MINNEAPOLIS-While office vacancy in the Twin Cities hit a 19-year high of 19.9% in the first half of 2010, and retail and industrial sector fundamentals also continued a downward slide, brokers such as NorthMarq are encouraged by flickers of life as owners and tenants approach negotiating tables again. The company, in its 2010 Mid-Year Compass Report, released Thursday, indicates that optimism comes from an expectation that this year will see the bottom of the market for the Minneapolis-St. Paul area.

As with most Midwest cities, market measurements such as occupancy and rental rates have continued a steady decline in the Twin Cities, but thankfully at a much slower rate than in the past two years, says EVP Mike Ohmes. “We are being candid about the weak fundamentals,” he tells GlobeSt.com. “The fact is that more companies and more owners are engaged in real conversations, which is significant, considering that things have been at such an utter standstill. The spread is getting much more in line with expectations between the landlord and tenant, and buyer and seller.”

Office users continued consolidations in the first half of the year, Ohmes says, “but some companies are finding that they are ready to make a five-year decision about their companies, and achieve pretty good pricing.” While the movement should move occupancy slowly back up by January, he says rental rates may not start a climb until mid-2011.

Retail is seeing activity just from the fact that companies such as Toys R Us, Bed, Bath and Beyond, Panera Bread, Buffalo Wild Wings, CVS, Walgreens and Whole Foods are able to move into areas where they were frozen out in the past. “In these areas there hadn’t been any quality real estate to occupy, but more properties have come on the market and space has opened up,” Ohmes says. About 6.9 million square feet, or 10.4%, sits vacant in the market.

With all the sectors, including industrial, there’s also a flight to quality buildings and away from older sites, he says. “High quality and high functionality have been the beneficiary of this downturn. The stronger properties are getting stronger, and the older, more obsolete and not-well-located are getting weaker in this climate,” he says. Multitenant industrial buildings continued to vacate more space than leased in the first half, resulting in negative absorption of 436,958 square feet and pushing vacancy to 16.7%.