Retailers find ways to grow despite increasing rents and construction challenges

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1 Q RETAIL MINNEAPOLIS-ST. PAUL RETAIL MARKET REPORT Retailers find ways to grow despite increasing rents and construction challenges MARKET INDICATORS Q VACANCY NET ABSORPTION RENTAL RATE VACANCY AND ABSORPTION TRENDS The vacancy rate in the Minneapolis-St. Paul retail market is 4.4 percent, down from 4.8 percent in the first quarter of There was 376,299 square feet of absorption, bringing the year-todate total to 444,545. Included in the absorption number for the first two quarters of the year is a 165,681-square-foot building in Little Canada. The building was converted into a furniture complex containing sister companies Dock 86, Gabberts, and HOM Furniture, owned by HOM. Also opening this year were TJ Maxx and Michaels at Shingle Creek Crossing in Brooklyn Center, as well as a 60,000-square-foot Hobby Lobby store that opened at Northtown Mall in Blaine. Rates continue to rise, and not only in prime locations. Secondary sites in further-out suburbs such as Chaska and Chanhassen are seeing increased demand and rates pushing upward. Rental rates at new construction are up to $40-$45 in these locations. Strong retailer demand in our region, in addition to increasing construction costs, are contributing to the rate increases. SF Absorbed Percent Vacant VACANCY 10% 8% 6% 4% 2% 0 6.9% 7.3% 6.8% 6.2% 5.1% 5.4% 4.9% 4.4% Q2 NET ABSORPTION 1,000, ,000 0 (500,000) (335,329) 872, , , , ,545 (143,478) CONSTRUCTION CHALLENGES Busy city building permit departments are struggling to keep up with approvals, delaying construction in some cases. Adding to this is ever-increasing construction costs that have gone up as much as 20 percent over the last year. Labor costs are a key factor as the number of skilled workers available for projects doesn t always meet the demand. Retail construction has been concentrated in build-to-suit projects for retailers such as Hy-Vee and smaller developments occurring on outlots that have sat vacant for years. There is not a lot of speculative construction happening; banks approving loans like to see at least an anchor tenant committed before they approve the loan. We are tracking over 775,000 square feet of space under construction. More than half of this space is in grocery store development including a Cub Foods in White Bear Lake, Hy-Vee stores in New Hope, Lakeville and Oakdale, Whole Foods in St. Paul, Kowalski s in Excelsior, and a Fresh Thyme in Bloomington. Also under construction is space at the Mall of America, which has office, hotel and retail space moving forward in its current expansion plans. (1,000,000) (962,017) Q2 YTD

2 TENANT ACTIVITY National tenants continue to seek lower rates by renegotiating their leases. They tend to want to stay in their existing locations, but feel they can secure lower rates by signing longer-term leases. This has been met with varied success depending on the location. Some landlords have other retailers who are expressing interest in their locations, so it s easier for them to refuse to renegotiate for lower rates. Landlords are responding by requesting sales information from the tenants and monitoring the market for tenant interest to potentially backfill the space. RETAIL FOLLOWS RESIDENTIAL The strength of the residential market bodes well for retail. Existing homes sales are increasing, with May 2015 sales up 19.5 percent compared to May of 2014 (Minneapolis Area Association of Realtors). New construction has not followed quite as strongly yet, with April 2015 single-family permits on par with April of But pent-up demand and a declining inventory of existing homes for sale points to steady growth in the residential market. Home improvement, décor and appliance stores benefit from a healthy residential market. After flocking to the area over the last three to five years, pizza, yogurt, and burger concepts are showing signs of slowing down. Expansion plans are moderating or halting, and we have seen stores close. The rapid increase in Quick Serve Restaurants (QSR) over the last few years has put the heat on QSRs that have been open here for 10 or more years as consumers pursue what is new and different. Tenant Tracker EXPANDING NEW

