by Dan Rafter
How hot is the Twin Cities’ commercial real estate market? The latest Compass report from Cushman & Wakefield|NorthMarq tells the story: New construction activity here is soaring, but vacancy rates are not.
The overall vacancy rate in the Minneapolis-St. Paul market did rise in the first half of 2015. But that slight rise came during a period in which construction crews added 1.75 million square feet of new commercial construction during the market.
The overall multi-tenant vacancy rate for the Twin Cities market stood at 11.1 percent at the midpoint of 2015. That is a slight rise from an overall vacancy rate of 10.9 percent at the end of 2014, but this is mostly the result of the addition of 1.75 million square feet of new construction hitting the market during the first six months of 2015.
And don’t expect new-construction activity to slow in Minneapolis-St. Paul any time soon. Cushman & Wakefield|NorthMarq reported that another 1 million square feet of multi-tenant space is under construction. The overall market posted more than 2 million square feet of absorption in the first half of 2015, with positive absorption across nearly all property types.
Mike Ohmes, executive vice president with Cushman & Wakefield|NorthMarq, said that the first half of the year saw developers rushing to complete new projects, especially in and around the urban center of the Twin Cities. The reason? A growing number of people want to live in walkable, urban neighborhoods, where they can ditch their cars, take public transportation and walk to shops, restaurants and entertainment.
“Robust development and construction activity have continued throughout the first half of 2015,” Ohmes said. “We expect that strong activity to continue throughout the remainder of 2015, with the Twin Cities cementing itself as an attractive market for investors and developers of all kinds.”
The Compass report highlights several attractive trends for the Twin Cities market. Consider the area’s office segment. As of the middle of 2015, 16.4 percent of the office space in the Twin Cities stood vacant. The first half of 2015 saw more office-space absorption than was recorded in all of 2014.
In good news for office-space owners, leases in this segment are getting longer, and landlords are now able to charge higher rents while passing out fewer concessions.
Medical office space is especially strong in the Twin Cities, with the Compass report showing about 677,000 square feet of medical office-space construction now underway in the area. A big entry in this market is the Mayo Clinic, which this year opened its sports medicine center at Mayo Clinic Square in downtown Minneapolis.
The area’s industrial market remains strong, too. Cushman & Wakefield|NorthMarq reported that 1.38 million square feet of industrial space was absorbed in the Twin Cities during the first half of the year. Construction in this sector is strong, too. According to the Compass report, build-to-suit and speculative projects are expected to bring another 1.38 million square feet in this sector in the next 12 months.
The Twin Cities area hasn’t seen this much absorption since before 2005, and experts with Cushman & Wakefield|NorthMarq are predicting that absorption levels in this segment could soon surpass pre-recession levels.
The southeast submarket has been especially strong when it comes to industrial, with the vacancy rate for functional industrial buildings here that are 50 years or younger falling below 5 percent.
The retail market is also on the rebound here, according to the report. Cushman & wakefield|NorthMarq reports that the segment’s vacancy rate stood at 6.6 percent at the middle of 2015. That is the lowest for retail since 2006.
At the same time, retail rents are nearing a new benchmark figure, almost in the $40-per-square-foot range for new small-shop space at top-performing properties. Retailers are getting creative, too, with many owners re-purposing old, tired space today.
Multi-family, of course, remains sizzling in the Minneapolis-St. Paul area. The Compass report says that 5,000 new apartment units opened in the market in 2014. But despite this, absorption continues to outpace new supply. Vacancy rates in this sector have been below 3 percent since 2011, with the current rate at the midpoint of 2015 at 2.7 percent.
Cushman & Wakefield|NorthMarq predicts that developers will deliver 3,000 new multifamily units to the market in 2015. Much of this multifamly development has been in and around downtown Minneapolis.
Not surprisingly, both domestic and foreign investors are targeting the Twin Cities, sending greater amounts of capital into the commercial real estate market here. Investors are most interested in apartments, student housing and grocery-anchored shopping centers. They are also sending money after Class-A office properties, value-added flex industrial buildings and new medical-office buildings.
According to the Compass report, the apartment investment market is especially strong, and was nearing $550 million in transaction volume in the first half of 2015. The office market is on pace to reach $1.25 billion in investment activity for all of 2015, while about $242 million in retail center transactions closed in the first half of this year.