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Minnesota Commercial Real Estate Outlook Showing Few Changes Following Election, says University of St Thomas Minnesota Commercial Real Estate Survey

The December 2016 University of St. Thomas/Minnesota Commercial Real Estate Survey, taken entirely after the November 8th election, shows few changes in commercial real estate leaders outlook. The biannual survey projects a two-year-ahead outlook for Minnesota’s commercial real estate industry and forecasts potential opportunities and challenges affecting all commercial real estate sectors.

In all 12 surveys the same group of 50 industry leaders have been polled on their expectations for future commercial real estate activity in six categories: rents, occupancy levels, land prices, cost of building materials, rate of return, and equity requirements. Their responses are used to create index scores that can be compared over time. Scores higher than 50 represent a more optimistic view of the market over the next two years; scores less than 50 represent a more pessimistic view.

The panel is expecting to see a continuation of the favorable market conditions for commercial real estate that we have been experiencing for the last two to three years. The results of the November 8th presidential election does not appear to have significantly changed their outlook for the next two years

Observations from 2016 have recorded few major changes in expectations from before the election compared to after the election. “The natural cycle in commercial real estate appears to be running its course somewhat independent of the presidential contest” says Herb Tousley, Director of the Real Estate Programs at the University of St Thomas. “While the forecast for 2017 still looks good, the increase in online shopping, higher interest rates, and the continued redefinition of the office environment will remain major factors in the performance of commercial real estate in 2017.”

Here is a look at the panel’s responses for each of the questions.

Rent Expectations

An outlook that rents will continue to increase at current rates. The index for rental rates has increased from a highly optimistic 60 to a slightly more optimistic 61. This is an indication of an expectation of continued rent growth over the next two years and that the economy will continue to grow and that business conditions will continue improve.

Occupancy Expectations

A moderately positive outlook on expected occupancy levels. The index for occupancy levels increased moderately from 52 to 54. This indicates the panelists continue in their belief that occupancy levels will increase slightly over the next two years. This is a continuation of a trend that began 1 ½ years ago that reflects their expectation that business will continue to expand and will need more space.

Land Price Expectations

Increases in land prices are expected to moderate. The panel’s outlook for land prices reveals an expectation that land prices will increase at a slower rate between now and fall 2018. The land price index has increased (become less pessimistic) for the fourth consecutive survey moving from 40 last spring to 46 this fall.

Building Material Price Expectations

Increases in the price of building materials are expected accelerate.  The index for the price of building supplies took a sharp turn downward, moving from a strongly negative 32 to an even more negative 29. This reflects the panel’s strong belief that rate of increase in building material prices will accelerate over the next two years.

Return on Investment Expectations

Investors return expectations are expected to increase slightly over the next two years. The index for investor’s return expectations has decreased slightly moving from 48 to 46. This slight decline indicates that investors will be looking for higher returns. The consensus among survey respondents indicates that investors will be seeking higher returns due to their expectation of increasing interest rates over the next two years.

Lending Expectations

More equity is expected to be required.  The index for the amount of equity required by lenders decreased significantly, falling from 42 in to 36. This indicates the panel’s strong belief that credit will be available for good projects but lenders will be more risk adverse by increasing their equity requirements in the coming two years.

 More Information

Additional details can be found on the Shenehon Center’s website: http://www.stthomas.edu/business/centers/shenehon/research/default.html.

Commercial Real Estate, Commercial Real Estate Index, Development, Economics, Industrial Real Estate, Industry News, Investment Real Estate, Office Real Estate, Real Estate Trends, Retail Real Estate, Twin Cities Real Estate

Semiannual Survey of the Twin Cities Commercial Real Estate Experts Predicts Continued Favorable Market Conditions

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Leaders in the field of Minnesota commercial real estate expect to see a continuation of the favorable market conditions for commercial real estate that we have been experiencing for the past two to three years.

May 2016 Results

The semi-annual Minnesota Commercial Real Estate Survey conducted in May 2016 has produced some interesting results. Overall, the survey continues to indicate a slightly less than neutral expectation looking ahead two years to spring 2018 for commercial real estate. The composite index was recorded at 46. This is the sixth consecutive survey where the composite index has been in the 46 – 48 range. Index values greater than 50 represent a more optimistic view of the market over the next two years, with values of less than 50 indicating a more pessimistic view. Although the composite index level is similar to previous surveys the pattern of the individual indexes in the current survey is very different.

