Minneapolis policy requires new apartments to include retail space regardless of demand, turning well-meaning small business owners into collateral damage.
I ride my bike pretty much every day weather permits, even in the winter. If the temperature is 36 degrees or above, or 99 or below, and the roads and trails are passable, out I go.
Mine is an eBike, so my rides can be pretty long. Sometimes I’ll break them up with a coffee shop stop. I always have a book with me, so I can get through 20 or 30 pages along with coffee and maybe a peanut butter cookie.
Thus I was sad to read that Arya Café, in the Wakpada apartments at 46th and Minnehaha has failed; it was a favorite. It’s also the third coffee shop to fail in that building, which itself is fairly new. (We long-time residents remember Geller Automotive, which occupied the corner for decades.)
If three coffee shops in a row fail, could it be that there is not sufficient demand in that location for a coffee shop? If so, does that mean the developer or small-business owner is stupid or incompetent?
Actually, no. Here’s why so many apartment buildings in Minneapolis have empty storefronts, or a history of failed start-ups.
The Minneapolis city code requires most new apartment buildings to allocate space in this fashion. It does not matter whether market studies and the experience and expertise of developers – yeah, those evil people who actually invest in our city – justify the allocation. If you want to build the apartment, ya gotta provide the commercial space. The policy has been defended thusly:
This policy is designed to support local businesses and create vibrant street life.
I get it. Empty storefronts and failed businesses are good for local business and produce vibrant street life. If I ever build an apartment building in Minneapolis I’ll name it Orwell Flats.
It’s been reported that many developers concede that their commercial space will mostly remain unoccupied; instead the apartment rents are higher than they’d be otherwise. Or they may offer the space at such a low rate that some optimistic would-be restauranteur or laundry or antique dealer will take a chance, only to give up a year or so, and many dollars later.
There’s an easy fix, of course. Repeal the requirement. Don’t look for that to happen soon.
In the series Terry White and I are running in MinneapolisTimes, we report on visits we made to West Coast cities (we studied Seattle, Portland and San Francisco). Although San Francisco is actually having a lot of success in revitalizing its downtown, this particular zoning error is one that the city has doubled down on. Their ordinance actually specifies the kind of business that must occupy a given property. And if that business fails, the building can only sign up another enterprise of the same type. If at first you don’t succeed, then throw good money after bad, to mix the metaphor.
It’s ironic that the 12th Ward Council Member actually lives in the Wakpada apartments, where we’ve seen a string of coffee shop failures. (Well, we’re not certain where she actually lives, but that was her legal address when she ran for office.) Perhaps she’s noticed that nothing succeeds in the first-floor corner of her building. After all, elected officials like a cup of coffee on their way to work, too!
As for me, and my coffee-and-bookreading runs via eBike, I’ll spare myself future disappointment by going more often to Nokomis Beach and Quixotic Coffee. They are long-established enterprises located where they can and do actually succeed. But I’ll miss the eager, optimistic entrepreneurs who put their own money at risk and gave it their best shot. After all, the city wanted to help them, and create vibrant street life!
In imagining what could thrive in these spaces, I come up against the logistical problem of no parking. For instance, after school centers for kids, daycare centers, urgent care or homeopathy, on and on.
Here’s an idea that wouldn’t require so much traffic though. Maybe these places could be turned into vegetable and herb growing centers. Maybe this could be instead of the city-owned grocery store idea. One truck could serve all locations and deliver produce to drop-off sites such as food shelves. Kids could be apprentices and learn about growing. Fresh home grown produce year round. I suppose grow lites and electricity would be the big expense.
This is an interesting issue but the authors seem to be avoiding quantitative questions in the comments. Why not lower the property taxes on the retail spaces? What are the rents and why can’t they be reduced? How much would it cost to remodel a retail space which is too big and make two? If we’re trying to solve problems instead of to score points against the other side (DSA or moderate) then it seems that there could be several paths to improving the situation.
Woods Halley
Yes I’m sure there are solutions. One would be for parking spaces included in the layout. Maybe not a full parking ramp but some area designated for patrons, not just residents. Of course, Im not schooled in city-planning (so obviously didn’t run for an office which would require me to have some knowledge of how it works). I’m on the demand side. I prefer establishments that cater to everyone.
