Minneapolis, MN Retail Market Report
Market Overview
Entering 2023, Minneapolis gained significant consumer purchasing power. This is due to their robust wage growth, tight labor market, and apartment affordability. Despite current market concerns of inflation, Minneapolis continues to see growth in the retail sector through tenant expansion. Minneapolis has the lowest nominal net deliveries of any metro nationally, and supply-side factors have played a large part in this.
Highlights
- Due to exceptionally tight fundamentals, the Minneapolis annual rent growth sits at 3%. The metro’s historical average is 0.3 percent.
- Annual net absorption is 302,000 square feet, which is a six-year high for the metro.
- Retail capital markets’ activity surpassed Minneapolis’ three-year pre-pandemic average by about 50 percent.
Leasing Activity
Looking forward, several economic tailwinds are poised to keep Minneapolis’s rental market on solid footing, even amidst a potential recession in 2023.
Due to the rise of remote jobs, the Twin Cities suburban retail market is outperforming its urban counterpart. Specifically, the submarkets of Apply Valley/Lakeville, Burnsville, Coon Rapids, Eagan, Maple Grove, and Woodbury saw tremendous population and job growth over the past year. This has contributed to significant demand for retail such as banking, large discount stores, and homegrown tenants.
Leasing activity for small square footage in the market include coffee and quick-service restaurants such as Caribou Coffee, Chipotle, Crisp & Green, Shake Shack, Starbucks, and Sweetgreen. In addition, medical services such as urgent care clinics are moving into inline spaces with build-outs more akin to offices. Retail banking also continues to be highly sought-after for smaller spaces. The market is seeing larger footprint national discounters like Big Lots, Kohl’s, and TJ Maxx open new high-quality and efficient spaces in the suburbs.
Rent | Construction
Minneapolis still trails the national average of market asking rents and ranks among the bottom 20 major markets nationally. However, market asking rents were up three percent year-over-year at the end of 2022. Due to the lack of space in the market, Minneapolis tenants have continued to roll out small format stores and new business models, leasing less square footage to maximize space and offset high rent costs. Minneapolis is predicted to remain relatively balanced for the foreseeable future due to its positive demand growth.
Due to the market’s persistently constrained supply-side conditions, Minneapolis saw low numbers of 780,000 square feet in gross deliveries in 2022. In 2023, the market is expected to set a new all-time low in gross deliveries. Trailing only Detroit, inventory has fallen significantly over the past five years by -685,000 square feet. There is currently 700,000 square feet of retail space underway, which is 0.3 percent of inventory.
The small retail supply under construction is focused on mixed-use projects to draw foot traffic. As the market adjusts and changes post-pandemic, reimagining strip centers and housing anchored properties is vital to success in the market.
Sales
Minneapolis is experiencing the highest deal volume recorded in more than 15 years at $1.8 billion. Fourth quarter sales volumes in 2022 recorded approximately 50 percent higher than the five year pre-pandemic average of $390 million. Ranked among the 15 highest cap rates for major markets nationally, Minneapolis’ current cap rate of 7.1 percent exceeds the national average of 6.7 percent.
In March 2022, a local private buyer bought the 380,000-square-foot shopping center, Galleria in Edina, for $150 million ($394 per square foot). This was the largest single-asset sale in more than three years in the Minneapolis MSA. The indoor shopping center was 99 percent leased featuring a long list of luxury brands.
In 2022, Minneapolis suburbs accounted for over 95 percent of total sales volume. The suburbs in Minneapolis continue to have steady population growth and high-income households.
