanwhile, another dozen centers totaling 534,320 sq. ft. are planned with groundbreakings scheduled for 2007.
It is becoming more difficult for developers to find good sites for neighborhood centers, and even if they do find an
attractive parcel, the entire development process is taking longer and often is complicated by more selective cities, vocal
neighborhood groups and more layers of governmental agencies.
o One example of a difficult development is Diffley Marketplace in Eagan. Reliance Development Co. planned to
build a 72,000-sq.-ft. neighborhood center at Diffley Road and Lexington Avenue, which would be anchored by a
43,000-sq.-ft. Radermacher's Fresh Market and feature additional retail, including a bank, a coffee shop, service
and other retail along with a restaurant. Although the Eagan City Council initially approved plans, the project met
major resistance from neighbors with concerns, including increased traffic. The city then approved the plan with a
condition that prohibits access to the development from a residential street called Daniel Drive. Dakota County,
however, will not approve it without this access point, so Reliance's hands essentially are tied. The developer sued
the city, but in November a Dakota County judge rejected claims brought by Reliance against the city. Reliance
may appeal the decision or choose to build with the conditions imposed by the city. Without access from Daniel
Drive, however, Reliance officials claim the site doesn't work for commercial development.
Anchor tenant CVS Pharmacy is aggressively expanding in neighborhood centers and continues to look for outlots, as it
'slugs it out" with Walgreen's, which also is performing well and looking for additional sites.
• Meanwhile, Snyder's Drug Stores continue to struggle. Snyder's Drug Stores Inc. filed for Chapter 11 bankruptcy protection
in 2003, closing eight local stores as part of its restructuring and leaving behind space in neighborhood and community
centers. The retailer later completed its Chapter 11 financial restructuring. However, with giant pharmacy chains CVS and
Walgreen's, it is difficult for Snyder's to compete. Some speculate Snyder's might be a casualty. It recently closed five
more local stores.
• Drugstores also are competing with Target Corp., which is launching a line of medical clinics at 18 stores and distribution
centers this fall. This strategy returns Target to the in-store clinic business after splitting with Minneapolis-based
MinuteClinic, which was acquired by CVS Corp. Target is partnering with Medcor Inc. on these new medical clinics.
• Some active in-line retailers continue to expand and look for sites, including Fed Ex/Kinko's; Jimmy John's Gourmet Subs;
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regional banks like US Bank, TCF and M&I; and coffee concepts like Starbuck's Coffee and Caribou Coffee.
• Another retailer coming to the metro is Salad Creations, a restaurant franchise concept that has committed to a downtown
Minneapolis skyway location. It will also look for additional sites.
• Express fitness-type concepts are extremely active. Chains like Snap Fitness and Anytime Fitness are opening small, no-
frills workout facilities in retail centers that are convenient for people. They operate on a 24-hour-a-day, card-key locking
system. Anytime Fitness has approximately 80 locations in Minnesota, including 20 in the Twin Cities. Snap Fitness' web
site says it has more than 130 locations open or planned in Minnesota.
• Existing neighborhood centers are starting to see more renovations and repositionings, and many communities want to
see pedestrian-friendly, mixed-use, urban-type redevelopments rather than a prototypical freestanding building or strip
center. The aging Hi-Lake Shopping Center at Lake Street and Hiawatha Avenue in Minneapolis is an example of a
renovation. Wellington Management Inc. purchased the 7.91-acre retail site, located immediately west of the Lake Street
light rail station, and completed a $3 million renovation, including a major facelift, new landscaping and new and increased
lighting. Wellington essentially made the center more accessible to pedestrians and LRT riders. Also, a new Aldi grocery
was built at Lake Street and 21st Avenue, a former Burger King site that sat vacant since a fire destroyed the building a
few years ago. The redevelopment also includes the addition of housing.
• Another partial renovation occurred at Miracle Mile Shopping Center, off Highway 100 and Excelsior Boulevard in St. Louis
Park. Hoigaard's, an outdoor equipment and apparel retailer and longtime St. Louis Park retailer, relocated to the Miracle
Mile Shopping Center, occupying the west side of the center after completing renovations to the interior and exterior of
that space.
• Also, developer True North Investments undertook a repositioning at Minnetonka Crossing at Crosstown (Highway 62) and
Shady Oak Road in Minnetonka. The project includes 12,000 sq. ft. of retail, which includes a Caribou Coffee and a Jimmy
John's Gourmet Subs with 12,000 sq. ft. of office space.
• The Cedar Grove redevelopment, slated for the intersection of Highways 77 and 13 in Eagan, is on hold. It's been reported
that the city of Eagan is considering ending its development agreement with developer Schafer Richardson and bringing in
anew developer for the $250 million redevelopment. The city took action after the developer failed to submit updated site
plans in November. Shafer Richardson told the city that the existing proposal was not feasible under current market
conditions, chiefly the sluggish condo sales. Eagan owns more than half the property in the slated redevelopment area-
including Cedarvale Mall-and is working to obtain the remaining sites. The area eventually will have transit facilities at
both ends, and plans call for the development of an urban village, including retail shops, entertainment venues and offices,
and hundreds of condos and townhomes.
• A number of sit-down restaurants are looking to "stay in the game" and compete with quick-serve, fast-casual eateries, so
they are pushing up their sleeves and retooling. They are changing their menus by adding take-out items, lowering some
of their prices, and offering curbside delivery or drive-thru windows for convenience. Examples include Applebee's, Chili's,
Ruby Tuesday and TGI Fridays.
• Grocery store °wars" continue in neighborhood and community centers. Target and Wal-Mart's super center concepts-
offering full grocers-are competing head-to-head with traditional grocers and taking a bite out of their profits (especially
since there is no longer the stigma associated at shopping at discounter Wal-Mart). Some traditional grocers, which can't
compete on pricing, are attempting to draw shoppers by offering nicer environments and convenient elements like bigger
delis, fresh flowers and home meal replacement. There are causalities, however, from this intense competition.
• Kowalski's Market announced it is closing its Lakeville store on January 15 as the result of low sales and big-box
competition. It will pull out of its 20-year lease at the new Lakeville Crossing center. The store, which opened just 15
months ago, is facing fierce competition from Cub Foods, Rainbow Foods and SuperTarget. There also are plans for a
second Cub Foods store in the city.
• Roundy's Supermarkets announced it will close three Rainbow Foods stores in the Twin Cities; two are in community
centers and one is in a neighborhood center. The stores are at 1801 County Road 42 West in Burnsville, 1643 County
Road 62 in Roseville and 1698 Vierling Drive in Shakopee. Roundy officials say they no longer fit within the future plans for
Rainbow's retail store network.
• Rick's Market, 1605 County Rd. 101 N. in Plymouth, is closing, as is Jubilee Foods at 90th Street and Penn Avenue in
Bloomington.
• Meanwhile, some grocers opening new locations are faring very well. Festival Foods opened earlier this year at 98th Street
and Lyndale Avenue in Bloomington-formerly Byerly's space-and reports strong sales.
The Outlook
Neighborhood centers will continue to see more redevelopment and repositioning, especially as good sites become even more
difficult to find. However, projects will take longer to develop because of more discriminating city officials, vocal neighborhood
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groups and more layers of bureaucracy.
Landlords of neighborhood centers will continue to be on the lookout for fresh and flexible retail and restaurant concepts and be
creative in their uses.
We might see more fallout from the fierce grocery store competition.
CVS and Walgreen's will continue to expand and aggressively look for sites; however, Snyder's will continue to struggle. _
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