3 Spotlight Trends SPOTLIGHT TRENDS: TECH REPAIR One of the latest trends to hit the Twin Cities retail market is an upswing in tech repair stores. These stores, typically between 1,000 and 1,200 square feet, are designed to offer customers repairs on their existing devices, with some of them offering refurbished devices for sale. Janet Olson, an Associate with the Minneapolis-St. Paul office, discusses the demand for stores like these. People can t live without technology, and if you can t afford to get a replacement at your cell phone provider, this is another option. And with the age of mobile phone and tablet users becoming younger and younger, more devices are breaking so there s definitely a market for this. Some stores, such as Device PitStop, have all the appearances of a typical retailer. Their store is clean and uncluttered and has display cases and counters keeping it from looking like a second-hand shop. Other retailers, such as Cell Phone Repair, or CPR, have a small front desk area, and the rest of the store is comprised of a back room where the repairs are made. These retailers focus on providing quick turnaround on repairs, and feel they offer something different than a typical technology provider. However, these retailers are hitting obstacles when attempting to enter different markets. These tenants like being close to other mobile device retailers, explains Olson. However, the major mobile device vendors, like Verizon, AT&T, TMobile, and Sprint, don t want these repair shops near their locations. Most of the major mobile device retailers have exclusive clauses in their contracts preventing other similarly-positioned companies to be in the same locations, which is causing places like Device PitStop and CPR to struggle with finding good locations. The existing mobile device retailers view these stores as potential future competition, should their business models change to offer repairs. These challenges are leading tech repair retailers to seek out different locations, potentially in less-than-desirable strip centers. They want to penetrate the market, but they struggle to get deals done, says Olson. It ll be interesting to see how this all plays out. Janet Olson Associate Retail Leasing DIRECT janet.olson@colliers.com

4 Minneapolis-St. Paul Retail Trade Areas TRADE AREA UPDATE We track vacancy and absorption in key concentrations of retail in our market. The synergies these locations provide make these areas highly sought-after. The Ridgedale Trade Area has the lowest vacancy rate of the trade areas we track. A transformation is underway at the regional shopping mall, Ridgedale Shopping Center. Macy s combined two locations at the mall, adding 84,000 square feet to its primary location. A new Nordstrom store is currently under construction and will open during the third quarter. This will be Nordstrom s second location in the Minneapolis-St. Paul metro area; the first opened at the Mall of America in The overall vacancy rate at the regional trade areas is 3.2 percent, which compares to an overall retail vacancy rate of 4.4 percent. DATA SUMMARY TRADE AREA SF VACANT % VACANT Q1 ABSORPTION Q2 ABSORPTION YTD ABSORPTION Ridgedale 2,099,343 10, % (9,183) 0 (9,183) Eagan Town Center 1,338,859 14, % 1,713 8,318 10,031 Southdale 5,185,596 79, % 3, ,892 Woodbury 3,289,468 61, % 5,861 61,046 66,907 Burnsville 3,020,067 68, % (8,307) 18,883 10,576 Eden Prairie 2,425,004 62, % (31,950) 2,786 (29,164) Arbor Lakes 5,224, , % (26,003) 80 (25,923) Apple Valley 2,093,585 69, % (5,000) (1,181) (6,181) Northtown 2,492, , % 58, ,835 Rosedale 3,350, , % 4,838 (62,156) (57,318) South Robert 2,084, , % 1,768 14,169 15,937 Maplewood 1,898, , % 5,772 (23,078) (17,306) Total 34,503,117 1,102, % 2,196 18,907 21,103

