If there is one word for the current state of commercial real estate in Minnesota it’s hot. According to a recent outlook survey by the Urban Land Institute and the PricewaterhouseCoopers accounting firms as published in the annual Emerging Trends in Real Estate report, the Twin Cities metro area currently ranks No. 1 in the Midwest commercial real estate market with the best outlook heading in to 2018. This survey takes into consideration multi-family housing, office, industrial and retail buildings.
So what accounts for the hot commercial market? Factors include: the vibrant local economy, investor interest, capital availability, development and redevelopment opportunities, public and private investments, a highly educated employment base and the overall activity level of the Twin Cities development community. What’s more, the ULI and PwC studies find that the Twin Cities ranks third in the U.S. for office real estate acquisitions and fifth in development opportunities. Additionally, on account of the metro’s diverse economy, arts, commerce and high quality of life - it offers many attractive assets for investors.
The survey also revealed that the Twin Cities is a leader in senior housing, well-accommodating aging baby boomers who call Minneapolis/St. Paul home. We are watching carefully as senior housing continues to change and new types of senior communities and opportunities to age in place come onto the scene.
Let’s take a closer look at trends within four basic commercial real estate categories:
Multi-family housing: Because of the strong economy and job growth, demand is substantial in both the Class A and Class B/C multi-family housing segments. Apartment sales in Hennepin and Ramsey Counties were up more than 30% in 2017 from the previous year. Also, whereas previously the multi-family market was dominated by local investors, today more national investors are purchasing these properties. These investors are interested in maximizing their returns and typically maintain shorter hold patterns which means an increase in sales volume among this type of commercial property. The big question is, how long will this boom last?
Office: Prices are currently at a record high per square foot for multi-tenant office buildings. This is raising Class A rents which, as a result, is forcing many office space tenants to consider Class B options. Also, many Twin Cities “trophy assets” are on the global radar and attracting international investors from countries such as China, Germany, Canada, Israel, the Middle East and Singapore. We are noting, however, more stringent underwriting from lenders for office product as well as increases in rent concessions.
Industrial: Industrial development continues. There is a significant demand for new, modern and updated buildings. This means an increase in new construction and the conversion of older, smaller industrial space for office and alternative uses. The increase in online shopping has also provided significant opportunity for the creation of new industrial space in the form of fulfillment and distribution centers. Of note, the industrial market has experienced 30 consecutive quarters of positive absorption and it appears this trend will continue through 2018. As we are out in the market with our industrial clients we know that we need to move quickly in order to secure space before it’s gone.
Retail: While many people believe that the retail segment is dying due to online shopping, a more accurate interpretation is that the retail segment is changing. Old brands are moving out and making space for new brands. More retailers are creating customer “experiences” at their brick and mortar locations and developers as well as city planning officials are embracing the live/work/play model, utilizing retail buildings and parking lot space for the development of hotels, offices, restaurants, multi-family housing and fitness centers. Southdale Mall is a great example of this.
Clearly it a great time to be involved in commercial real estate in the Twin Cities!
If you would like to learn more about current commercial real estate trends in the Twin Cities area or have any commercial real estate needs, we would be happy to talk with you.
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