As was done with all ten of the previous surveys, the same group of 50 commercial real estate industry leaders involved in development, finance, and investment were polled regarding their expectations of near-term, future commercial real estate activity. One thing we have observed in the current survey is there is less variation in the responses and that has caused a more uniform response rate reflecting the panel’s increased certainty in their views. The individual indexes are detailed below:

Rent Expectations

Less optimistic outlook that rents will continue to increase at current rates. Market conditions expected in spring 2018 are best described by the price for space (rental rates) and the supply of space (occupancy levels). The index for rental rates has declined from a highly optimistic 66 to a somewhat less optimistic 60. This is an indication of an expectation of a moderation of rent growth over the next two years. Higher rents help to offset the increased costs of new construction. A slowdown in rent growth puts pressure on expected returns that will be achieved by developers and owners.

Occupancy Expectations

A continued neutral outlook on expected occupancy levels. The index for occupancy levels increased slightly from 50 to 52. Despite the increase, the panelists continue in their expectation that occupancy levels will remain steady at current levels. As new buildings have been completed it takes some time for the market to absorb the new space. Over the last 2 years the occupancy index has been drifting downward towards a neutral expectation concerning the demand for space.

Land Price Expectations

Increases in land prices are expected to moderate. The panel’s outlook for land prices reveals an expectation that land prices will increase at a slower rate between now and spring 2018. The land price index has increased (become less pessimistic) for the third consecutive survey moving from 37 last fall to 40 this fall this spring. The low point for the index was recorded at 31 in the fall 2013 survey. This sentiment while still in pessimistic territory indicates an expectation that land prices will moderate their rate of increase during the next two years. Increasing land prices increase total project costs and are a hindrance to new development, making it more difficult to obtain financing and adequate returns for investors.

Building Material Price Expectations

Increases in the price of building materials are also expected moderate.  The spring 2016 survey reveals that for the fourth consecutive survey our panel continues to become less pessimistic about the rate of increase in price of building materials. The building material index moved from a strongly negative 32 to a somewhat less negative 37, reflecting the panel’s opinion that building material price increases are expected to moderate. Since building materials are a major cost component of any development project any improvement in prices will be favorable for future development.

Return on Investment Expectations

Investors return expectations remain unchanged over the next two years. The index for investor’s return expectations has increased slightly for the third consecutive survey at 48. Although this index value is slightly pessimistic, it is essentially neutral.  The consensus among survey respondents continues to indicate that investors expected returns will not change significantly in the next two years. Investors will continue to seek out quality investments but they are being much more diligent about how they price risk and evaluate return when considering their investment options.

Lending Expectations

More equity is expected to be required.  The index for the amount of equity required by lenders decreased significantly, falling from 51 in to 42. This indicates the panel’s strong belief that credit will be available for good projects but lenders will increase their equity requirements in the coming two years. The good news is that more equity should result in better rates and terms; however, the bad news is that in many cases equity is harder to find and more expensive than debt.

 Summary

To summarize the panel is expecting to see a continuation of the favorable market conditions for commercial real estate that we have been experiencing for the last 2 to 3 years, however there will be some differences as to why this will happen. The panel has moved from a positive to a neutral position on occupancy. With all of the new product coming on line it is expected that given a little time the market will be able to absorb all of the new space but while this happens occupancy rates will be depressed in the short run. Additionally, the panel expects to see continued rent growth, however, that growth will be at a slower rate as new product comes on line and is absorbed. Development efforts will be helped by an expected moderation in the rate of increase in land prices and building materials. The panel is also expecting to see lenders tighten their lending standards somewhat. That results in lower loan amounts and higher equity requirements on development projects. Higher equity requirements makes development more difficult since equity dollars are more expensive and using less debt financing tends to reduce the rate of return on a project. Overall, our panelists see continuing activity at or near present levels in most categories of commercial real estate during the next two years.

May 2016 Commercial Survey

Commercial Real Estate, Office Real Estate, Real Estate Trends, Twin Cities Real Estate

North Loop Among Top 10 Tech Submarkets for Rent Growth Nationwide

The North Loop neighborhood of Minneapolis is among the top ten tech office submarkets for rent growth in the nation, according to a recent report by CBRE. Office rents in the area have shot up by more than 20% in just two years, which is double the rate for the overall Minneapolis office market. The North Loop also ranked fifth nationally for net absorption growth, which was at 8.2 percent during the same period. These numbers put the North Loop among an elite class of tech office submarkets in the nation, posting similar numbers to San Francisco’s SOMA and Austin’s Northwest submarkets.

