Cushman & Wakefield|NorthMarq’s Ohmes: Credit diverse economy for Twin Cities’ CRE strength

nic on fifthby Dan Rafter

The Twin Cities’ commercial real estate market remains a hot one, with the latest Compass report from Cushman & Wakefield|NorthMarq saying that developers added 1.75 million square feet of new commercial construction during the first half of the year.

It’s true that the overall vacancy rate in the Minneapolis-St. Paul market did rise in the first half. But that rise was a slight one considering the mini-construction boom taking place here during the first six months of 2015.

According to the Compass report, 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 all that new construction hitting the market during the first six months of they year.

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.

Ohmes said that the construction activity isn’t surprising: The Twin Cities has long been one of the strongest commercial real estate markets in the Midwest for a variety of reasons, he said.

“We have a very educated workforce here, and companies like to tap that workforce,” Ohmes said. “We also benefit from the work ethic typical of the Midwest. It’s not just in the Twin Cities, but in the Midwest people are hard workers. They take pride in their work. They show up and do a good job. That helps companies that are already here, and it helps attract companies to the area.”

At the same time, the Twin Cities attracts those with an entrepreneurial spirit. Ohmes said that the Twin Cities boasts a strong venture capital environment.

“It’s a great place to be for new companies and start-ups,” he said. “It’s a great place to find that working capital to get your business off the ground.”

Ohmes points, too, to the diverse economy of the Minneapolis/St. Paul area. Unlike many Midwest cities, the Twin Cities does not rely heavily on any one major industry. That offers the region protection from the economic ups and downs that other cities often face.

“We are not reliant on one major industry or sector that has to drive the engine,” Ohmes said. “We have a multi-faceted, diverse economy. Our economy is strong in many different areas. When other markets might be in a boom time, we’ll see growth, too. But we won’t see these huge spikes in growth. But we also won’t see the bust period when that industry goes out of favor.”

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.

Ohmes said that he doesn’t expect vacancy rates to climb in the Twin Cities area – at least by any significant amount – any time soon. The Minneapolis/St. Paul market simply has too much going for it right now to allow that to happen, he said.

“There are some soft things from a quality-of-life perspective that help us,” Ohmes said. “The amenities here, both culturally and physically are outstanding. We have a pretty city. It is a very outdoors-oriented area. People are drawn to that.”

At the same time, the Twin Cities has access to talented workers who graduate from the University of Minnesota and the several other highly ranked colleges in the area. Ohmes said that many of the students who come to these universities end up staying in the Minneapolis/St. Paul area after they graduate.

“They come here with no plans to stay, but after four or five years here, they like it so much that they stay,” Ohmes said.

The southeast submarket of the Twin Cities 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.

Ohmes said that he’s not worried about overbuilding in this commercial sector. In the last three years, nearly 10,000 apartment units came online in the Twin Cities market. That sounds like a high number, but Ohmes said that it only represents an increase of 3 percent in the overall Twin Cities apartment market.

The overall apartment vacancy rate in the Twin Cities is still so low that it suggests that developers are simply meeting the increasing demand for multi-family living here.

“Even though some might say that this market has been too hot for too long, if you look at the statistics behind it, you can see that this isn’t a situation that could qualify as a bubble,” Ohmes said.

Ohmes is excited, too, about the growth and expansion of the industrial market in the Twin Cities. That market continues to be a strong one, which often surprises outsiders who don’t view the Minneapolis/St. Paul area as a major distribution market.

“It is really fun to watch these new modern industrial buildings being built here,” Ohmes said. “The companies that are growing here can’t find the existing industrial inventory to occupy, so we are seeing new construction now in this market. We haven’t been known as a distribution market. But that is changing. It’s very exciting to watch.”

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