Prof. Halley,
Great ideas from the Academy, a little more valid, but not much more, from public policy makers who have no experience or expertise about how business actually works.
Sure, let’s lower property taxes on these spaces…..but then wait for the lawsuits from similar-situated properties not getting the same breaks.
Prof, why not keep it simple? Why not keep the city out of differentiated property taxes?
Or, much better yet, why not let business people, who have business knowledge, who have in some skin in the game, just make their own bets on how to be successful, without any ‘help” from the city?
A very obvious consideration is parking. Nokomis Beach Coffee has plenty of it.
Considering the times that coffee shops and breakfast/brunch type places want to be open, retired people would be a good demographic to try to entice. Many of us do ride bikes, but not all, and most probably not in inclement weather. Many of us love to enjoy coffee and a meal and visit with friends, have our bookclub meetings and so forth. If there is no available place to park for blocks, as is the case at big intersections where bus stops and local residents eat up all the parking, we look for someplace else to meet and spend our money.
It’s fine to have a vision, such as turning Minneapolis into a mainly walking/biking mecca. Trying to will it to happen overnight is foolish. Pretending that one store-front shop creates a thriving street life doesn’t cut it either. There are many steps between point A and point B. Squeezing out the aging population who have time and money to spend and has become wise with experience is a definite misstep.
The city should provide lower tax rates on the commercial portion of these buildings or not require them to be built at all in the entitlement process. The landlords generally have to spend $75-100psf in build out plus leasing costs to get a tenant to pay $15-25psf in rent. The economics don’t work except in the North Loop, NE and select other locations. Zoning needs to be more flexible and more variances should be allotted by P&Z and counsel with exception of best intersections. That being said no market rate apartments make sense to build in this city currently since rents have dropped 15% since 2020 while property taxes have gone up 20%+.
Closer to me, we have the Pearl Apartments, an also-new-ish apartment building on the SE corner of 54th and Chicago. Nice looking building, I guess. It also has one of these mandated commercial spaces. Pearl is a little behind Wakpada, life-arc-wise, so they have only run through one restaurant so far, with a second opening now.
The first, Stonegarden, was exclusively a brunch restaurant. Most of the dishes were breakfast-y. Not much was even lunch-y, and of course, it wasn’t even open in the evenings. The food was definitely “a cut above”. I really liked it. Critics really liked it. It lasted a year. Turns out you can’t do all that well selling only a breakfast-heavy “brunch” in a neighborhood that has several other places where one can grab morning and afternoon meals, but has almost no “traffic” other than the local residents on their way to, or home from, wherever they work. 54th and Chicago – if you’ve been, you know – is not exactly Lake and Lyndale – or even 46th and Minnehaha.
The second restaurant is called Nokomis House, and what I’ve read of the proprietor’s plans seems to indicate that – at least for now – they will be open six days a week for dinner – at 4PM four weekdays, open earlier for a mid-morning-to-afternoon brunch Sat-Sun, and closed Mondays. Now, I’m no restaurateur, and I have the utmost respect for those who can be successful in that incredibly difficult business, but one has to wonder why one proprietor chose a business model that had the place open only half the usable hours on weekdays, and the second restaurateur to try it on for size will be open only the hours the first one chose to be closed. It would nearly have been possible for these two business models to have shared the space!
Which is a long way of saying that the problem with these mandated spaces is not ONLY that there is not currently any significant business demand for them (as there IS for more housing!), but ALSO that the local restaurant / coffee shop entrepreneurs have not quite yet figured out just what a viable business model for one of these non-prime-location spaces might be. Too large, not enough incidental traffic, and because of the building’s newness, one presumes that either the rent is higher than an older space. OR that if one gets a bargain rent, it will be raised if one is successful there. And then what?
Perhaps rather than assuming “If you build it, they will come”, the “New Urbanists” (who seem to believe it is possible to MAKE a city be whatever they want it to be) should intervene MORE by also having the government provide real guidance and assistance to those willing to take the considerable risk to open something in a space no one would have even built without governmental coercion.
Or, you know… they could also just stop doing the coercing.
