Research & Forecast Report -ST. PAUL | RETAIL Q1 2017

The Changing Demographic of Consumers Presents a Break with Retailers of the Past

Vacancy & Absorption Trends The vacancy rate in the Minneapolis-St. Paul retail market Market Indicators increased for the third straight quarter, rising to 6.1 percent in Relative to prior period Q1 2017 quarter one of 2017. Vacancy has been steadily increasing from VACANCY end of year 2015 when at that time, it was at 4.4 percent. There was 28,426 square feet of negative absorption, which was NET ABSORPTION largely due to regional shopping centers metro-wide reporting RENTAL RATE negative 152,446 square feet of absorption. Some of the negative absorption was due to Sears closing in Coon Rapids, vacating 132,700 square feet. Net Absorption Changes on the Horizon for Fast Casual Dining 872,912 1,111,241 Fast casual retail expansion activity continues to remain strong in 1,000,000 632,849 508,759 431,134 the Twin Cities, while long-standing sit-down chain restaurants like 500,000 251,879

Applebee’s, Ruby Tuesday’s and Buffalo Wing Wings are projected 0 (28,426) to decline as diners are consistently opting for convenience, (246,509) (143,478) SF Absorbed affordability and healthier options. The competitive and ever- (500,000) (335,329) changing nature of the restaurant retail landscape is forcing the (1,000,000) (962,017) retail giants of the past to reinvent themselves as newcomers in 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 the market continue to emerge. Buffalo Wild Wings is closing two Twin Cities PizzaRev restaurants, one in Edina’s Centennial Lakes and the other at Hopkins’ Knollwood Crossing. The chains were Vacancy opened three years ago as franchisees of the California chain.

Buffalo Wild Wings confirmed the restaurants would close, but did 10% not give a specific date. 6.9% 7.3% 6.8% 8% 6.2% 6.1% 5.1% 5.4% 6% 5.7% Fast casual restaurants are also facing the upcoming policy change 4.9% 3.6% 4.4% of a $15 minimum wage increase, which could mean an increase 4% Percent Vacant Percent in menu prices. Automation is projected to take away minimum 2%

wage jobs with the potential for one robot to replace six jobs as 0 referenced in a recent Wall Street Journal article. 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Q1

SUBSCRIBE TO OUR BLOG Retail showroom at new 120,000-square-foot Schneiderman's location in Lakeville, MN.

2 Minneapolis-St. Paul Research & Forecast Report | Q1 2017 | Retail | Colliers International Quality Over Quantity Consumers today are shifting their focus on high-quality goods to The remodel will include the expansion of more fresh and prepared stores that promote sustainability and have embraced the do- foods, updated finishes and an expanded Starbucks. Additionally, gooder culture of millennials. As consumers continue on their Target will remodel its St. Paul Midway store and St. Louis Park ‘health kicks’ they also are more aware of ethics and backgrounds location. of companies and are more prone to purchase consumer goods from a company with a respected mission, even if the product is Going against the trend, two major furniture outlets are expanding more expensive. The Minneapolis North Loop’s Warby Parker and their showrooms in the Twin Cities market. HOM Furniture is Askov Finalyson are prime examples. planning a Brooklyn Center store at , a building formerly home to Kohl’s. HOM has proposed to renovate the 75,000 SF building and will add 24,600 SF of additional space. Big Box Retailers The remodel will create space for 11,800 square feet of new Many shopping centers are seeing an exodus of big-box retailers. multitenant retail space and close to 13,000 SF of storage space. As large, well-known players continue to announce store closures like Sears and JCPenney, property owners and landlords are being Additionally, Schneiderman’s furniture built a two-level Lakeville forced to either search for another large retailer to fill the space, or showroom totaling over 120,000 square feet. The showroom demolish the space and begin leasing smaller amounts of space. recently opened next to Gander Mountain near the Interstate 35 / Both options become time consuming and expensive. It’s not clear Kenwood Trail interchange. Design-build by Opus Companies. whether the malls who do not transform themselves into something else will survive. The departure of large anchor tenants are forcing Future Outlook owners to redevelop and adapt to a changing demographic. The High interest rates are projected over the next 12 months, while owners who do not see this as an opportunity may not fare as well. construction deals and a low cap environment is projected to stay in place. If one thing is continuing to remain constant in the world Gordmans, the most recent in a string of big-box retailers of retail, it’s the amount of change. Retail concepts of the past are announcing closures, will shutter five of six stores as a result of not satisfying a changing demographic of consumers, forcing many their Chapter 11 bankruptcy filing. One store in Woodbury will retailers to think more innovatively and creatively, or fade into the remain open. past. This will be a trend we’ll continue to see as more retailers look for the differentiator that allows them to stay attractive and Gander Mountain has been purchased by Camping World and all relevant to today's consumer. 126 locations will begin selling off merchandise. Gander Mountain's new owner says they will keep 70 Gander Mountain locations open.

