MINNEAPOLIS—This metro area has stood out for past few years as a region with a remarkably strong economy. As reported in GlobeSt.com, the industrial, multifamily and office markets, for example, were restored to health soon after the recession ended, and investors from across the US have been lining up to buy these properties. And now Marcus & Millichap has just published a study showing that the retail market has also taken off.

The unemployment rate here is the lowest in the US for any major metro area, and this has helped to drive retail sales growth. “As a result, retailers including Hy-Vee, La-Z-Boy, Hobby Lobby, PizzaRev, Pizza Studio and Dunkin' Donuts are searching the metro for multiple sites to open," the company notes in its third quarter market overview. Fully developed areas in the metro region have seen developers take older malls such as Knollwood in suburban St. Louis Park and start remodeling projects.

Furthermore, developers of new apartment projects now find it feasible to add ground-floor retail space. Perhaps most impressive, a new 105-store outlet mall in suburban Eagan was fully occupied before its August opening. “The robust tenant growth this year will allow operators to lift rents, improving NOI,” M&M notes.

Investors have taken notice of the retail market as well. “Competition among buyers for the limited supply of single-tenant, net-leased properties has pushed prices higher and compressed cap rates 50 to 75 bps over the past 12 months,” according to the report. Prospective buyers have been giving the most attention to properties in the first-ring suburbs.

Still, the intense competition has made investors more willing to consider purchases farther from the central city or farther down the quality scale. “Throughout the metro, former gas station corners are being redeveloped into small multi-tenant strip centers that are trading at cap rates in the 7% range for national tenants and 100 bps higher for local tenants.”

The unemployment rate, which hovers in the low 4% range, has gone about as low as it can go. Job growth, therefore, will slow up a bit from the fast pace of the past few years, M&M says. The firm forecasts that metro area employment will grow 1.4% in 2014, or about 25,000 new jobs, as opposed to 2.3% the previous year. Professional and business services should lead the way.

New retail construction, however, will proceed at the same brisk pace, and perhaps even accelerate, the firm forecasts. In 2013, developers completed about 725,000-square-feet of space, and this year, they should finish about one million square-feet, a 0.6% rise in total inventory. But with such strong demand, vacancy rates should decline even further. In 2013, retail vacancies shrank by 20 bps and this year the rate should decline by 40 bps to just 5% overall.

All that new construction, however, will have a big impact on rents. “New inventory available for lease will push average asking rents in the metro up 2.6% to $13.85-per-square-foot at year end, nearly erasing the 2.9% drop recorded in the prior year.”


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Brian J. Rogal

Brian J. Rogal is a Chicago-based freelance writer with years of experience as an investigative reporter and editor, most notably at The Chicago Reporter, where he concentrated on housing issues. He also has written extensively on alternative energy and the payments card industry for national trade publications.