Source: CBRE

Source: CBRE

The growth is driven by demand among tech firms for non-traditional office space with features such as brick-and-timber construction and exposed ceilings, features common to the North Loop’s many historic warehouse and light industrial buildings. The demand has led to low vacancy rates and created an environment ripe for new development, something developer Hines Interests hopes to capitalize on with its T3 project which will incorporate many of the design features that tech firms want and which are typically only found in historic buildings, such as exposed wood ceilings.

Hines hopes to capture some of the North Loop tech office demand with its new construction T3 building.

 The trend is also likely to drive additional conversions of historic buildings to office space. One example of this is the recent announcement that Artic Cat will move its corporate headquarters to a renovated warehouse in the North Loop in order to help attract new employees.

Recreational vehicle manufacturer Artic Cat recently announced it would move its corporate headquarters to the renovated Western Container building in the North Loop.

It remains to be seen whether the North Loop can sustain continued growth in absorption and rents for tech office space. A recent Start Trib article on the CBRE report quoted Tyler Kollodge, a Minneapolis-based CBRE broker: “The high demand and low vacancy rate has allowed landlords to push rental rates; however, most of the tenants in the area have been there for several years and are facing sticker shock when they see the new proposed rental rates on a potential lease renewal.”

However, national and local trends point to continued growth in the tech office market. The CBRE report noted that the high-tech software/services industry has created over  700,000 new jobs nationally since 2009 (at a growth rate of 34%), which accounts for one-fifth of all new office-using jobs. And in a recent Bureau of Labor Statistics report, Minnesota ranked number one for tech job growth in 2015, growing 8.3 percent in the first six months of this year.

The full CBRE “Tech-Thirty 2015” report is available here.

Architecture & Design, Commercial Real Estate, Green Building, Office Real Estate, Real Estate Trends, Think Outside The Box, Twin Cities Real Estate

Shipping Container Building Proposed for Minneapolis North Loop

A unique office building to be constructed of shipping containers has been proposed for a small site in Minneapolis’ North Loop neighborhood. The project is being developed by Akquracy, a Minneapolis-based marketing firm that will be the primary tenant for the office space. Its located just blocks from Target Field, near two other recent creative office developments in the Ford Center and the new Be The Match headquarters building.

Steelcase

The building will be about 18,000 square feet, consisting of office space and a small café/restaurant space with outdoor seating. The design involves fifty shipping containers, each 75 feet in length. The containers will be stacked three levels high, with a portion of the building elevated over a public plaza. To minimize foundation piling due soil conditions on site, one triangular half of the building will sit on top of an existing underground parking structure, while the other half is shifted one level upwards. The lifting of half the building allows for the creation of covered plaza space and opens up the street corner.

The developer for this project commissioned New York-based architectural firm LOT-EK to design the building. The firm is known for its use of “up-cycling,” or repurposing unique materials in order to create unique designs and build sustainably. Shipping containers have become an increasing popular building material in recent years, having been used for everything from small homes to multifamily and office buildings.

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Building Owners Brace for Tall Order: One Way to Measure Space

 Reposted fron a Wall Street Journal article that apperred on May 27th

 By
Ilona Billington

The MetLife building used to be listed at 2.4 million square feet. Now it is listed at 3 million square feet. Getty Images

Coalition Plans to Announce Measurement System in June

One of the biggest complaints of office tenants is that building owners throughout the world use different systems for measuring how many square feet or square meters tenants are leasing, deviating as much as 24% from one another.

Now an international coalition of real-estate organizations formed last year is hoping to change that. The International Property Measurement Standards Coalition in June plans to announce a single measurement system for the global office market.

“The current situation on measuring standards is totally unacceptable,” said Ken Creighton, chair of the coalition’s board of trustees.

But whether or not building owners adopt or ignore the standards remains to be seen. The coalition doesn’t have the clout to require owners to follow its standards and many landlords don’t want to change their current systems, which can mean millions of dollars in extra rent.