As an example of a big-box retailer reinventing itself, Target Corp. announced its plan to remodel their downtown flagship store, an endeavor that will cost the corporation close to $10 million.

Minneapolis-St. Paul Research & Forecast Report | Q1 2017 | Retail | Colliers International 3 Tenant Tracker

Expanding

New or Looking

Net Absorption - Q1 2017 Vacancy - Q1 2017

300,000 25%

150,000 71,721 20% 16.8% 7,471 44,828 15% 0 0 10% 8.0% SF Absorbed

(150,000) Vacant Percent (152,446) 5% 5.3% 3.6% (300,000) 0% 0 CBD Community Neighborhood CBD Community Neighborhood Outlet Regional Outlet Regional

4 Minneapolis-St. Paul Research & Forecast Report | Q1 2017 | Retail | Colliers International Minneapolis-St. Paul Retail Trade Areas

Please note for historical comparisons, since Q2 2016 we have added eight additional trade areas to our retail report: Plymouth, Coon Rapids, Stillwater, Blaine, Shakopee, West End, Brooklyn Center, and Cottage Grove.

Data Summary

TRADE AREA SF VACANT %VACANT Q1 2017 ABSORPTION YTD ABSORPTION

Plymouth 1,976,620 10,845 0.5% (6,852) (6,852) Ridgedale 2,099,343 48,271 2.3% (19,782) (19,782) Apple Valley 2,054,496 88,974 4.3% 14,055 14,055 Maple Grove 5,037,849 117,820 2.3% (8,200) (8,200) Stillwater 2,562,007 63,729 2.5% (4,873) (4,873) Woodbury 3,371,769 98,329 2.9% (14,364) (14,364) Eagan Town Center 1,607,281 48,022 3.0% (6,216) (6,216) Coon Rapids 3,074,541 205,589 6.7% (99,565) (99,565) Rosedale 3,216,932 121,588 3.8% (25,283) (25,283) Southdale 5,256,356 149,907 2.9% 30,093 30,093 Blaine 1,805,869 65,097 3.6% 456 456 Shakopee 2,525,038 107,296 4.2% (837) (837) Burnsville 3,020,067 128,118 4.2% (323) (323) West End 1,276,323 74,316 5.8% (8,110) (8,110) Northtown 2,122,701 177,683 8.4% 25,202 25,202 Maplewood 1,875,383 136,835 7.3% 10,569 10,569 Brooklyn Center 1,061,525 87,511 8.2% (19,383) (19,383) South Robert 2,204,097 216,487 9.8% 8,680 8,680 Eden Prairie 2,472,209 279,673 11.3% 1,305 1,305 Cottage Grove 1,213,220 141,244 11.6% 1,902 1,902

Minneapolis-St. Paul Research & Forecast Report | Q1 2017 | Retail | Colliers International 5 Knowledge Leader: In Retail, Feeling Good is the New Looking Good

