MINNEAPOLIS (07/25/2018) – The Twin Cities multi-tenant commercial real estate market exceeded expectations in the first half of 2018, outpacing projected absorption by about 20 percent even as the retail and office sectors slowed significantly. At the end of June, the market’s multitenant properties had a measured vacancy rate of 10.6 percent, 20 basis points lower than six months ago, according to Cushman & Wakefield’s biannual Compass report.
A total of 1.8 million square feet (sf) was absorbed across office, industrial and retail properties in the first half of 2018, a positive sign for a market contending with the ongoing “right-sizing” trend in the office market and the long list of national retailers giving back large spaces due to bankruptcy or structural changes. That number is down from 2.3 million sf of absorption in the second half of 2017. As in prior reporting cycles, the industrial property type continued to provide most of the absorption on record, totaling 1.6 million sf over the last six months.
New construction of multi-tenant properties continues to bull forward, with 2.3 million square feet due for delivery by the end of the year. That number on its own would nearly match 2017’s total for the year and bring 2018’s total to just about 3 msf,
“The Minneapolis-St. Paul market remained stable amid a near-record economic recovery in the first half of 2018,” said Mike Ohmes, Managing Principal for the Minneapolis-St. Paul office of Cushman & Wakefield. “The market is projected to continue tightening in the second half as investors and users become more conservative with their decision making, but activity remains stable and strong.”
In the first half of 2018:
- New capital poured into the market in search of higher yields. Investors continued to ramp up bidding competition for the best assets in the metro, many of which are now stabilized. As has been the case lately, there is more capital chasing properties than there are properties for sale, especially in the industrial market. But multifamily is as hot as ever, with a pace for more than $1 billion in sales for a fifth consecutive year.
- Office leasing remained active. Leasing activity kept up in the first half despite the continued right-sizing of office tenants around the market. That trend has meant little to no growth in the sector, which has also experienced a growth in single-tenant build-to-suits and corporate campuses. One positive sign: Several multi-tenant speculative projects are under construction and will open soon.
- The Multifamily market continued to surprise. The remarkably low 2.8% vacancy rate makes the Twin Cities one of the most in-demand rental markets nationwide, and developers continue to remain bullish about the market, with a record 5,500-plus new units projected by year’s end.
- The Land market flourished. Led especially by the suburban residential and industrial markets for another cycle, the land market continued to enjoy the spotlight in the first half of the year. “Mid-Density” housing has become a high-demand product among first-time buyers and baby boomers, and industrial developers continue to seek new land positions to accommodate the e-commerce boom. With cities updating their comprehensive plans for the next decade, developers could see new opportunities open up.
- The Industrial market provided more action. As projected, Rogers led an industrial charge in the first half of the year, with more than 1.5 msf of space absorbed in six months. The property type has been a driving force during the near-record economic recovery, buoyed by robust user demand and a healthy economy. Office-warehouse remains extremely tight, and more absorption is yet to come – 1.1 msf projected for the second half would make 2018 a 25% improvement over last year.
- The Retail market withstood a surge of national bankruptcies. The barrage of bankruptcy headlines involving major national retailers has continued throughout 2018, creating several high-profile (and large-format) real estate openings throughout the Twin Cities retail market. Some new and exciting users have already emerged to backfill those spaces, and more similar transactions are expected to take place over the next six to 12 months, as the retail landscape has remained competitive.
- The Medical Office market continued evolving. The evolution away from multi-tenant properties and toward single-tenant and system-driven properties continued in the medical office world, which meant absorption remained flat throughout the Twin Cities. The “retail-ization” of healthcare means that more care providers are popping up in high-traffic accessible retail areas, and changes in new technology have changed how spaces are used.
- The Hotel market cooled its heels. Demand remains strong and rates continue to inch upward, but growth in the hotel market has slowed due to the surge of new supply coming online in this cycle. Developers continue to seek out prime sites and bring the right brands to the right markets, but increasing construction and financing costs have forced some developers to back off their plans. Still, more than 7,000 rooms are in some stage of development.
The full Compass Report is available online at compass.cushwakemsp.com.
About Cushman & Wakefield
Cushman & Wakefield is a leading global real estate services firm that delivers exceptional value by putting ideas into action for real estate occupiers and owners. Cushman & Wakefield is among the largest real estate services firms with 48,000 employees in approximately 400 offices and 70 countries. In 2017, the firm had revenue of $6.9 billion across core services of property, facilities and project management, leasing, capital markets, advisory and other services. To learn more, visit www.cushmanwakefield.com or follow @CushWake on Twitter.
Adam Rae Voge