For some building owners, adopting a new measurement standard would mean that their building would shrink in size and lose value. “There is a risk that some firms may be sitting on balance sheets that are actually worth significantly less when measured by a common standard,” said Scott McMillan, chief of real estate at the International Monetary Fund.

For many, the debate might seem surprising. After all, landlords throughout the world are governed by the same laws of physics.

But they use widely different systems for measuring space and this affects rents, which typically are charged on a price-per-square-foot or price-per-square-meter basis.

For example, for a space that measures 10,000 square meters (108,000 square feet), some landlords will simply charge rent based on that amount. But most will increase the size by some factor depending on what formula they use for apportioning public space in the building—lobbies, bathrooms, hallways—to tenants.

Landlords also vary in whether they begin their measurement from inside or outside an exterior wall. Some begin measurements at their building’s farthest extremity, like the nose of a gargoyle.

In some cities, including New York, landlords generally have increased loss factors over the years. For example, in 1979, architectural guides listed the Pan Am Building at 2.4 million square feet. Today the tower, which has been renamed the MetLife Building, is listed at 3 million square feet.

Tenants say consistent standards are greatly needed. “I would have preferred this to have happened five years ago, but better now than in five or 10 years’ time,” said Billy Davidson, group property director of Vodafone. VOD.LN 0.00% Vodafone Group PLC U.K.: London GBp209.50 0.00 0.00% May 30, 2014 4:38 pm Volume : 63.70M P/E Ratio 0.01 Market Cap GBp55.39 Billion Dividend Yield 7.13% Rev. per Employee GBp420,129 05/29/14 Vodafone to Meet With Indian O… 05/27/14 FCC Could Use Merger Concessio… 05/22/14 Why is Vodafone Flogging a Net… More quote details and news » VOD.LN in Your Value Your Change Short position “This is the right thing to do.”

The Standards Coalition was formed in 2013 by a group of international property organizations including the Royal Institution of Chartered Surveyors in the U.K., the Building Owners and Managers Association in the U.S. and the International Monetary Fund. The move was partly in response to increasing pressure from large global tenants that are frustrated by the numerous measurement systems.

A group of 18 experts representing 11 countries have been working on the standards. Proposed standards have been circulating for comment among real-estate professionals for months.

Coalition members expect the standards to be controversial. “In any initiative in standardization there will inevitably be winners and losers,” said Marc Mogull, an executive with the investment firm Benson Elliot who also is a member of the Royal Institution of Chartered Surveyors.

There is also the question of implementation. Building owners will have to voluntarily accept the new standards and it isn’t clear how many will do so, especially if it could mean a financial loss.

Many real-estate executives in New York are skeptical that new standards will change the minds of the city’s landlords. “It’s an important enough market that they can make their own rules,” said Mark Weiss, vice chairman of Newmark Grubb Knight Frank.

But tenants could put pressure on building owners to accept standards by avoiding properties that don’t. “I need the confidence from my suppliers to know when they give me comparable details that it’s really comparable,” said Vodafone’s Mr. Davidson. “With [the new standards] I can say that I won’t consider your building unless you show me the measurements based on these standards.”

Some government agencies say they will help pressure owners to accept the standards. One such agency is Dubai’s Land Department, according to Mohamad Al-Dah, a senior director. “From our own point of view we don’t have very fair standards in Dubai, but once the Land department begins using it, we will encourage businesses in Dubai to adopt it,” he said.

Write to Ilona Billington at ilona.billington@wsj.com

 
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Medical Offices Now Work as Timeshares

 The following article was reposted from Globe Street.com

By Carrie Rossenfeld | Orange County
 

Dopp-Grech: “The next step is for independent operators to offer this format without a specific hospital affiliation.”

IRVINE, CA—Like executive suites in the office market, shared medical space to accommodate multiple practices is being explored by medical landlords, Sonya Dopp-Grech, SVP/director of healthcare services for NAI Capital, tells GlobeSt.com exclusively. The concept allows for physician mobility and maximized use of the space.

“The healthcare industry is showing movement toward time-share concepts, allowing physicians to serve different geographical areas without the need to open additional offices,” says Dopp-Grech. “The concept has already been widely used by hospital groups to allow various specialists to reach out into the communities they serve. The next step is for independent operators to offer this format without a specific hospital affiliation.”

Medical landlords are beginning to explore this option with vacant or underperforming space in their buildings. The caveat is finding a responsible and reputable source to manage this type of space, which would look like a regular medical office with a common waiting area, receptionist and exam and treatment rooms. They may also contain a shared lab, equipment and other amenities.

