Minnesota's twin cities, Minneapolis and St. Paul, have traditionally been a mismatched pair when it comes to retail. While Minneapolis has been seen as being more vibrant, especially with a recent boom in residential construction, St. Paul, by contrast, has always been perceived as more desolate.

“Downtown Minneapolis rocks,” says Richard Grones, principal at Cambridge Commerical Realty, a retail brokerage company based in Minneapolis. “They have Neiman Marcus, Marshall Field's [now Macy's] and a Saks downtown, as well as lots of peripheral retail.” But while there has been residential infill in St. Paul as well, the city has historically struggled to get retailers interested in it, Grones says.

Instead, most retailers have bypassed the small capital city in favor of its larger counterpart. Today, the demographics in Minneapolis are compelling, with the core downtown population reaching about 35,000 this year. That number is remarkable considering five years ago the populace downtown was projected to reach only 30,000 by 2010, says Russ McGinty, senior vice president of retail services for Madison Marquette. Last year alone condominium sales in Minneapolis reached 1,200 units. Most of the new condo units are selling above the $750,000 mark, say analysts.

With such a residential boom, the retail amenities are now following. “For years, the residents that lived in Minneapolis wanted a grocery, but haven't had any upper-end grocer,” says Matt Friday, senior vice president of Staubach Retail in Minneapolis. Most grocery stores were on the periphery of the core downtown area. In the past six months, three supermarkets have been announced.

Exeter Realty Co. is now building Cobalt Condominiums in downtown Minneapolis, which will include 106 units and a Lunds Market. Expected to open in the fall of 2006, it will be the first large grocery store in the area to meet the rise in residential population.

Lunds is preparing to open a second store in the southern end downtown next year. And Seattle-based Milliken Urban Ltd. Partnership is planning to build a mixed-use residential development in downtown Minneapolis with a 75,000-square-foot Whole Foods as an anchor.

“I think that's an excellent sign for potential future retail in downtown Minneapolis,” says Tim Murnane, senior vice president of Opus Northwest LLC, a member of the Opus Group. “I think downtown Minneapolis retail continues to evolve and I believe it will get stronger as downtown population grows.”

Bad rap

Meanwhile, St. Paul seems unable to shake off its reputation as a desolate downtown, despite some residential growth. Part of the reason for the city's standing is that St. Paul's daytime workforce is made up of government employees, while Minneapolis draws from a larger cross section of private companies. “It's mostly government employees and at 5 p.m. they leave,” says Aaron Barnard, vice president of brokerage for Grubb & Ellis/Northco Real Estate.

Some developers, however, are betting that attitudes will change and strong retail is in St. Paul's future.

The JLT Group is building the 2 million-square-foot, mixed-use Bridges of Saint Paul hoping to create a critical mass of retail for the eastern MSA. “St. Paul is one of the more underutilized retail markets in the nation,” says Rick Hill, president of Village Solutions, a retail strategist working with the JLT Group. “This project will have all the benefits of being adjacent to a downtown, but none of the problems of actually being in a downtown.”

Slated to open in fall 2007, the project is located on the Mississippi River across from downtown St. Paul and includes about 1,150 condominiums, a 250-room hotel, 300,000 square feet of office and 400,000 square feet of retail. The project also will include a cultural center and a museum known as Mythica, a cultural and anthropological museum with two planetariums. At an estimated cost of more than $500 million, the Bridges also will be home to 10 restaurants including Claddagh Irish Pub. It has recently been announced that a Tiburon Caribbean Bistro and McCoy's Public House will be at the development. In addition, a 16,000-square-foot bistro and deli known as France 44 will anchor a culinary marketplace known as Harvest Hall.

Bridges will be one of the largest mixed-use projects in the Twin Cities area. “I think like any market, you are seeing a lot of these mixed-use projects,” says Friday. “But until now, none of these things have been very large in nature.”

Take TOLD Development, for example. It is constructing the second phase of its high-end Excelsior & Grand in St. Louis Park, which will feature 660 condominiums and 90,000 square feet of retail on the bottom floor including Qdoba Mexican Grill, Starbucks and Cold Stone Creamery.

JLT's planned development of the Bridges follows recent news that Target may be entering the downtown area near the Xcel Energy Center sports arena. A multi-level Target store has existed in downtown Minneapolis for several years now.

Hot spots

Historically, many of the area's shopping hot spots, such as the Mall of America and the Mills Corp.'s Southdale Center, have been around Minneapolis and its western suburbs. There has long been an east-west divide in the MSA, with the area around St. Paul (the eastern part) being underserved. That has changed somewhat, as some of St. Paul's suburbs, such as Woodbury, have caught up with the traditionally more affluent western side of town, both in terms of both population density and residents' average annual income.