As the new year gets underway, it always brings a certain level of paper butterfly art installation. The main attraction, the cocoon-like retrospection about how far each of us has come in fulfilling our Dome meditation room, includes a variety of seating options and goals, both personally and professionally. The next step for most blankets for optimal comfort. Guests participate in timed, audio- of us will be deciding what we can do better for ourselves. If you guided meditation sessions with aural and visual elements to are like most Americans, losing weight, living a healthier lifestyle encourage meditative reflection and relaxation. and enjoying life to the fullest rank in the top five of your list of resolutions for 2017. As Keledjian noted in a recent article, creating immersive experiences is his trademark: “I reimagined the concept of the The good news for retailers is that there are more and more specialty boutique when we founded Intermix, which disrupted the opportunities to meet the demand for fitness and mindfulness luxury shopping experience by styling different designers together regimens with bricks-and-mortar solutions. The global wellness in one space.” industry is a $3.7 trillion market that has expanded beyond physical training and nutrition to include mindfulness, meditation and And now he’s doing the same for health and wellness. Most of positive thinking. the well-known meditation centers are spiritual retreats offering healing art and yoga programs. With Inspace, Keledjian aims to universalize the concept into a secular activity that can be enjoyed MEDITATION GOES MAINSTREAM at the consumer’s leisure. During my last visit to New York City, I was introduced to the latest trend to hit the health and wellness space: Inscape, a meditation- This idea of a customized meditation experience is new, but it only studio with a complementary online app that provides guests is catching on fast. In addition to Inscape, other pioneers in this with an immersive experience. Inscape, the first “multi-platform emerging trend include Unplug in Los Angeles, MNDFL in NYC and meditation brand,” is the brainchild of Khajak Keledjian, the founder Current Meditation, which recently opened in Phoenix. and former CEO of Intermix, and Lew Frankfort, the executive chairman and former CEO of Coach.town Council, that number will WHAT’S NEXT: HOLISTIC FITNESS double by 2025. The health and wellness sector is in the midst of its own creative Inscape’s 5,000-square-foot studio is located in a landmark disruption as the desire to scale audiences increases and building in Manhattan’s Flatiron district and includes a retail center, businesses focus on creating experiences that appeal to younger a waiting lounge with cozy bean chairs and a three-dimensional generations.

6 Minneapolis-St. Paul Research & Forecast Report | Q1 2017 | Retail | Colliers International Millennials, because of their interest in activities that motivate them opened a multi-sensory boutique in Manhattan that recreates a mentally, physically, and socially, are sometimes referred to as modern Provençal open-air market with a community board of “stimulation junkies.” Today’s brands strive to create products that in-store services. And Samsung, in partnership with Wonder-Wall, speak to these audiences holistically. refashioned their corporate headquarters in New York City with a multi-functional theater, recording booth and exhibition/product Boutique studios like Flywheel, Orangetheory Fitness and Barry’s display space where they host everything from virtual reality Bootcamp are joining the revolution to create an environment workshops to Wanderlust meditation and yoga sessions. that taps into the millennial preference for specialized classes and personal attention. As they gain in popularity, these niche As the commercial real estate industry continues to focus on fitness centers have also begun to take a larger slice of the fitness developing mixed-use spaces, landlords should keep an open and fashion spend thanks to their merchandising apparel and mind and get into the habit of looking beyond traditional retailers— accessories offerings. especially in urban environments.

Because it’s clear a shift is happening. Macy’s flagship store in ENHANCING THE IN-STORE EXPERIENCE Pittsburgh has plans to convert into a mixed-use space. Limelight The shift toward wellness holds important implications for many is a new gothic-church-turned-nightclub in New York City that also retailers, even those who aren’t in the fitness arena. McKinsey houses a restaurant, David Barton Gym and retail pop-up shops. & Company’s The State of Fashion 2017 reports that “wellness” And the Brooklyn Lyceum, once a performance space, was recently extends beyond traditional definitions to include mental, physical, cleared to become a fitness center. spiritual, emotional and environmental attributes. They go on to suggest that brands that are able to connect with consumers across With the fitness industry explosion and the arrival of Inscape and these levels will ultimately form deeper, long-lasting relationships other boutique centers, landlords may want to pause and meditate and a sense of community. on the tenants of their future.