“It’s like Regus does in the general-office market,” says Dopp-Grech. “Doctors go in and out and don’t need private offices so much anymore. They have their laptops and they see patients, but this way they can see patients at all ends of the county and don’t need to find a long-term lease in each location. It makes great sense, since the way of the future is consolidations.”

The concept makes sense for smaller independent practices or those who want to combine with a larger group. From the landlord perspective, if one is faced with vacant space, this presents another way to fill it with medical tenants.

As GlobeSt.com reported in January, consolidation is the keyword for medical practices today as they search for operating efficiencies. Since healthcare is moving away from the hospital setting into more of a retail environment, this consolidation presents challenges for larger medical practices seeking space to accommodate their needs.

One solution has been for larger groups to lease retail space that formerly held sizable stores such as Barnes & Noble, Dopp-Grech told GlobeSt.com. As GlobeSt.com reported earlier, as healthcare moves toward retail settings, many retail landlords are finding themselves for the first time involved in build-outs and tenant improvements for medical practices. While this trend is welcome among most landlords, they may not be prepared for the high cost of some of these improvements, according to Dopp-Grech.

“Consolidation is occurring because health systems want to make everything efficient for the groups,” says Dopp-Grech. “Smaller groups won’t be able to survive with malpractice insurance [and other costs]. So they’re consolidating and going into larger retail buildings, such as a Barnes & Noble that got vacated.”

 Follow this link to Globe Street: http://www.globest.com/
 
 About Our Columnist
Carrie Rossenfeld
Carrie Rossenfeld is a reporter for the West Coast region of GlobeSt.com and Real Estate Forum. She was a trade-magazine and newsletter editor in New York City for 11 years before moving to Southern California in 1997 to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics ranging from intellectual-property licensing and giftware to commercial real estate. She recently edited a book about profiting from distressed real estate in a down market and has ghostwritten a book about starting a home-based business.Email
Office Real Estate, Twin Cities Real Estate

Jones Lang Lassalle Releases 2014 Skyline Review

Jones Lang LaSalle recently released its 2014 Skyline Review, a report on CBD office markets in major cities across the country. The review offers an inside look at occupancy in urban office centers across the country. As the “Skyline” term indicates, the review focuses on Trophy and Class A buildings in office districts known for high-quality assets, market-leading rents and high demand from institutional investors.

The Minneapolis Skyline building set includes 22 buildings and currently has an overall vacancy of 11%, down from 12% in last year’s report. However, absorption has been slow despite increases in office-using employment. This is mainly attributable to tenants “right-sizing” their space to use less square feet per employee.

2014 Minneapolis Skyline Review (Source: Jones Lang Lasalle)

Six Minneapolis Skyline buildings sold in 2013, as the market saw increased interest from institutional investors. Total sales volume was approximately $600 million on transactions for 3.4 million square feet of space. Skyline buildings sold for an average of just above $150 per square foot, which was higher 2012 levels but still below historical peaks above $250 psf in 2007 and 2010. One of the buildings sold was the IDS Center, which was acquired by joint venture of Beacon Investment Properties LLC and two Israeli companies for $253 million.

The IDS Center, Minnesota’s tallest building, was one of six Skyline buildlings in Minneapolis that was sold in 2013. Inland American Real Estate Trust sold it for $253 million after buying it for $277 million in 2006.

Capella Tower currently has vacancy of 15% on 1.4 million square feet, but that will change when the Star Tribune moves in next year.

 

 

 

 

Occupancy and rents continue to vary widely among the Skyline buildings. As in 2013, the lowest vacancy can be found at 33 South Sixth Street, with occupancy at 99.4% on 1.1 million s.f. of rentable area. On the other end of the spectrum is Fight Street Towers, which continues to struggle with vacancy of over 35% on about 1 million square feet. Minneapolis’ three tallest buildings continue to perform well, although vacancy has increased slightly at the IDS Center at 9%, up from 5% last year. Wells Fargo Center maintains 98% occupancy and the highest direct rents of the Skyline at $37.56 per square foot.  Capella Tower has had higher vacancy than its two tall peers, but that will be helped somewhat by the recent news that the Star Tribune will soon call the building home.