These ground floor spaces are sterile and dead. They’re also too big. Small businesses want small, quaint, charming spaces—see Namaste and Nico’s on Hennepin. Or any of the historic storefronts in downtown Hopkins.
But local rules and developer costs don’t allow for small spaces anymore.
The empty ground floor retail spaces at the newish building at Franklin and Lyndale are one example, but I’m sure there are many others throughout Minneapolis.
Agreed. In terms of ambience, well there is none. Just another space with the same windows, the same sidewalk outside, and the same buses coming and going.
Establishments that develop a loyal clientele have personality, a cohesiveness that comes with longevity.
48th and Chicago is a good example of an area with a thriving street life. But it has taken decades and the efforts of the businesses that anchor the area; Turtle Bread, Ken and Norm’s, Parkway Theater, and numerous others. And there is parking so it can cater to local residents and those coming in from other areas.
It seems that a new venture in one of the cookie-cutter storefronts would need to spend heavily just to make the space unique. If it were me scouting out a place in which to pour my heart and soul, I would most definitely take a pass.
So, how about some facts? Who owns the building over in St Paul where you like to get coffee, and how much do they charge per Sq ft for rent? Who owns the building where Nokomis Coffee is, and how much do they charge for rent? How do those rents compare to the rent at the location the Geller family heirs sat on for years and years?? Does the zoning requirement specify the amount of rent? Maybe the developers prefer an empty storefront to a vibrant retail establishment that pays very low rent.
If you’re not sure where our very effective councilperson lives, ask her.
Even if provided rent as low as free a small business owner will still need enough business/customer traffic to cover payroll, insurance and a whole host of other costs to support even the smallest of businesses.
Simply blaming the landlords and property owners for not providing low enough rent to a potential entrepreneur is simply not a realistic solution in a lot of these empty store front situations.
Also, I find it interesting that there’s an assumption if you own a property, you have bottomless pockets and no costs to cover or support.
So, why are Nokomis Beach and Quixotic able to make it? What’s the variable that enables success?
Convenient parking. Also, they have been there long enough that the occupation costs are reasonable.
What does ‘be there long enough so that the occupation costs are reasonable’ mean? Is Nokomis Beach getting a break on rent because they’ve been there a long time? Is parking at Quixotic really that convenient?
Mr. McGuire,
It doesn’t matter who owns these businesses, what they are charged for rent, or what the Geller family may have done. You ask for facts. The pertinent facts are that these businesses have succeeded for many years, because business people made good business decisions: where to locate, what to sell, how to price their products. They did this based on their experience and their knowledge of markets. They did this without any dubious help from local government.
Here’s another pertinent fact. I believe it is correct that not a single current elected official in Minneapolis has ever had full responsibility for the success or failure of a substantial business enterprise. (Though CM Palmisano and perhaps one or two others does have an MBA, which counts for something.) Yet they feel they know more about whether a business will succeed at a particular location than business people!
I don’t agree that having had full responsibility for the success or failure of a substantial business enterprise is a requirement for being a good council person. I also don’t think being a Republican is a necessary requirement, or being a Democrat, or being a Lutheran, or being a Twins fan.
Dan, you are right in that there are several paths to becoming qualified to hold public office. But don’t you find it even a little troubling when not a single one of 13 CMs has ever had ultimate responsibility for the success or failure of any substantial enterprise, yet they think they know more about how to run a business than people who do run businesses?
I asked my old friend Claude if a new mixed used building’s financing/appraisal requirements are being chosen by the developers and financiers regardless of actual local retail demand. The response was: Largely yes, though it’s less “developers arbitrarily ignoring demand” and more “the whole capital structure creates incentives that override local demand signals.” Worth unpacking the mechanism a bit more precisely, because there are a few different actors involved, not just one villain:
**How appraisal actually works, and why it’s demand-blind in a specific way**
Commercial real estate appraisals for income-producing property are typically done via the **income capitalization approach**: value = projected net rental income ÷ cap rate. The appraiser doesn’t primarily ask “what would a coffee shop actually pay here” — they look at comparable *asking* rents for similar-class space in similar-class buildings nearby, often other new-construction ground-floor retail, which itself may be sitting vacant at inflated asking rents. This creates a **circular reference problem**: high asking rents at other new buildings justify high appraised rents at this building, which justifies high asking rents here, regardless of what any of these spaces are actually renting for in signed leases. Appraisers are somewhat structurally disconnected from “will a tenant actually pay this,” and more anchored to “what are similar landlords asking.”
