MINNEAPOLIS (07/31/2019) – The Twin Cities multitenant commercial real estate industry got off to a strong start in 2019, with absorption meeting projections across the board, vacancies continuing to tighten, and rent growth remaining strong, according to Cushman & Wakefield’s bi-annual Compass Report. At the end of the second quarter, the vacancy rate across office, industrial and retail properties sat at 10.8%, down slightly from 10.9% at the beginning of the year.
A total of 2 million square feet (msf) was absorbed by occupiers throughout the office, industrial and retail property types in the second half of 2018, in line with what Cushman & Wakefield had projected for the six-month period. At its current pace, the market would handily outpace its 2018 absorption total of 2.78 msf, with industrial continuing to drive much of the activity.
In the first half of the year, the industrial submarket saw 1.42 msf of absorption, putting it on pace to match its strong 2018. Office posted 557,600 sf of absorption, nearly matching its pace from the second half of 2018, while retail rebounded from negative 600,000 sf in the second half of 2018, posting a relatively flat absorption number.
New construction continued forward at a healthy pace, with 1.52 msf being built across all property types in the first half of the year. With 1.5 msf projected for the remainder of the year, the 2019 total for new deliveries would hit 3.0 msf, up from 2.1 msf delivered in 2018.
“The industrial market has remained a strength during this real estate development cycle, and in the first half of the year, we saw office and retail start to show their strength as well,” said Mike Ohmes, Managing Principal in the Minneapolis-St. Paul office of Cushman & Wakefield. “We’re projecting an even stronger second half of 2019, particularly in the retail and investment sectors, and as of now we’re expecting one of the best absorption years we’ve seen during this economic expansion.”
In the first half of 2019:
- The Retail market overcame the big box bust. With the momentum of new big-box closings slowed almost to a halt, the Twin Cities retail market got a chance to show its strength. Well-located big boxes are being demised or leased entirely to single tenants. Some new closings may occur throughout the rest of the year, but the market overall is expected to absorb positive space.
- The Office market continued its amenities arms race. With the labor market tight and exciting spaces leasing quickly, office tenants know it’s important that their space appeals to potential recruits. Companies want highly amenitized space to attract and retain talent, and the buildings that appeal to that dynamic are doing the best in the market.
- The pool for investment assets remained deep. New and abundant sources of capital continue to target the Twin Cities in search of higher yields. Both domestic and foreign capital is drawn to the metro’s strong fundamentals and demand drivers. However, there continues to be more investors than buying opportunities.
- Industrial continued to power the leasing market. With about 1.4 msf of absorption, the industrial sector continued to lead the way in leasing. An even stronger second half is being projected, and the construction pipeline remains robust as vacancies stay low.
- The Land market stuck with its bread and butter. Industrial and residential users kept the land market busy during the first half, targeting strategic land positions for new developments all over the Twin Cities. The market’s upward momentum did take a bit of a break in the first half, however, with prices stabilizing.
- Multifamily achieved rent growth amid its building boom. The Twin Cities continues to rank among the country’s most dynamic, in-demand apartment markets. Despite a flood of new development, the metro boasts healthy absorption, a low 2.6% vacancy rate, and solid rent growth. Business expansion, job growth, and in-migration are bolstering renter demand, while the shortage of available, affordable starter homes is keeping more millennials in the rental pool.
- The prognosis for Medical Office remained positive. Undeviating demand for space, stable occupancy rates, steadily increasing rental rates, and an uptick in construction all bode well for the Twin Cities medical office market. However, unrest continues as the sector faces uncertainty around healthcare policy, new medical technologies, the aging population’s mounting medical needs, changes in reimbursement, and new healthcare delivery models. Medical office real estate continues to evolve to keep up with these changes.
- Supply for Hotels caught up to demand. Following a record-setting run — thanks to robust business and leisure travel — the Twin Cities burgeoning supply of hotel rooms is finally starting to catch up to demand. After several peak-performance years, a downturn is inevitable, but when and how deep is unclear. As long as the economy remains healthy and there is no “black swan” event, the hotel industry could merely experience a “hiccup” in activity.
The full Compass Report is available online at compass.cushwakemsp.com.
About Cushman & Wakefield
Cushman & Wakefield (NYSE: CWK) 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, valuation and other services. To learn more, visit www.cushmanwakefield.com or follow @CushWake on Twitter.
Adam Rae Voge