Commercial Real Estate, Development, Executive Insight Series, Investment Real Estate, Office Real Estate, Real Estate Brokerage, Upcoming UST Events

Spring 2014 Real Estate Executive Insights Speakers Announced

The Real Estate Executive Insight Series invites speakers from the real estate industry to provide valuable information and discussion about hot topics and current trends. This is a free program and is open to the public. Attendees who are interested in the MS Degree in Real Estate program are encouraged to participate in an optional class visit following the speaking presentation. Registration is required.

Schedule of Events
5:30  – 6:00 p.m.: Registration and networking reception
6 – 7:00 p.m.: Speaker presentation
7 – 9:00 p.m.: Optional class visit

Cost: Free

 

Wednesday, March 5
Commercial Real Estate Investment and Ownership
Speaker: Will Hoeg, Falcon Ridge Partners

Will Hoeg, Falcon Ridge Partners

Will Hoeg, Falcon Ridge Partners

Real estate investment involves a substantial amount of risk. Will Hoeg of Falcon Ridge Partners will discuss the challenges and opportunities of investing in and owning commercial real estate. Hoeg will also discuss how to create partnerships for the purpose of making successful real estate investments.

Falcon Ridge Partners, LLC is a commercial real estate acquisition, investment and asset management company. Projects include data centers, complete campus renovations, confidential startup growth incubators, notable towers, building repositioning, and overall corporate campus redevelopment. Total investment value has exceeded $1.2 billion with primary concentration in Minnesota and Silicon Valley.

This program has been submitted for one hour of real estate agent/broker continuing education credit through the Minnesota Department of Commerce.

 

Wednesday, April 23
Retail & Office Development/Asset Management
Speaker: Tim Murnane, Opus Holdings, LLC.

Tim Murnane, Opus Holdings, LLC.

Tim Murnane, Opus Holdings, LLC.

Tim Murnane has been a leader in the commercial real estate market in the Twin Cities for many years. He will discuss where he thinks the opportunities are for Opus Holdings and for the market in general as the commercial real estate climate continues to improve.

The Real Estate Executive Insights Series is presented by the Opus College of Business MSRE program. This series invites speakers from the real estate industry to provide valuable information and discussion about hot topics and current trends. This is a free program and is open to the public.

This program has been submitted for one hour of real estate agent/broker continuing education credit through the Minnesota Department of Commerce.

Development, Industrial Real Estate, Industry News, Investment Real Estate, Minneapolis / St. Paul Housing, Office Real Estate, Property Management, Real Estate Trends, Residential Real Estate, Retail Real Estate, Twin Cities Real Estate, UST Program News

2014 Real Estate Outlook

Last week, Twin Cities real estate professionals gathered at the University of St. Thomas for the third annual Real Estate Outlook event. The program included a series of panels featuring leading experts in local real estate market segments, each offering their views on the current state of the market and their expectations for the coming year. The event was co-sponsored by Shenehon Center for Real Estate at the University of St. Thomas Opus College of Business and Integra Realty Resources. Here is a recap of some of the major themes presented:

Economic Forecast

The keynote presentation was made by State Economist Laura Kalambokidis, who discussed the current state of the economy locally and nationally. Minnesota has generally fared better than the nation in recovering from the economic downturn. Employment in the state has now climbed back to pre-recession levels. Unemployment in Minnesota is at 4.6%, well below the national rate of 7%. Employment growth has been strongest in the health services, business services, retail, and hospitality industries, all of which have grown between 2.5 and 4% year over year. Government and manufacturing were the worst performing job sectors over the previous year, each declining by about 2%. Despite a slight drag on the economy from policy uncertainty related to the federal budgetary process, continued modest growth is expected locally and nationally over the next two years.

Laura Kalambokidis, State Economist

Office Market Update

Mike Salmen of Transwetern started off the office panel with a report on 2013, which was a decent year for Twin Cities office real estate. Absorption was modest at approximately 200,000 sf. Vacancy has slowly been decreasing thanks to the job growth and low unemployment noted by Ms. Kalambokidis. While Class A Space is performing well, Class B and C space and certain sub-markets are still seeing high vacancy.

Steve Chirhart of TaTonka Real Estate Advisors agreed, noting that the St. Paul and East suburban sub-markets were the weakest office markets in the region, although vacancy has declined from a peak of over 25%. Mark Kolsrud of Colliers stated that the St. Paul CBD had the least amount of investor interest of the regional submarkets, and that this was due to a lack of interest from lenders.