**Why developers/lenders prefer this over responding to local demand**
– **The loan is underwritten before the building exists.** The construction loan and the eventual permanent financing (often a separate refinance) are sized against projected income, including commercial rent. If a developer negotiates down the commercial rent to match real local demand, that lowers the projected income, which lowers the appraised value, which can shrink the loan amount they can get or trigger a default on loan-to-value covenants on existing debt. So it’s not indifference to demand — it’s that **responding to actual local demand can be financially worse for the developer than leaving space empty**, given how the debt is structured.
– **A signed low-rent lease is a permanent mark on the record.** Once you lease at, say, $25/sqft instead of the pro forma’s $60/sqft, every future appraisal, refinance, and sale of the building uses that real lease as a comp against you. An empty space at a $60 asking rent doesn’t create that downward comp. This is the key asymmetry: **vacancy is invisible to the appraisal in a way that a low-rent lease is not.** That’s a genuinely perverse incentive, and it’s well documented in commercial real estate — landlords sometimes rationally prefer “vacant at ask” over “occupied at market.”
– **Ownership is often not the same entity as the operator/manager**, especially for institutional-owned buildings (REITs, pension fund capital, etc.). The people setting leasing strategy are managing an asset for a distant capital owner whose mandate is protecting portfolio-wide valuation, not neighborhood vibrancy or filling one storefront.
**Where local demand does eventually push back in**
It’s not that demand never matters — it matters at the point of *sale or major refinance*, when a new buyer/lender will actually scrutinize real trailing income, not just asking rents. Long vacancy eventually forces a write-down. But that correction can take years, especially if the current owner isn’t planning to sell or refinance soon, which is exactly why you see spaces sit empty for 3-5+ years in some buildings — there’s no immediate financial pressure forcing them to reprice down to what the neighborhood will actually pay.
So: yes, the requirements are set by developers/financiers largely independent of real-time local retail demand — but it’s better understood as a structural feature of how commercial debt and appraisal work (comps-based, income-projection-based, asymmetric penalty for underpricing) than a simple case of ignoring the market. The market signal does eventually get incorporated — just on the lender/appraisal timeline, not the “storefront sitting empty next to your apartment” timeline.
Mr. McGuire, this is a very fine addition to the conversation. In fact, one of the future articles in our “West Coast” research project is likely to discuss this very thing.
I do not believe this information exonerates local governments from ignoring actual market forces when they impose requirements on developers and owners, however, for these reasons:
– Ultimately, whether space is used, profitably, does enter in to calculations of building value.
– Many buildings, especially of a smaller scale, ARE owned and operated locally, and are not necessarily re-sold in a few years.
– Write-downs may not hurt the original owner, but they do hurt someone in the chain of ownership.
All of this aside, it simply is never good public policy to attempt to legislate what will happen in the marketplace, regardless of demand considerations.
Especially when those doing the legislating, as in Minneapolis, haven’t the slightest notion of how business actually works.
? Huh? You’re claim that “those doing the legislating, as in Minneapolis, haven’t the slightest notion of how business actually works” may be overstated and unsupported by actual fact.
In further reply, Mr. McGuire, and re:our council person, I don’t disagree with you as much as you might think.
I agree CM Chowdhury is a smart person and has good motivation for serving in public office; I believe she genuinely wants to help our community and our society be better. I also agree she is “very effective” in accomplishing her aims.
Her aims, however, along with six other CMs, are to advance the agenda of DSA. It is beyond dispute that DSA is anti business and anti police; they say so in their own platform. Those policy positions, however, don’t help cities be effective, they do the opposite.
Units of government (be it local, state, or federal) have tools available to assist small businesses. What the Minneapolis city council has done is create an “un- funded mandate”. They have inserted themselves into the process of business lifecycles with rules that don’t work in the capitalist system, and created an eternal loop of failure for the property owners. All because they want to “create vibrant street life”.