MINNEAPOLIS (07/26/2017) – Despite a slight uptick in vacancy, the Minneapolis-St. Paul commercial real estate market in early 2017 held at a healthy 10.8 percent in vacancy across all product types – office, industrial, retail – and is headed for a more active second half of the 2017.

Even in the face of some major tenants closing their doors (in retail) or consolidating operations into single-tenant buildings (office and industrial), the recorded vacancy rate signals a tight market in each sector. Combined, users absorbed 339,563 square feet (sf) in the first half of the year, about the same number as was absorbed in the second half of 2016.

However, Cushman & Wakefield is projecting a significant increase in absorption over the next six months, with as much as 1.625 million sf of space to be occupied by industrial, retail and office tenants. That would bring the year-end total to just shy of 2 million sf.

New construction continues to truck along, with a solid 836,000 sf delivered in the first half of the year. Although that number feels small in the wake of 2016’s 1.9 million sf and 2015’s 3.36 million sf, most new space was preleased or is quickly landing users, and the total also does not take into account single-tenant properties not recorded in the Compass statistical universe. The two years prior to 2017 brought with them the most new construction delivered since 2008.

“The Twin Cities multi-tenant market isn’t moving with the urgency or intensity of recent years, but demand and activity have remained remarkably strong throughout the first half of this year,” said Mike Ohmes, Executive Vice President-Transaction & Advisory Services. “A more careful approach by developers and end-users has caused our transaction volume to be lower than expected so far this year, but we project a much more active second half of the year.”

The full Compass Report is available online at www.northmarqcompass.com.

In the first half of 2017:

  • The Office Market posted positive absorption and set a positive path forward. After struggling with negative absorption amid several big tenant moves to single-tenant buildings, the multitenant office market started its comeback early this year, posting slight positive absorption and seeing an improvement in vacancy. Looking forward, big tenants are becoming more active, and the lure of Amazon could attract other tech users to downtown Minneapolis.
  • Multifamily continued its winning streak. Vacancy remains near record lows and new projects are popping up and meeting leasing expectations. The construction pipeline could deliver as many as 8,000 units this year and next, and millennials and empty-nesters continue to move into the new units.
  • Investor demand remained strong, although buyers were discerning. As has become the norm this cycle, investor demand is outpacing the number of properties for sale. Private investors are capitalized and motivated to purchase properties. But as is happening nationally, transaction volume shrunk this half due to that lack of inventory. Plenty of sales are projected for the second half of the years, and the investment market should remain solid.
  • Demand stayed insatiable for industrial and residential land. The demand for land that could accommodate massive distribution and e-commerce centers is heavy, and single-family homebuilders have started to scramble to meet the needs of the housing market renaissance. However, buyers of all kinds continue to cautiously evaluate the market, which has kept pricing in check.
  • The Industrial market took a breather before diving into another strong half of activity. Absorption cooled from its record pace in recent years, but activity remains throughout the industrial sector. 1 million sf of absorption is expected by year-end, as many large multi-tenant deals are completed. The question most industrial users are facing: Where to locate to find and keep top talent within their walls.
  • Retail shifted gears thanks to multiple national store closures. Sears and J.C. Penney’s are among the iconic chains dramatically changing their real estate footprint, and that will have an impact on Minneapolis-St. Paul. For one, large blocks of vacant space have popped up. On the other hand, so have opportunities to do something different. Landlords are looking at closings of Sears in some markets as a chance to divide the former one-user space into multiple newer, more interesting concepts.
  • Medical Office remained healthy amid industry uncertainty. It wasn’t clear as of publication what would happen with the Affordable Care Act, but the Twin Cities medical office sector chugged forward with more construction, a slight uptick in rents and a low vacancy rate. As healthcare delivery changes, the market will see more off-campus locations more accessible to customers. Other factors moving forward include physician shortages and system consolidation.
  • The hotel market landed softly. After seven years of rate and revenue growth, the Twin Cities hotel market hit its peak and will cool. But so far, there has been no crash, but rather a “soft landing,” with fundamentals remaining solid. Development will also continue, with about 5,000 more rooms in some stage of planning or development.

About the Compass report

Cushman & Wakefield’s bi-annual Compass Report compiles comprehensive market data and analysis for all commercial property types, including office, retail, industrial, multi-family and medical office. The report also features an overview of the Twin Cities economy and an analysis of the market’s commercial real estate investment trends. For more information, visit www.northmarqcompass.com.

About Cushman & Wakefield

Cushman & Wakefield is a leading global real estate services firm that helps clients transform the way people work, shop, and live. Our 45,000 employees in more than 70 countries help occupiers and investors optimize the value of their real estate by combining our global perspective and deep local knowledge with an impressive platform of real estate solutions. 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. 2017 marks the 100-year anniversary of the Cushman & Wakefield brand. 100 years of taking our clients’ ideas and putting them into action. To learn more, visit www.cushwakecentennial.com, www.cushmanwakefield.com or follow @CushWake on Twitter.

Media Contacts

Adam Rae Voge
Cushman & Wakefield
Jean Hill
Maccabee Group