On the other side of the metro, the 394, Southwestern, and Minneapolis CBD submarkets are all performing very well. Mr. Salmen believes the I-394 corridor is currently the hottest office market in the Twin Citeis, with rates pushing into the mid-teens and low vacancy. Vacancies are also low in the Southwest submarket, despite the addition of 3 million sf of space since 2007. An anomaly in the West Metro is the Northwest submarket, which has among the highest vacancies at 24%. Mr. Kolsrud pointed out a 150 basis point swing in cap rates from the 394 area to Northwest submarkets. Like St. Paul and Eastern suburban, Northwest is unlikely to attract interest from institutional investors, although the panelists believed a local developer could find a way to make a deal work.

Lastly, the Minneapolis CBD remains the largest submarket and currently has vacancy at 15%. A big concern for office real estate downtown is the impact of the Wells Fargo build-to-suit deal with Ryan Cos. for new office space in Downtown East; the panelists speculated that this move could pull 1 million space of occupancy out of the downtown core as Wells Fargo consolidates employess in the new buildings. Another concern is the increasing obsolescence of older buildings, where mechanical systems and floorplans don’t support the employee density and layouts now desired by office tenants. But despite these concerns, downtown continues to see strong investor interest, as institutional investors from the coasts seek out the comparatively higher cap rates available in Class A properties in Minneapolis. Additionally, institutional investors are increasingly interested in “non-traditional” investemnets, such as office conversions in historic warehouse buildings in the North Loop area.

Office Panel

The office market panelists ended with a discussion of a macro trend that will have a large impact the office market going forward, which is coporate users taking less space per employee. The average space used per employee is expected to decline from over 220 sf to 150 sf by 2015. Among ten large renewals over the last 18 months, almost all took less space than they had before. Thus despite employment growth, the outlook for office absorpbtion is flat.

Retail Market Update

The retail market panel featured a lively discussion with Jim McComb, John Johannson of Colliers, and Skip Melin of Cushman Wakefield. In the Twin Cities, 2013 saw declines in vacancy and somewhat flat absorption of roughly 900,000 sf. However, Mr. Johannson noted that good space is mostly full, and gave the example of 16 formerly vacant spaces over 12,000 sf in the Southdale area, of which 13 have leased in the last 16 months. Mr. McComb noted that there isn’t much vacancy in smaller neighborhood spaces either. He pointed out that changes in the economy and demographcis are creating opportunities in retail markets.

One of the most significant retail developments currently underway is an outlet center in Eagan. Mr. Melin noted that the center will have 400,000 sf of space for 19 tenants, anchored by Saks Off 5th. Mr. Johannson then described another large 450,000 sf outlet development currently in the planning stages, this one also in Eagan. These two projects are all the more interesting because they are just about the only large multi-tenant retail developments currently in the works in the Twin Cities. Each are banking partly on capturing tourist trade from the nearby Mall of America but also taking advantage of a submarket in Eagan that is currently under-retailed.

The panelists noted that grocery-anchored retail centers continue to Continue Reading

Architecture & Design, Commercial Real Estate, Development, Economics, Investment Real Estate, Office Real Estate, Property Management, Real Estate Trends, Think Outside The Box

Changing Office Trends Hold Major Implications for Future Office Demand

Office TrendPioneered by Tech Firms in California, Communal Workspace Model Becoming More Mainstream Among Big Office Firms

 The article below is reposted from CoStar. It was written earlier this year but I believe that it is still very relevant. There is a major change underway in how office space users are looking at their future office space needs and the utilization of their esisting office space.  This is a long term trend that is going to have a significant impact on office space owners, users, and investors.      – Herb Tousley, Director of Real Estate Programs, University of St. Thomas

 

By Mark Heschmeyer

 
Perhaps just as the inevitable disappearance of music, video and books stores should have been foreseen at the onset of a digitized connected world, so too should the commercial real estate industry start taking a hard look at changes occurring in the office market.Tenants are downsizing their offices, particularly larger public firms, as they increasingly adopt policies for sharing non-dedicated offices and implement technology to support their employees’ ability to work anywhere and anytime, according to Norm G. Miller, PhD, a professor at the University of San Diego, Burnham-Moores, Center for Real Estate, in a webinar he presented to CoStar subscribers last week.Miller said he put together the webinar to examine what would happen if office tenants used 20% less of the nation’s current office space, which has a total valuation of $1.25 trillion. That decrease in demand would represent $250 billion in excess office capacity. Although the current situation is not that dire, Miller said the trend is real, and he presented how it is currently playing out and the long-term implications for office building owners and investors.Following the webinar, CoStar News interviewed Dr. Miller for a more in-depth discussion of the topic and surveyed a wide sample of webinar participants to share their firsthand account of the ongoing trend and its implications.
 
