The Twin Cities commercial real estate market showed signs of recovery in 2011, with vacancy declining across most property types amid some signs of an improving economy. Market-wide, vacancy declined to 15.2% for direct space (17.6% overall across all property types)—reversing a three-year slide that saw direct space vacancy go from 11.5% in 2007 to 15.9% in 2010. The market recorded 1.6 million square feet of positive absorption, breaking a two-year skid that brought the market deep into negative territory.

Bulk Industrial Draws Investor Interest
Large national investors showed significant interest in Twin Cities industrial properties in 2011, particularly newer bulk warehouse product, both multi-tenant and single-tenant. The number of investment sales in bulk industrial properties was the highest seen in the Twin Cities in more than a decade, including at least 10 high-profile deals. Properties with low office finish and 24- to 32-foot clear height saw the most activity. Industrial properties in this market haven’t seen the run-up in prices that coastal markets have experienced, nor has there been much of a supply increase in recent years. 

Institutional investors are again looking closer at investment opportunities in the Twin Cities now that the big gateway markets have been saturated with demand. On the radar screens of such investors are well-positioned grocery-anchored retail centers and multi-family properties. Multi-family is particularly strong, since the Twin Cities is in the midst of a revival in renter demand for apartments and developers are rushing to meet the market with new, class A product that appeals to institutional investors.

Deal-Makers Delight in Office Market
Large office space users were active in the Southwest submarket, which posted 456,000 sf of positive absorption for the year, its highest number in more than decade. The overall Twin Cities market experienced 484,000 sf of absorption. Class A property owners were the main beneficiaries as space users looked to move up in class and quality while vacancy rates were still elevated and rents were deflated. Increased demand for class A space was also evident in the West and Minneapolis Central Business District (CBD) submarkets.

Investment activity continued to rebound in the office sector in 2011, resulting in more than $800 million worth of sales volume. Several significant transactions closed in the second half, and the pipeline of potential deals is relatively robust going into 2012. Activity levels in 2012 may pick up, with at least one prominent property in the Minneapolis CBD likely to be sold.

Office, Industrial Leasing Markets Slow in Second Half, Still Post Improving Results
Office and industrial space users pulled back during the second half, resulting in lower-than-anticipated growth as measured by absorption. The office market recorded 160,000 sf of positive second-half absorption but still posted 484,000 sf of positive absorption for the year. Even more dramatically, the industrial market posted just 72,000 sf of positive second-half absorption but still finished the year strong with 613,000 sf of positive absorption.

Multi-Family Construction Boom Underway
Demand for rental housing is fueling a boom in apartment construction in the Twin Cities. Developers added approximately 900 new market-rate units in 2011 and another 1,300 units are slated for completion in 2012. Rental rates are rising in the face of rapidly declining vacancy rates, giving developers reason to invest in new construction. Much of the apartment development is taking place in urban areas such as the Minneapolis CBD and the Uptown area in south Minneapolis.

Retail Properties Benefit from Medical Space User Demand
Medical space users injected a healthy dose of demand into the otherwise quiescent retail leasing market. Healthcare providers have been moving to locate patient-friendly primary care and specialty practice clinics in high-profile retail sites, taking both existing second-generation retail space and also building new locations on land adjacent to existing centers—primarily neighborhood centers. Retail center owners are more open to accommodating medical space users, given existing market conditions.

Vacancy among all retail property types is 8.4% for direct space, down from 9.8% at year-end 2010. Major retailers such as Walmart, Gordmans and Bed Bath and Beyond are expanding in the Twin Cities area, fueling an uptick in construction activity. Regional mall space is at a premium, as evidenced by an overall vacancy rate of 1.3% among the area's eight such properties.

Outlook
Construction projects will be more numerous in 2012. Retail alone will see about 1 msf of new construction in 2012, led by big-box retailers. More multi-family projects are in the works for the Minneapolis CBD—observers are anxious to see how well the market absorbs this new generation of high-end apartment product—and other parts of the Twin Cities as demand for rental units is expected to continue to grow. The market will likely also see more construction of large, single-user bulk warehouse distribution facilities to meet the needs of users who cannot find the space they need in the current inventory. 

Expectations are that the office and industrial leasing markets will experience solid growth in demand in 2012, although much of that new demand will likely occur in the second half of the year. Investors may broaden their search for more Twin Cities opportunities in 2012, including more office properties—a high-profile Minneapolis CBD transaction is possible—while the supply of lender-owned office properties put back on the market for sale will also likely increase. Well-positioned retail centers can anticipate improvement in demand, including from some medical space users. The market will continue to gradually absorb the over-supply of vacant retail boxes—now down to about 60, compared with 85 in 2009.

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DISCLAIMER 
The Compass report, published since 1997, is created by Cushman & Wakefield/NorthMarq experts using Twin Cities commercial property data from the last six months of 2011. The data used for this report has been obtained from sources which we deem reliable. While every effort has been made to report accurate data, Cushman & Wakefield/NorthMarq cannot guarantee the accuracy of this market report. Furthermore, we cannot assume responsibility for any omission of data which may occur. It is our intent to provide the best possible information regarding the office, industrial, land, retail, multi-family and investment markets while leaving the reader the responsibility of further verification before using this report for business and/or financial decisions.

This report includes information for multi-tenant office, industrial and retail projects greater than 20,000 sq. ft. and multi-family for-rent properties. Not included are owner-occupied, government or single-tenant buildings. Not all information and insights we’ve collected can be published in any given volume.