Harsh economic conditions weighed heavily on Twin Cities commercial real estate during the second half, raising vacancy levels to heights not seen since in almost 20 years.
Overall vacancy among the office, retail and industrial property sectors reached 15.2%—17.4% including available sublease space—as user demand shriveled.
The pace of decline slowed, although the market still racked up negative 700,000 sq. ft. of absorption in the second half. The year’s overall total was negative 4.3 million square feet of absorption—1.8 million square feet of it accounted for by the office market.
In the capital markets, lenders continued to err on the conservative side while waiting out the storm. Financing was essentially available only for the highest-performing assets and the most credit-worthy borrowers in each property type.
Property buyers and sellers were increasingly challenged to find common pricing ground, especially since values continue to fall—down by as much as 40% or more from the mid-decade peaks—in the wake of weakening market fundamentals.
Distress selling was muted in 2009, but more opportunities will be available in 2010 as stressed property owners exhaust their financial options. As the tide of lender-mediated selling rises, pricing could take an abrupt decline in 2010—most likely in the second half. Some significant properties in the Twin Cities could be brought to the market as a result of distressed situations.
Rental Rates Under Extreme Duress
Even the lure of steep rate discounts—as much as 30-40% off the recent peaks, in some cases—failed to stir up much demand among still-wary retail, office and industrial space users.
Medical office is the healthiest of the product types, with an overall vacancy rate 10.8%, 8% on hospital campuses.
Retail Market Hardest Hit
Hardest hit in the multi-tenant universe was the retail sector, where overall vacancy topped the 10% mark. More than 80 retail spaces larger than 10,000 sq. ft. are vacant in the Twin Cities.
Industrial space demand continued to decline in 2009, pushing vacancy in the sector to an all-time high of 15.8%, 18.1% with sublease space. However, negative absorption slowed significantly during the second half.
Multi-tenant office market conditions were equally unsettled, with overall vacancy climbing to 19.6%, 22.3% including available sublease space. The normally stable Northeast submarket saw its vacancy rate soar by 40%, indicative of the widespread malaise affecting the economy. Vacancy in the Minneapolis Central Business District reached 19.5%; the Southwest submarket had a 20.5% vacancy rate, 24.5% including sublease space. Other submarkets suffered similar declines.
Speculative land prices remained locked into the downward trajectory that has erased as much as 80% of the value of some speculative land. Demand was seen picking up for in-fill sites, and some municipalities were purchasing land at low prices for future uses. The land demand drought has prodded more landowners into exclusive marketing contracts with market-savvy real estate brokerages who can ferret out buyer interest in what is the coldest development market in decades.
Development Plans Evaporate
Even with the downturn, new development brought an additional 1.8 million square feet of new multi-tenant product to the market in 2009—most of it well in progress before the recession took hold. That number marked the low point in the decade for new construction; the high point was 2000, when 7.2 million square feet of new product came on line.
There likely won’t be much new development during the next several years—not until there’s sufficient heat in the economy to rekindle strong job growth, which is unlikely in 2010. Demand will fluctuate between tepid and torpid for office, industrial and retail space, forcing landlords to get creative to attract tenants.
Market Smarter to Survive in 2010
Leasing activity may pick up, but it will likely be more of the same “shell game” that took over in the second half of 2009 as tenants—especially in the office and industrial markets—swap one building for another as their leases expire. Most of these tenants are looking for a better rate, better space or some combination thereof; often they’re taking slightly less overall space than what they’re leaving behind.
”Market intelligence,” even more than cash, will be king in 2010 for landlords and other players in the Twin Cities commercial real estate market. Rental rates are likely to continue to slide, but landlords—and tenants—need to look at the unique value proposition of each of their properties and adjust their marketing approach accordingly.
On the positive side, economists are projecting some improvement in the Twin Cities job market in 2010, albeit with uncomfortable bumps along the way. Job growth, as always, is the long-term key to sustainable recovery in commercial real estate, and it should also help weary consumers return to a certain level of comfort so they can begin spending again.
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DISCLAIMER
The Compass report, published since 1997, is created by NorthMarq experts using Twin Cities commercial property data from the last six months of 2009. 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, 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.