CRE W Minnesota

Minneapolis CRE market bringing in outside investors, plenty of activity

Minneapolis CRE market busier than ever,ph01
3701 Wayzata, a multi-tenant office repositioning by Opus Development Company.

Steady might be the best way to describe the commercial real estate industry in Minneapolis and St. Paul, with all the major commercial sectors showing at least some positive signs. But steady might not be the most appropriate description for two of the sectors here. The industrial and multifamily sectors? The word “booming” is more appropriate for them.

These sectors are performing well throughout the Midwest, of course. But they are performing especially well throughout the Minneapolis/St. Paul region. Just ask Phil Cattanach. He’s vice president and general manager for Minneapolis-based Opus Development Company.

Cattanach said that demand is still outpacing supply here in both the multifamily and industrial sectors. And when he looks ahead to 2020, Cattanach says, there are few signs that either sector will slow down much in the coming months.

And in even better news, those sectors that aren’t quite as hot as multifamily and industrial remain firmly in that “steady” arena, with new projects still popping up across the Minneapolis/St. Paul area. Cattanach pointed, for instance, to seniors housing, which he said is still in great demand in the Twin Cities area. He said that demand for build-to-suit office products and even specialized retail remain strong in certain pockets of the region, too

But multifamily and industrial remain the stars.

“We are completing projects in the industrial and multifamily sectors and getting them leased up quickly,” Cattanach said. “We are still kicking off new projects in those sectors and continue to see strong fundamentals supporting them. To me, it’s a healthy sign of an economy that remains strong with continued growth and business expansion. We are still seeing new businesses coming to this market because the Twin Cities area is so strong right now.”

This leads to the obvious question: Why has the Minneapolis/St. Paul commercial real estate market been so strong for so long?

Cattanach cited the diversity of the local economy. Several Fortune 500 companies in an array of product types have a presence in the Twin Cities. This means that the region doesn’t rely on just one or two main industries. That provides a buffer in case of a slowdown in any one industry type.

The Twin Cities is also more steady than boom, even with the strength of the multifamily and industrial sectors today, Cattanach said. That steady nature of the industry prevents overbuilding when times are good.

“We don’t have the lightning-hot activity that you see in some of the coastal markets,” Cattanach said. “Conversely, we don’t get the same lulls that they get.”

Cattanach said that the Twin Cities benefits from a large number of sophisticated and strong developers and contractors working the market. These professionals know what the Minneapolis/St. Paul market can handle and don’t build projects that then struggle to attract tenants.

“We have a lot of developers with a national presence here. The best practices that they rely on are then brought to the Twin Cities market and applied here,” Cattanach said. “There is a strong awareness, too, of the supply-and-demand metrics. You see a lot of discipline exercised by developers here. You are not seeing the expansion or overbuilding that might have happened 10 or 12 years ago. A lot of those areas in the Twin Cities region that had been overbuilt years ago have been corrected over time. There is still a good amount of discipline being exercised by the developers in this market.”

The multifamily demand

Like in many Midwest markets, the urban center of the Twin Cities is attracting plenty of multifamily construction. As Cattanach says, people want to live in the heart of Minneapolis. And developers are reacting by bringing more apartment units to the CBD.

It’s an example of the live/work/play mentality: People want to live close to where they work. They want to be able to walk to public transportation, restaurants, entertainment and shopping. By living in the urban core of the Twin Cities, they can reach these goals.

At the same time, unemployment remains low in the Twin Cities. To help attract and retain the best workers, then, companies in Minneapolis and St. Paul must offer office space in downtown, where workers more often want to live. This has provided another boost to the multifamily construction activity in the urban centers of the Twin Cities.

“With that comes the population growth and those added services,” Cattanach said. “We are seeing more restaurants, retail and even grocery options in the CBD.”

But it’s not just downtown. Cattanach said that developers are adding more apartment units to the inner-ring suburbs, too.

“The demand for quality housing options in a variety of markets in the surrounding suburbs is very high right now,” Cattanach said. “The developers and the market are calling for this product.”

As strong as the multifamily market is, the industrial market in the Twin Cities is even more robust. Cattanach said that investors have increased their appetite for commercial real estate. And they’re especially interested in industrial assets, something that has provided a boost to the Twin Cities industrial sector.

Then, of course, there is ecommerce. As consumers do more shopping online, and demand that the products they order arrive ever faster, companies are investing more in industrial space located closer to population centers. This trend has boosted the industrial sector throughout the Midwest, and Minneapolis/St. Paul is no exception.

And while developers are adding new industrial space to the Minneapolis/St. Paul market at a high rate, they’re not overbuilding, Cattanach said. New industrial space is filled quickly, and the demand exists for even more space, he said.

“The demand for industrial space today can’t be ignored,” Cattanach said. “Capital is flowing and looking for this investment. The institutional investors, the REITs, they are all looking for industrial.”

The strength of the Twin Cities industrial market has attracted an increasing number of developers from outside Minnesota, Cattanach said. They are attracted to the strong fundamentals of this sector and the overall strength of the Minneapolis/St. Paul market, he said.

This, of course, has resulted in more spec industrial popping up across the region. Cattanach estimated that about 50 percent of the new industrial product that Opus is building is speculative and 50 percent build-to-suit. That’s about the same percentage that most major developers in the Twin Cities market are following, Cattanach said.

The good news is that this spec space is filling quickly. There aren’t large chunks of empty industrial space looking for tenants.

Cattanach predicts that the industrial market will remain strong and active in 2020. Companies still need modern, functional industrial space, Cattanach said. That need isn’t about to lessen anytime soon, he said.

The demand for quality space extends, too, to the office sector, Cattanach said. Unemployment remains low, so companies are working hard to attract and retain top employees. One way to do this is to offer modern office space with plenty of amenities.

Companies, then, are offering bike storage areas, rooftop decks, training rooms and club rooms in thier office spaces. This has led to an increased demand for retrofitting old, outdated office spaces — spaces that do, though, boast good locations — into modern office space. This trend isn’t about to slow, either, Cattanach said.

“Businesses are still looking for quality options for their employees,” Cattanach said. “As long as we see a lower unemployment rate, this isn’t going to change.”