Woodbury's population more than doubled from 1990 to 2000 to about 46,463. It added an additional 5,000 people since.

In the wake of the influx of new residents, at least a million square feet of retail has developed here. The largest retail offering so far has been the 780,802-square-foot Tamarack Village developed by the Robert Muir Company.

Part of the reason for the shift from the outlying western suburbs to the east and inner city has been higher land prices.

Like many large metropolitan areas, land has become a more valuable commodity. “Land is more and more scarce so it's harder to find sizable parcels large enough for major developments for the likes of big boxes,” says Barnard. “It's becoming more costly and retailers have to get their arms around bigger rents.”

In fact, scarcity has forced land prices to double in the past few years to $28 to $30 a square foot from $15 a square foot, says Friday. Rents on a triple-net retail basis in a highly desirable area are now pushing into the mid- to high $20s.

Big get bigger

The fact that prices could make such a jump and vacancy rates remain in the low 6 percent speaks to the vibrancy of retail in the Twin Cities area. After all, this is home to Target (with 47 stores in the market) and the Mall of America.

Not content with already being America's largest shopping mall, the Bloomington, Minn.-based Mall of America will double its size, if proposed plans go through. The mall's owners, Triple Five of America, unveiled a new 5.6 million-square-foot expansion in August. The expansion doesn't just boost retail space, though there will be some of that in the form of a fashion-themed addition including specialty space and possibly two department stores.

The proposed addition embraces the mixed-use theme many developers have taken up in recent months. At the Mall of America, Triple Five is proposing to add 600 hotel rooms in two towers that will sit above the expansion.

The plan also includes 300 apartments, a performing arts center and museum space for rotating exhibits. (The original proposal for the expansion, unveiled earlier this year, to add a Native American-run casino looks like it won't pass muster with Minneapolis legislators, according to market experts.)

Wealth effect

“It's my opinion that we are blessed with a higher than average disposable income as a community and an educated population which translates into a very good work force,” says Peter Dugan, senior associate for CB Richard Ellis Inc. in Minneapolis. Being a medical and banking hub helps the city weather recessions better than other parts of the country.

Proving that the eastern half of the me tropolitan area has finally arrived, it now claims the Twin Cities' second open-airlifestyle center. Completed in September, Opus Northwest LLC and RED Development have teamed up to create the 398,000-square-foot Woodbury Lakes in Woodbury.

To capitalize on the perceived success of the new open-air center, the Robert Muir Company is opening an almost 400,000-square-foot power center across the street.

Lakes is a copy of the area's — and the Opus Group's — first lifestyle center, the 411,000-square-foot Shoppes at Arbor Lakes in the western suburb of Maple Brook. In fact, many of Woodbury's retailers, such as J. Jill, Limited and Victoria's Secret, all have stores at Arbor Lakes. The open-air Shoppes is just part of a 1.8 million-square-foot project developed by Opus called Arbor Lake. A 750,000-square-foot fourth phase is being planned called the Fountains, which will feature a power center anchored by Costco and Lowe's with a main street and office component.

Meanwhile, based on their initial success in the Twin Cities, RED and Opus Northwest plan to work to develop more lifestyle centers nationally, says Murnane. “We teamed with RED because they are one of the premier developers of lifestyle centers in the country,” says Murnane. “They have excellent relationships with retailers like Z Gallerie and Pottery Barn and all the other lifestyle tenants in Arbor Lake.”

In general though, both open-air lifestyle projects have caused quite a stir here. When Arbor Lakes opened in September 2003, there was widespread criticism. With average temperatures in January around 11.8 degrees Fahrenheit, enclosed malls were thought to be the preferred retail choice. “We were one of the last markets to get lifestyle centers,” says Barnard. “People were like, ‘You guys have cold winters and who wants to go from store to store while wearing their coat?’ While the verdict is still sort of out, that seems to have been proven wrong because these places are packed on weekends.”

DEMOGRAPHIC OVERVIEW

  • MSA population: 3.12 million
  • Population growth (2000-2004): 3.7%
  • Median income: $58,961
  • Retail occupancy: 94%
  • Percentage of population that are college graduates: 40.7%
  • Rents for 10,000 square feet: $17 to $23 per square foot
  • Rents for 4,000 to 5,000 square feet: $21 to $25 per square foot

Source: Grubb & Ellis, CB Richard Ellis