5 SIGNIFICANT LEASE AND SALES ACTIVITY LEASE ACTIVITY TENANT PROPERTY ADDRESS CITY SIZE (SF) Alerus Canadian Pacific Plaza - Retail 120 S 6th St Minneapolis 11,877 TGI Fridays TGI Fridays 5875 Wayzata Blvd Saint Louis Park 10,000 Villa University Ave W University Ave W Saint Paul 7,300 Payless Crystal Shopping Center 99 Willow Bend Crystal 7,182 Snap Fitness Rosemount Crossing Robert Trl S Rosemount 5,481 Masu Sushi 156 Dale St N 156 Dale St N Saint Paul 4,500 SALES ACTIVITY BUILDING ADDRESS CITY BUYER SELLER PRICE PRICE PSF SIZE (SF) Lifetime Fitness 5525 Cedar Lake Rd Minneapolis Realty Income Corp Life Time Fitness Inc $37,000,000 $ ,602 Lifetime Fitness Dodd Blvd Lakeville Angelo Gordon Life Time Fitness Inc $29,200,000 $ ,000 Lifetime Fitness 6233 Baker Rd Hopkins Waterford Park Plaza th Ave N Minneapolis Gramercy Property Trust PE ARC Grocery Center REIT II Life Time Fitness Inc $23,200,000 $ ,896 Provident Real Estate Ventures $19,500,000 $ ,287 Walgreens 1055 Wayzata Blvd E Wayzata Doran Companies Semper Development $12,120,000 $836 14,500 Glen Haven Center Excelsior Blvd Minnetonka Glen Lake's Mall LLC Bahram Akradi $5,200,000 $146 35,726 Goodwill th Ave E Shakopee MDSC2015 LLC Oppidan Investment Co $4,276,000 $207 20,624 Former Seven Corners Hardware 319 Eagle St Saint Paul Opus Goodwill 4111 Cedar St Monticello Fourth Street Parking Partnership LLP Seven Corners Hardware $4,100,000 $49 83,510 Oppidan Investment Co $3,900,000 $221 17,636 Wal-Mart 2222 Crest View Dr Hudson Wal-Brand LLC Told Development Co $3,800,000 $42 89,557 Silverview Plaza 2574 Mounds View Dr Saint Paul Shoppes at Blaine Baltimore St NE Minneapolis Carlson Center Shoppes 187 Cheshire Ln N Minneapolis Suntide Commercial Realty Elevage Development Group LLC Steven Scott Development Kraus-Anderson $3,500,000 $102 34,455 Town Lake Real Estate Inc/Tammy Medina $3,122,569 $187 16,720 Shelard Group, Inc $2,750,000 $194 14,200

6 Market Statistics SUBMARKET TOTAL SF DIRECT VACANT SF % VACANT DIRECT SUBLEASE VACANT SF % VACANT W/SUBLEASE 2ND QUARTER ABSORPTION YTD ABSORPTION MINNEAPOLIS CBD Minneapolis CBD 980, , % 11, % 3,207 2,573 NORTHEAST Community Center 4,082,362 80, % 0 2.0% 185, ,206 Neighborhood Center 4,137, , % 0 9.2% (10,026) (13,409) Regional Center 2,914,077 37, % 0 1.3% 0 5,438 Totals: 11,133, , % 0 4.5% 175, ,235 NORTHWEST Community Center 6,410, , % 64, % 49,260 62,181 Neighborhood Center 8,489, , % 129, % (30,036) (6,857) Outlet Mall 430, % 0 0.0% 0 0 Regional Center 4,557, , % 0 2.3% ,498 Totals: 19,888, , % 193, % 20, ,822 SOUTHEAST Community Center 4,324, , % 131, % 44,616 38,410 Neighborhood Center 6,637, , % 70, % 65,139 92,254 Outlet Mall 409, % 0 0.0% 0 0 Regional Center 6,054, , % 3, % (7,600) (2,100) Totals: 17,424, , % 205, % 102, ,564 SOUTHWEST Community Center 3,096,190 60, % 56, % 3,559 (34,825) Neighborhood Center 5,735, , % 3, % 19,016 31,776 Regional Center 5,934,679 50, % 0 0.8% 53,104 35,400 Totals: 14,766, , % 59, % 75,679 32,351 TOTAL ALL MARKETS CBD of Minneapolis 980, , % 11, % 3,207 2,573 Community Center 17,913, , % 252, % 282, ,972 Neighborhood Center 24,999,639 1,603, % 203, % 44, ,764 Outlet Mall 839, % 0 0.0% 0 0 Regional Center 19,460, , % 3, % 46,413 85,236 Totals: 64,193,026 2,832, % 470, % 376, ,545 The above table is summarized data on multi-tenant retail centers greater than 30,000 square feet.

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8 MARKET REPORT Q OFFICE MINNEAPOLIS-ST. PAUL 502 offices in 67 countries US $2.3 billion in annual revenue 16,300 professionals and staff 1.7 billion* square feet under management $97 billion USD in total transaction value * Square footage includes office, industrial and retail property under management. Residential property is excluded from this total. All statistics are for Minneapolis-St. Paul 4350 Baker Road, Suite 400 Minnetonka, MN DIRECT Accelerating success.