Brands across the board are taking these cues to maximize the in-store experience and appeal to consumers’ senses in a more Source: Knowledge Leader – Anjee Solanki, National holistic way. Tag Heuer recently updated their network of stores to Director of Retail Services USA, Colliers International include a new audio appearance through tailored playlists through the Spotify “Soundtrack Your Brand” streaming service. L’Occitane

Minneapolis-St. Paul Research & Forecast Report | Q1 2017 | Retail | Colliers International 7 Significant Lease and Sales Activity

Lease Activity

TENANT PROPERTY ADDRESS CITY SF SUBMARKET

Northtown Village Shopping Urban Air 10-60 E Coon Rapids Blvd NW Coon Rapids 40,319 Northwest Center Walgreens Wabasha Center 411 Cedar St Saint Paul 24,928 Southeast PetSmart West Lake Center 119-299 12th St Forest Lake 20,700 Northeast Aldi Rex 26 2601 Lyndale Ave S Minneapolis 20,600 Southwest Goldfish Swim School Bergen Plaza 7009-7191 10th St Oakdale 18,940 Northeast Octapharma Birch Run Station 1715 Beam Ave Maplewood 12,113 Northeast Turnstyle Clothing Highland 2012-2056 Ford Pkwy Saint Paul 8,400 Southeast Royal Buffet Richfield Shoppes South 6601 S Nicollet Ave Richfield 8,330 Southeast Dogtopia Normandale Shopping Center 5200 W 84th St Bloomington 7,678 Southwest Sammy Perrella's Hillside Crossings Mall 19242-19260 Evans St Elk River 7,200 Northwest Ax-Man Moore Lake Commons West 999-1099 E Moore Lake Dr Fridley 6,200 Northwest Alchemy Onyx - Retail 6725 York Ave Edina 5,526 Southwest Willy McCoys Chaska Commons 114-234 Pioneer Trl Chaska 5,436 Southwest Filament Lighting & Home 7121 France Ave 7121 France Ave Edina 5,363 Southwest Anytime Fitness Rum River Plaza 5900 167th Ave NW Ramsey 5,100 Northwest The Penalty Box River's Bend Plaza 14001 St Francis Blvd Ramsey 4,566 Northwest Uniform Advantage Woodbury Village 7020-7250 Valley Creek Plz Woodbury 4,227 Southeast Creative Kids Stuff Colonial Square Shopping Center 1125-1151 Wayzata Blvd Wayzata 4,215 Southwest Urban Iron Fitness South Tamarack Square 8150-8160 Coller Way Woodbury 4,110 Southeast

The above is a list of tenants that have signed leases during the current quarter and not actual absorption, which is recorded when the tenant opens at the location.

Hobby Lobby Hobby Lobby has signed a 10-year lease to open a location at Burnhill Plaza shopping center in Burnsville. The 51,720 square foot space was the former home of Sports Authority.

8 Minneapolis-St. Paul Research & Forecast Report | Q1 2017 | Retail | Colliers International Significant Lease and Sales Activity

Sales Activity

PRICE PROPERTY NAME ADDRESS CITY BUYER SELLLER SF PRICE PSF

fmr Macy's 700 Minneapolis 601W Companies Macy's 1,006,275 $59,000,000 $59 Walgreens 950 County Rd 42 W Burnsville Inbesa America Inc Bruce J Rakay 14,490 $12,500,000 $863 Walgreens 1055 Wayzata Blvd E Wayzata Pari Moghbel Doran Companies 14,500 $11,720,000 $808 North Shopko 5630 Saint Croix Trl Haskell & White Slate Office REIT 80,000 $11,250,000 $141 Branch 13000 Technology Venture Pass Prtnrs 13000 Technology Drive Eden Prairie Steven Rubin 10,975 $6,720,850 $612 Dr LLC The Christopher Walgreens 1180 Arcade St Saint Paul 1180 Arcade LLC 14,176 $6,500,000 $459 Trust South Pond Retail Center 11209 Aquila Dr N Champlin Wallingford Props Co Told Development Co 12,655 $6,175,000 $488 Urban Anthology, Paster Hillman Machinery 124 3rd Avenue North 124 3rd Ave N Minneapolis 20,930 $3,050,000 $146 Properties and Supply Inc 1310 Wayzata Boulevard 1310 Wayzata Blvd Wayzata Boulder Properties Inc E and R XI LLLP 15,000 $2,900,000 $193 Peter Brownlee; Anoka Shopping Center 500 W Main St Anoka Farzad Farr 34,000 $2,650,000 $78 Heidi Brownlee

