A strong market getting stronger

MINNEAPOLIS—A strengthening economy has given extra energy to the Twin Cities’ commercial real estate market, according to a new report from Cushman & Wakefield | NorthMarq, and many other experts agree the region has become one of the strongest in the US. The firm just published its semi-annual Compass Report, which examines the metropolitan area’s conditions, and found that “the market recorded 1.85 million-square-feet of positive absorption in the second half of 2013, primarily thanks to the industrial and retail markets, which both saw vacancy drop to new five-year lows.”

“With more than 3.1 million-square-feet of space currently under construction, many in the Twin Cities real estate market are looking toward 2014 as a barometer to determine how much of this planned construction is prudent to deliver the market,” says Mike Ohmes, Cushman & Wakefield | NorthMarq executive vice president, transaction and advisory services. “While developers wait, investors in the first half of 2014 appear poised for new activity across all product types with the assumption that interest rates will remain low. Absorption is expected to be solid throughout 2014 as construction gets delivered to the market.”

The Urban Land Institute’s recently released Emerging Trends in Real Estate 2014 placed Minneapolis in its top 20 US areas for overall investment prospects and its top 10 for development prospects.

Other highlights in the C&W | NorthMarq report include:

  • Retail vacancy continued to drop. With nearly 440,000-square-feet of positive absorption, the Twin Cities’ retail vacancy rate decreased from the five-year low of 7.8% in first-half of 2013 to 7.4% at year end.
  • Industrial demand grew due to lack of inventory. The vacancy rate in the multi-tenant industrial market dropped to 10.6%—the lowest in a decade—thanks to the sustained strength of the Northwest and Southeast submarkets.
  • Apartments remain hot. Rents grew steadily, and the vacancy rate dropped from 2.8% at mid-year to 2.5% at year end in the multi-family market. Landlords are leasing up product at a good pace throughout the metropolitan area.
  • The arrival of healthcare reform. The multi-tenant medical office market continued to perform well. The overall vacancy rate fell in the second half of 2013 to 9.6%. Many on-campus or healthcare system-sponsored facilities have essentially filled up, with eight hospital campuses reporting zero vacancies in their multi-tenant space.
  • Office activity slowed, but still positive. Demand for space continued to slow in the second half of 2013 from the pent up demand seen in 2012. The overall vacancy rate nudged down to 17.4% for direct space (18.6% including sublease space). But five of the seven submarkets posted positive absorption during the past six months, led by the Northeast with 120,249-square-feet and the St. Paul CBD with 72,785-square-feet.
  • Land sold to a large variety of users. The Twin Cities land market enjoyed a healthy 2013 as more deals closed thanks to readily available financing for land sales. Much of the sold land will host new development with a focus on residential projects and industrial users.
  • Investors had strong interest in hotels. With hotel values set to increase through at least 2014, investors were confident putting their money to work in hotel acquisition funds. A lot of properties changed hands around downtown Minneapolis and some will undergo multi-million-dollar renovations.