Don’t bury it yet: Retail is far from dead

Dan Rafter from RE Journal

Think of the commercial sectors hit hardest by COVID-19. What comes to mind? Office, hospitality and … retail, right?

Maybe. But commercial real estate professionals working the Minneapolis-St. Paul market say that the retail sector in the Twin Cities and beyond is firmly in rebound mode today. That’s because retailers have adjusted to the new shopping habits of consumers. They’re focusing today on in-store pickup, curbside pickup and increased delivery options.

These retailers are taking the omnichannel approach – focusing both on brick-and-mortar locations and their online presences – to succeed in an environment that still remains challenging.

And plenty of the retailers doing this are doing business today in the Twin Cities market.

Drew Johnson, senior vice president of development with Excelsior, Minnesota-based development firm Oppidan, said that retail real estate remains an important part of the company’s business. And, he says, he sees a bright future for this sector.

“By no means is retail dead,” Johnson said. “It is still an important part of our business.”

In the Twin Cities area, several retail types are in expansion mode, Johnson said. That includes car washes, fast-casual restaurants and daycare centers.

And the Twin Cities has an advantage over some markets: It isn’t plagued with much vacant junior box space, Johnson said. Retailers who have wanted to expand in the Minneapolis-St. Paul market are filling any junior box space they can find as an alternative to building new spaces. The reason? Construction costs are so high today.

As Johnson says, most well-located power centers have filled in any empty space that opened during or before the COVID-19 pandemic.

“Of the junior box groups that have left the market, names like Kmart, Sears and Shopco, most of that space has been back-filled,” Johnson said.

The exception? Larger spaces in malls. These spaces are more difficult to fill not only because malls themselves are often struggling, but because there are so many additional regulations about which retailers can fill these spaces.

Mixed-use developments that feature retail spaces are also performing well throughout the Twin Cities market. The key, though, is that the developers of these spaces must find sites that work for all the uses at them.

Developers who are building a multifamily tower with first-floor retail, for instance, need to make sure that they are building this development in an area where there is enough demand for both retail and apartment units.

“If something is a bona fide site that works for both the retailers and the apartments, you can make it work,” Johnson said. “It has to be a really good site. Pulling off these projects is a little bit harder than developing straight retail or straight apartment buildings. For the right site, for an experienced developer, mixed-use can certainly work.”

Johnson said that more mixed-use developments should pop up across the country, including in the Minneapolis-St. Paul market. Cities are expecting these types of developments, Johnson said. Minneapolis, for example, has a zoning ordinance that pushes for mixed-use projects.

“When the project has a strong anchor tenant and the rest of the space is built around that tenant, that is usually a good investment in the community,” Johnson said. “But when you don’t have tenants in place and a city wants you to build a lot of retail space into a multifamily project, and the space is not well-thought-out, that can lead to problems. Developers might be susceptible to overbuilding the amount of retail space.”

As in most cities, Minneapolis and St. Paul do face challenges when it comes to the retail sector. This is especially true in downtown Minneapolis, which is still recovering from the impact of COVID-19, a lack of workers in downtown offices and the protests following the murder of George Floyd.

The hope, though, is that downtown Minneapolis will rebound, if slowly at least steadily. Already, more people have returned to downtown offices for work. As that trend gains strength, activity should steadily return to downtown, helping the retailers and restaurants working in this market.