Latest Minnesota Commercial Real Estate Survey Reveals Subdued Market Outlook – Real Estate Matters
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Latest Minnesota Commercial Real Estate Survey Reveals Subdued Market Outlook

The latest Minnesota Commercial Real Estate Survey from University of St. Thomas posts first decline since inception,  forecasts that land and building materials will wax while rent and occupancy rates wane.

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The University of St. Thomas Shenehon Center for Real Estate’s latest Minnesota Commercial Real Estate Survey has been released, showing the first step back from positive outlook in its two-year history.  Fifty supply-side commercial real estate leaders were polled about their beliefs and expectations of the local market conditions over the next two years, and their collective responses registered a decline from somewhat optimistic in the spring to neutral today.

The Minnesota Commercial Real Estate Survey, conducted earlier in November and available for review at http://www.stthomas.edu/business/centers/shenehon/pdf/MNCRE_2011Fall_Web.pdf, analyzes forecasts for future rental rate growth, vacancy rates, land development costs, building material costs, ROI and loan-to-value equity in the Twin Cities. Aggregating these measures into a 0-100 index where numbers over 50 are bullish, the composite index revealed a score of 51.2 versus 55.6 when the study was last conducted in June.  While the sentiment isn’t bearish, its noticeable decline – the single largest movement observed in the composite index since inception – is a sign of eroding confidence.

“Economic uncertainty over the past six months seems to have taken its toll on commercial real estate outlook in the Twin Cities,” said University of St. Thomas Opus College of Business real estate programs director Herb Tousley, who conducts the bi-annual research with Thomas Hamilton, an associate professor of real estate at the b-school.  “The study showed a lot of agreement amongst panel members that their mood has been tempered.”

While still more optimistic than pessimistic, prognostications for the price for space and supply of space both dropped significant levels, revealing dampened outlook for economic improvement and demand for space.  The outlook index specific to rental rates declined from 70.8 to 66.5 while the forecast of occupancy soured from 71.4 to 67.

The survey panel was bearish about land and building material prices, which would further weigh down the market and impede new development.  The building material index exists at 27.9, slightly less negative than the sharp downturn this area took in the spring to 25.  The land-price index registered 38.1, a little more pessimistic than the 37.5 number in the spring.

The index for the amount of equity required by lenders decreased slightly (60.2 today versus 62.5 in the spring), drawing back on the optimism that credit markets will bring about attainable loan-to-value requirements and lead to greater financing.  Perhaps reflecting the study’s overall findings, the expectations for returns on commercial real estate investments remained essentially flat (49.4 now versus 52 in the spring).

The next Minnesota Commercial Real Estate Survey is expected to be available in the spring of 2012.

Learn more about research done through the Shenehon Center for Real Estate.

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