MINNEAPOLIS (01/25/2018) – The Twin Cities multi-tenant commercial real estate market exceeded already optimistic expectations in the second half of 2017, outpacing projected absorption and keeping vacancy rates steady at 10.8% despite a sizable influx of new construction, according to Cushman & Wakefield’s biannual Compass report.
A total of 2.3 million square feet (sf) was absorbed in the second half of 2017 across office, industrial and retail in the second half of the year, an impressive achievement especially considering the “right-sizing” trend in the office market and the long list of national retailers giving back large spaces due to bankruptcy or structural changes.
New construction at the end of the year totaled 2.58 msf, the second-most since the end of the last recession, and up from 2016’s 1.9 msf. Most of the new space was already leased or spoken for prior to or early in the construction process.
“The second half of 2017 saw a flurry of activity across all product types, and absorption across the board exceeded our projections from earlier in the year,” said Mike Ohmes, Managing Principal in the Minneapolis-St. Paul office of Cushman & Wakefield. “Market activity continues apace, and our team is already projecting a number of significant transactions to occur in early 2018.”
In the second half of 2017:
- The Retail market braved a new environment. Demand for new space remained competitive in retail, even amid a lengthy list of national retailers closing or declaring bankruptcy. Competition is already happening for many vacant big boxes, with most being divided up for multiple smaller users.
- The Industrial market surged forward. Despite the second-highest total of new construction hitting the market over the past decade, the industrial vacancy rate didn’t budge. That was driven by 1.66 msf of new absorption, well over what had been projected. Strong absorption is expected to continue in 2018.
- The Multifamily market defied gravity. Absorption outpaced new construction in 2017, even with 3,500 new apartment units delivered to the market. Even with approximately 15,000 units delivered between 2013 and 2016, the vacancy rate for apartments metro-wide has stood pat at 2.5%. However, 2018 could be a big test year for landlords – 5,000 apartments are projected to open during the year.
- Investors kept chasing desirable properties. $4.54 billion in commercial and multifamily sales closed in 2017, barely a move from 2016’s $4.6 billion. Investors showed willingness to bid on assets that meet their investment strategies, seeking out both steady cash flow and value-add opportunities. A number of noteworthy transactions are expected to close in the first part of 2018, giving the year another strong start.
- Medical Office stayed steady amid uncertainties. Construction continues at strong levels in the Medical Office market, with health systems evolving to meet patient needs and locate more facilities in easy-to-access locations.
- The Hotel market cooled, as expected. Average occupancy dipped to 69.2%, signaling a cooling to the hotel market’s seven-year hot streak. The slowdown is primarily due to the flood of new rooms hitting the market. Approximately 3,900 rooms were delivered this cycle, and around 3,000 more are in some stage of development.
- The Office market stayed on course. The year ended with modest absorption in the office market. Companies are relocating, expanding and trading into more efficient space, but some space has come back into the market due to downsizing or consolidation into single-tenant projects not measured in the multi-tenant statistical universe. Rates have remained healthy relative to vacancy rates, but their growth is leveling off except for buildings with plenty of character or amenities located in desirable locations.
- Residential and Industrial kept the Land market humming. In a theme consistent with previous reports, industrial and single-family developers continue to drive much of the demand in the land market. Homebuilders are aggressively seeking out positions in excellent school districts, and industrial developers are seeking bigger sites to accommodate the expanding eCommerce distribution and fulfillment business.
The full Compass Report is available online at compass.cushwakemsp.com. With Super Bowl LII just over a week away, Cushman & Wakefield has also released Super Stats, an infographic report on the effects of the Super Bowl on commercial real estate and the Minneapolis-St. Paul market, available here.
About Cushman & Wakefield
Cushman & Wakefield is a leading global real estate services firm with 45,000 employees in more than 70 countries helping occupiers and investors optimize the value of their real estate. Cushman & Wakefield is among the largest commercial real estate services firms with revenue of $6 billion across core services of agency leasing, asset services, capital markets, facility services (C&W Services), global occupier services, investment & asset management (DTZ Investors), project & development services, tenant representation, and valuation & advisory. To learn more, visit www.cushmanwakefield.com or follow @CushWake on Twitter.
Adam Rae Voge