Twin Cities Commercial Real Estate Activity Improves Despite Weak Market Fundamentals

MINNEAPOLIS, July 22 /PRNewswire/ -- Signs are beginning to surface that the slumbering commercial real estate market in the Minneapolis-Saint Paul metro area is waking up. According to NorthMarq's mid-year analysis, downward trends still continue in fundamental indicators such as rental rates and pricing on assets, and vacancy rates continue to increase. However, brokers are beginning to see an uptick in inquiries from strong national retailers, residential land is starting to trade as national homebuilders move back into action, and some office markets are beginning to stabilize.

"The consensus is that the commercial real estate market fundamentals haven't quite yet hit bottom but will do so this year, and that a long, gradual recovery will begin late in the year or in early 2011," said Mike Ohmes, NorthMarq executive vice president, Brokerage Services. His prediction is based on the following data and observations recorded during the first half of 2010:

Office

• The overall office vacancy rate reached a 19-year high of 19.9 percent – just a 0.03 percent rise from the vacancy rate recorded at the end of 2009. This rapidly slowing increase suggests that the market is bottoming out from a vacancy perspective.
• Landlords are exhibiting an increasing willingness to cut rates, increase concessions or do whatever it takes to generate new leasing activity – implying that there will be continued downward pressure on rental rates.

Retail

• The Twin Cities retail vacancy rate continues to inch upward, to 10.4 percent during the first half of 2010; meaning that 6.9 million square feet of retail space currently sits vacant.
• Drastically reduced rental rates and increasing concessions from landlords are enticing national retailers like Toys R Us; Bed, Bath and Beyond; and value concepts like Big Lots and Goodwill to look to the Twin Cities for expansion opportunities. Big-box concepts like buybuy Baby and Christmas Tree Shops are also looking to enter the market.
• Grocers are performing well because consumers are eating in more, and a number of grocers are competing for market share. Casual dining concepts such as Panera Bread, Buffalo Wild Wings and Burger Jones are also actively seeking space.

Land

• For the first time since the U.S. housing market collapsed in 2007, residential land is beginning to trade as national homebuilders such as Lennar Corporation begin to buy finished lots in first- and second-ring communities.
• National retailers like convenience stores and retail pharmacy chains such as CVS and Walgreen's are seizing the downturn in prices to penetrate markets that were considered off-limits to them when land prices were higher.

Investment and Capital Markets

• Investment capital was abundant for Class A properties with strong anchors, highly creditworthy tenants, low vacancy and no near-term lease rollovers. However, these properties comprised only a fraction of the total market. The remaining portion remains in investment limbo, even though much of it represents solid real estate ventures.
• Surprisingly, few distressed buying opportunities have surfaced so far this year. Banks' increased ability to negotiate with troubled loan holders, and special servicers' limited capacity to deal with the surge of defaults by commercial mortgage backed securities are two reasons for the delay.
• Institutional investors such as life insurance companies and private equity funds have rebuilt their capital bases. Additionally, there are new inflows of investment capital coming into major metropolitan areas – including the Twin Cities – from foreign investors.

Industrial

• User-building sales are increasing due to the softening in prices and increasing inventory. The gap in pricing between buyers and sellers is narrowing, offering users the opportunity to buy if they can obtain financing.
• While speculative development is non-existent, several build-to-suits are underway, including HealthEast Medical Transportation and Baldinger Bakery in St. Paul, and Open Systems International in Medina.
• Overall, Twin Cities multi-tenant industrial tenants continued vacating more space than they leased in 2010, resulting in negative absorption of 436,958 square feet and pushing vacancy rates to the highest in a decade – 16.7 percent.

Medical Office

• While not recession-proof, medical office properties continued to outperform the traditional office market, due in part to strong demographic trends including the aging baby-boomers' continuing desire for medical services. Vacancy rates across the Twin Cities were recorded at 11.5 percent for the first half of 2010.
• Rental rates are under downward pressure and concessions are increasing. On the other hand, the weak retail market is offering an opportunity for medical office tenants to move to high visibility retail sites. One example is Emergency Physicians Professional Association, which is looking to develop off-campus, non-ambulatory emergency care facilities in easily accessible retail sites.

Detailed Compass findings can be seen at www.northmarqcompass.com.

About Compass Report

NorthMarq'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 NorthMarq Compass Report.

About NorthMarq

NorthMarq offers commercial real estate services, including brokerage, property management, corporate solutions, investment sales and debt/equity services, to investors and occupiers of commercial real estate from its headquarters in Minneapolis, Minn. The company manages more than 60 million sq. ft. of retail, industrial and office assets in 22 markets around the country and handles more than 7,500 transactions annually. It also provides real estate debt and equity financing, and commercial loan servicing in 32 offices coast-to-coast, with an average of $7 billion in annual production volume and services a loan portfolio of more than $40 billion. For more information, please visit www.northmarq.com.

SOURCE NorthMarq