Most Twin Cities Commercial Real Estate Market Sectors Enjoying Higher Levels of Leasing Activity and Development
The Twin Cities commercial real estate market had a strong first-half 2013 as the economy continued to improve and development activity significantly increased. Market-wide, overall vacancy across all property types declined to 12.3%, which is the lowest it has been since 2008. The market recorded 1.7 million square feet (msf) of positive absorption, primarily thanks to the industrial market.
Retail Market Boasts Strong Performance
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% at the end of 2012 to 7.8%, a new five-year low. The Twin Cities market is now seeing rates that have not been achieved since 2008.
Big-box and junior-box spaces are now being filled by specialty grocers and fitness users. Further, value-oriented national tenants like Walmart, Fleet Farm, HomeGoods, Savers and TJ Maxx are actively expanding in the market.
Industrial Vacancy Rate at 10-Year Low
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%, which is a 10-year low and a big decrease from 16.4% in 2010.
While overall market fundamentals improved and high-quality space is performing well, leasing activity in less-functional properties remains relatively slow. Leasing velocity slowed overall due to fewer large blocks of prime space available.
Medical Space Enjoys Continued Momentum
While vacancy remained relatively flat in the medical office market, landlords of well-positioned, well-maintained properties saw improvement in overall economics as the market continues to tighten. Many on-campus or healthcare system-sponsored facilities are essentially full, with eight hospital campuses reporting zero vacancies in their multi-tenant space. Many new projects are under construction and are set to come on line in 2014. Medical users are also continuing to locate in traditional retail centers to be closer to their patients.
Office Market Slows After Banner Year
Following nearly 1 msf of absorption in 2012, the Twin Cities office market quieted in the first half. Despite the slowdown, the market is on track to record a third consecutive year of declining vacancy.
Since January 2013, Twin Cities employers have added more than 20,000 jobs in areas critical to the health of the office market—financial services, business and professional services and information technology—compared with adding only 13,000 jobs in the same areas for all of 2012. It will take several more quarters of solid job growth to rekindle more robust demand.
Apartment Development Maintains a Record Pace
The multi-family market continues to attract the attention of developers and investors. At 2.8%, the Twin Cities boasts one of the lowest apartment vacancy rates nationally.
Absorption continued to outpace new construction, and strong pre-leasing is reported at prime, well-located projects under construction. In addition, the development boom continues with a total of 2,800 new units expected to be delivered by year-end 2013 and another 4,300 units in 2014.
Land Inventory Declining, Prices Increasing
The Twin Cities land market continues its comeback in first-half 2013 as developers take strategic land positions in sought-after markets. Fundamentals continue improving across all categories, resulting in increasing transaction volume and rebounding values.
Driven by a recovering housing market, single-family residential is the hottest land sector as national homebuilders aggressively acquire raw land in first-, second- and now even some third-tier communities.
Buyers Out in Force for Twin Cities Commercial Real Estate
Investment capital is abundant, both locally and nationally, and investors are coming to the Twin Cities in search of higher yields. Most of the significant first-half deals were in the office, multi-family and medical office sectors, with industrial trailing simply because there was limited product for sale. In-demand product types include: contemporary industrial properties, grocery-anchored retail centers, multi-family, stabilized class A office buildings, and retail power centers.
There is little activity among the non-core assets and “middle-market” properties. Owners of these properties need to be cognizant of the concerns investors have about their potential to show positive growth over the next few years. Potential sellers may need to adjust pricing expectations accordingly.
While there is continued optimism in the Twin Cities due to the number of development projects that are currently under construction or slated to begin this summer, a slower second half for leasing activity is expected. There is a shortage of prime locations across all the property types.
Many are waiting for the long list of current construction projects to reach completion. New housing projects will be completed in downtown Minneapolis, downtown St. Paul, downtown Wayzata and Uptown. Approximately 550,000 sf of industrial space and more than 317,000 sf of medical office space is under construction. More is planned, and the second half looks primed for plenty of new investment activity across all property types.
The Compass report, published since 1997, is created by Cushman & Wakefield/NorthMarq experts using Twin Cities commercial property data from the first six months of 2013. 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.