Retail W Minnesota

Need more evidence of Twin Cities' CRE strength? Compass Report provides it

The Twin Cities' apartment market remains a booming one.

The latest Cushman & Wakefield/NorthMarq Compass Report provides plenty of good news for brokers working the Minneapolis-St. Paul market.

The latest Cushman & Wakefield/NorthMarq Compass Report provides plenty of good news for brokers working the Minneapolis-St. Paul market.

But the report, which covers commercial real estate activity in the first half of 2013, is also a realistic one. Yes, the Twin Cities is a strong commercial market today. But it still faces challenges in the second half of 2013 and beyond.

“The Twin Cities commercial real estate market had a solid first half of the year,” said Mike Ohmes, executive vice president of Cushman & Wakefield/NorthMarq’s transaction and advisory services division.

The overall vacancy rate across all property types in the Twin Cities declined to 12.3 percent, the lowest since 2008. The market also recorded 1.7 million square feet of positive absorption, primarily thanks to the strength of the industrial market.

Clint Miller, executive managing director for Cushman & Wakefield/NorthMarq, told Minnesota Real Estate Journal, that he views the Compass Report as the latest evidence that the Twin Cities’ commercial market is firmly in rebound mode.

“I’m pleased that it’s a positive report,” Miller said. “Everything we comment on, the property types, job growth, absorption, improvement in vacancy rates, is positive. I’m certainly pleased with that.”

Not all segments, though, performed equally as well. Activity in the Twin Cities’ multi-tenant office market actually slowed in the first half of 2013. Tepid demand limited the decrease in overall vacancy to just a 0.5 percent downward tick, resulting in a mid-year market-wide vacancy rate of 17.5 percent for direct space and 18.7 percent including available sublease space. Still, this market is on track to record a third consecutive year of declining vacancy.

This is a reminder, Miller said, that despite its recovery mode, the Twin Cities’ real estate market faces some of the same challenges that markets across the Midwest and country face.

“I think the overall caution that you see, the theme of our outlook, is that it is sobering to remember that we are growing really slowly,” Miller said. “We see leasing activity falling off. We are growing, but it is happening more slowly than we would like.”

What would change this? No surprise, jobs are the key.

“It all comes down to more jobs,” Miller said. “With an improved jobs outlook, all the uncertainty starts to fade. The outlook of the consumer improves, and that improves the retail market. If we feel better about everything related to having a job and feeling good, we go out and buy things. That has been what will fuel an even stronger recovery. It does come down to jobs.”

On a more positive note, the multi-tenant medical office market continues to thrive. The overall vacancy in the first-half of 2013 only jumped to 9.8 percent compared with 9.7 percent at year-end 2012 even with new development. Many on-campus or healthcare system-sponsored facilities are essentially full, with eight hospital campuses reporting zero vacancies in their multi-tenant space. Off-campus space reported an 11.6 percent vacancy rate and on-campus space was 8 percent.

The Twin Cities apartment development boom also remains strong. The construction activity, however, has not pushed up vacancy rates or slowed rental rate increases. Despite the 620 new units delivered in the first-quarter—primarily in urban core markets—the overall multi-family vacancy rate dropped slightly to 2.8 percent, Marquette Advisors reported. The vacancy rate has been below 3 percent for eight consecutive quarters. Absorption continued to outpace new construction, and strong pre-leasing is reported at prime, well-located projects under construction.

The retail market continued to improve in the first half of 2013 thanks to increased leasing activity in community and neighborhood centers. Vacancy decreased from 8.3 percent at the end 2012 to 7.8 percent, a new five-year low. This was mainly due to the 434,000 square feet of positive absorption. Community Centers accounted for most of the absorption with more than 600,000 square feet of positive absorption. Rental rates increased nearly $1 per square foot to an average of $27.73 per square foot. The Twin Cities market is now seeing rates that have not been achieved since 2008.

The Twin Cities multi-tenant industrial market is experiencing positive momentum as demand for well-located, functional warehouse/distribution space continues. Vacancy dropped to 11.7 percent, a 10-year low and a big decrease from 16.4 percent in 2010.