According to Miller, four major trends are impacting the office market:
* Move to more standardized work space.
* Non-dedicated office space (sharing), along with more on-site amenities.
* Growing acceptance, even encouragement of telecommuting and working in third places, and
* More collaborative work spaces and functional project teams.
 
“Historically, under the old corporate hierarchy, everyone had their own assigned office or work desk and we saw utilization rates of 50% or so,” Miller said. “Firms that have moved to sharing space are seeing much more efficient utilization rates of 80% to 95%, sometimes using conference space seats to handle unexpected overflow. Some also have arrangements with temporary office space vendors like Liquid Space, Regus, HQ, Instant Space, as well as supporting employees working from home or third places.”“The average amount of leased space (per employee) has been shrinking,” he said. “As of mid-2012 the average was 185 square feet per worker, well below the average space assumption in most office-demand models, and well below figures 10 years ago.”There have definitely been changes in office demand, agreed Tim Wang, director and head of investment research for investor Clarion Partners in New York. “Ten years ago, 250 square feet per office employee was the gold standard in office real estate. Today, that average has dropped to approximately 195 square feet. While some office tenants are hesitating to commit to large leases primarily due to economic uncertainties, the long-term trend is clearly shifting towards efficient space usage.” Brian J. Parthum, who tracks employment and economic trends for Southeast Michigan Council of Governments (SEMCOG) in Detroit, said his group is a case in point. “Our own organization recently moved into a smaller space,” Parthum said. “Efficient office design has allowed us to rent 7,000 square feet less space — down from 34,000 square feet — and at a lower rate. Additionally, we now have an office that is more attractive to the next generation of staff. The new space takes advantage of natural light, promotes face-to-face contact, and utilizes laptops, wireless technology, and mobile devices to allow for a more flexible work environment.”“Technology is allowing companies to be more paperless and work from a single laptop or device,” agreed Jason Lewis, president and managing broker of EcoSpace Inc. a brokerage firm in Denver that specializes in working with tenants to find sustainable workplaces. “Culturally the new generation of employees is requiring a more flexible and open environment. And in regards to the economics, there is the need for both startups and corporations to lower their burn rate and conserve cash, something that can easily be done by restructuring the way they view their office space,” Lewis said.For now, at least, the trend is more prevalent among large corporate office users with locations in multiple cities. John G. Osborne, executive director, leasing and marketing at Bergman Real Estate Group in Iselin, NJ, said also that the trend to shared office space is more prevalent among larger publically traded companies than smaller firms. “The majority of our smaller tenants, those that lease less than 5,000 square feet, still prefer private offices than an open plan,” Osborne said. “The majority of our smaller tenants, those that lease less than 5,000 square feet, still prefer private offices than an open plan,” noted John G. Osborne, executive director, leasing and marketing at Bergman Real Estate Group in Iselin, N.J.For many office-using firms, the Great Recession made downsizing a greater imperative. Occupancy rates dropped across the country as employers downsized staff and sought efficiencies through lower square foot per employee footprints. “Everything we’ve seen since 2006 and 2008 could be called the ‘Great Deleveraging,’” said Wilson Greenlaw, vice president of Thalhimer in Fredericksburg, VA. “Companies were removing fluff and eventually someone got around to looking at space utilization. Now that it is on the table, it will be maximized and implemented, resulting in a cultural shift for the office worker.”“Some of it is economic,” agreed Miller. “That is, companies realized they could save money by minimizing excess space. But I believe the single biggest factor driving this trend is technology. Now that we have moved to cloud-based file storage and can access our work from anywhere and it can be easily shared, workers no longer have to be tethered to an office to be productive. Technology is very much at the heart of this transformation.”Follow this link to read the rest of the article:  http://www.costar.com/News/Article/Changing-Office-Trends-Hold-Major-Implications-for-Future-Office-Demand/146580