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MINNEAPOLIS-When nine Twin Cities Mervyn’s stores were closed this summer, vacancy among regional malls in the Twin Cities shot up 1.3 million sf. Meanwhile, retail developers delivered just over 1.3 million sf of new construction to the metro market in 2004.

The combination helped drive vacancies in the Twin Cities retail market up to 7.8% at year-end from 5.2% at mid-year–in what was otherwise another strong year for retail properties, according to a new market study. The vacancy rate for regional malls, where the Mervyn’s stores were located, increased to 14.9% at year-end from 3.6% at mid-year 2004, according to a market report from United Properties.

Even so, the retail market has stayed healthy and developers are projected to complete an historical high of 2.5 million sf of new retail construction. Nearly 1.5 million sf of new construction will be community center space.

“Since most retail development is preleased and the repositioning of the Mervyn’s sites will be substantially complete, absorption will soar by year-end 2005,” predicts Tricia Pitchford, senior associate of retail brokerage at United Properties. She adds there will be another two million sf or more of new retail construction in 2006. The 1.3 million sf of new construction this year is the lowest level in three years.

“The drop-off is really more of a ramping up,” Pitchford says. “Retail developments are extremely complex and have very long lead times.”

The Mervyn’s closings, plus a modest amount of new construction, also drove the absorption rate to its first negative number since 1996. Following positive 567,286 sf of absorption the first half of 2004, the retail market finished the year at negative 49,602 sf of absorption–a six-month swing of more than 600,000 sf.

Retail rental rates also softened in 2004 to an average $28.18 per sf versus $29.45 per sf in 2003. The decline can be attributed primarily to short-term tenant transitions at the regional malls.

Some regional mall owners have purchased the former Mervyn’s sites, which average 180,000 sf, and are exploring a range of opportunities from creating entertainment complexes to dividing the space among retailers looking to enter the market. Other sites are being eyed and leased to new mall anchors, including JC Penney in Woodbury and Maplewood.

As retail development sites become more and more limited, the trend toward converting well-located office and industrial buildings to retail will continue in 2005, further fueling strong absorption. Several retailers in 2004, including Costco, Lowe’s, Schneiderman’s Furniture, ALDI, Best Buy and Sam’s Club, acquired existing commercial properties and redeveloped or renovated them for retail use.

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