Frontier Building 525 W 78th St Chanhassen United Properties Britta Bloomberg 33,976 $2,000,000 $59

Panera Bread JAB bought bakery chain Panera Bread in a $7.5 billion deal in early April. JAB, also the owner of Caribou Coffee, purchased the chain as it works to expand its coffee and breakfast empire. Panera’s fresh offerings appeal to health-conscious consumers and relies on a strong digital platform.

Minneapolis-St. Paul Research & Forecast Report | Q1 2017 | Retail | Colliers International 9 Market Statistics

Total Direct % Vacant Sublease % Vacant W/ Q1 2017 YTD Submarket SF Vacant SF Direct Vacant SF Sublease Absorption Absorption

Minneapolis CBD 960,984 161,055 16.8% 0 16.8% 7,471 7,471

Northeast Community Center 4,187,322 170,283 4.1% 0 4.1% (4,803) (4,803)

Neighborhood Center 5,142,265 364,491 7.1% 1,211 7.1% (21,697) (21,697)

Regional Center 2,914,077 101,206 3.5% 0 3.5% (5,223) (5,223)

Totals: 12,243,664 635,980 5.2% 1,211 5.2% (31,723) (31,723)

Northwest Community Center 5,495,812 288,197 5.2% 0 5.2% 52,111 52,111

Neighborhood Center 9,104,589 713,570 7.8% 4,967 7.9% (75,828) (75,828)

Outlet Mall 430,000 0 0.0% 0 0.0% 0 0

Regional Center 3,900,369 196,315 5.0% 0 5.0% (136,259) (136,259)

Totals: 18,930,770 1,198,082 6.3% 4,967 6.4% (159,976) (159,976)

Southeast Community Center 4,810,163 317,138 6.6% 45,015 7.5% 27,087 27,087

Neighborhood Center 7,423,071 763,878 10.3% 0 10.3% 30,713 30,713

Outlet Mall 409,000 0 0.0% 0 0.0% 0 0

Regional Center 6,015,202 79,956 1.3% 0 1.3% 4,227 4,227

Totals: 18,657,436 1,160,972 6.2% 45,015 6.5% 62,027 62,027

Southwest Community Center 3,550,912 173,471 4.9% 7,900 5.1% (2,674) (2,674)

Neighborhood Center 6,836,669 429,673 6.3% 9,209 6.4% 111,640 111,640

Regional Center 5,934,679 304,707 5.1% 0 5.1% (15,191) (15,191)

Totals: 16,322,260 907,851 5.6% 17,109 5.7% 93,775 93,775

Total All Markets CBD of Minneapolis 960,984 161,055 16.8% 0 16.8% 7,471 7,471

Community Center 18,044,209 949,089 5.3% 52,915 5.6% 71,721 71,721

Neighborhood Center 28,506,594 2,271,612 8.0% 15,387 8.0% 44,828 44,828

Outlet Mall 839,000 0 0.0% 0 0.0% 0 0

Regional Center 18,764,327 682,184 3.6% 0 3.6% (152,446) (152,446)

Totals: 67,115,114 4,063,940 6.1% 68,302 6.2% (28,426) (28,426)

10 Minneapolis-St. Paul Research & Forecast Report | Q1 2017 | Retail | Colliers International

BROKERAGE SERVICES CONTACT: 403 offices in William M. Wardwell SIOR Executive Vice President | Brokerage Minneapolis-St. Paul 68 countries on +1 952 897 7828 [email protected] 6 continents

United States: 153 Colliers International | Minneapolis-St. Paul Canada: 29 4350 Baker Road, Suite 400 Latin America: 24 Minnetonka, MN 55343 Asia Pacific:86 www.colliers.com/msp EMEA: 111

SUBSCRIBE TO OUR BLOG $2.6 billion in annual revenue

2 billion square feet under management

16,000 professionals and staff

Copyright © 2017 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.