Retail real estate finally turning the corner

After years of struggling through a post-recession economy, retail real estate in the Twin Cities is finally on a significant upswing.

The sector is showing solid increases in rentals as new players are gobbling up formerly vacant space, particularly so-called junior boxes left behind when Circuit City and Linens 'n Things went out business.

Retail brokers "are finally ready to admit that this year everything is good," Sara Martin, a senior associate for Colliers International, told members of the Institute of Real Estate Management on Tuesday. The panel noted that three out of four commercial sectors in the Twin Cities are showing improvement.

Retail vacancies fell from 6.4 percent in the first quarter of 2013 to 6.2 percent in the second, with further decreases expected for the rest of 2013. Meanwhile, the panel said rents are up "quite a bit," even in hard-hit community retail centers.

Martin pointed to a deal Colliers recently did at the Southdale 494 Shopping Center in Bloomington, where the Potomac, Md.-based Total Wine chain of superstores will be opening in a former Circuit City store — the first of a planned 12 new Total Wine outlets in the Twin Cities market, including six by the end of the year.

"There are only a few of those bankruptcy spaces left," Martin said.

Other areas showing strength are the industrial market and the multifamily segment, which is also giving the Twin Cities a huge lift. Maxfield Research Vice President Matt Mullins told attendees that 15,000 more units are in the Twin Cities development pipeline.

The Twin Cities industrial real estate sector, meanwhile, has made an almost total recovery from the recession, said Tim Olsen, an associate vice president with Cassidy Turley.

"We've made a comeback of 930,000 occupied square feet since 2009," he said. "It happened so fast because when we went into the recession, there was hardly any new development happening, so we're able to absorb what we lost very quickly."

Now, with rental rates up by 20 percent, speculative bulk warehouse projects are back in play, including new buildings in Rogers, Fridley and elsewhere.

Panel experts said the only lagging area has been the office market. Dan Gleason, executive director of brokerage services for Cushman & Wakefield/Northmarq, acknowledged that recovery in that segment hasn't met expectations.

"When we got together in the office at the beginning of the year, we had a target of 1.2 million square feet of positive absorption for this year," he said. "We thought we'd outperform 2012, but that hasn't come to fruition."

At this rate, it could be seven years before the Twin Cities office vacancy rate of 17 percent is whittled down to a hoped-for 10 percent, Gleason said.