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Commercial Real Estate

Despite some headwinds, Minnesota commercial real estate survey finds general optimism

Minneapolis, Minn.  —   Leaders in the field of Minnesota commercial real estate are generally optimistic about their industry and economic conditions in general. However, they also have identified some headwinds related to land prices and the cost of building materials.

That is the theme of the ninth Minnesota Commercial Real Estate Survey that was conducted in May. The semiannual poll of 50 Minnesota commercial real estate leaders from the fields of development, finance and investment is conducted by the Shenehon Center for Real Estate at the University of St. Thomas’ Opus College of Business.

In all nine surveys the same group of 50 industry leaders have been polled on their expectations of future commercial real estate activity. 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 composite score for the May survey stands at 46 and continues a “slightly less-than-neutral” trend for the fifth-consecutive survey.

Untitled

“This survey’s composite results reflect a mixed bag of optimism in some areas and pessimism in others” said Herb Tousley, director of real estate programs at the university. “This is similar to the pattern that was observed in our previous survey. However, the degree of optimism and pessimism has become slightly more moderate.”

Price for Space

The index score for rental rates remains positive at 66, which Tousley said is “an indication that our panel is still expecting strong rent growth for the next two years.”

The index for occupancy levels moved from 62 to 56. “Despite the decrease, the panelists remain optimistic that rents and occupancy levels will continue to improve,” he said.

This marks the ninth-consecutive survey with positive index scores in these two areas. That indicates, he said, “continued optimism that the economy is going to continue to improve and there will be a continued demand for additional space.”

Land Prices

The panel’s outlook for land prices reveals a strong expectation that land prices will continue to increase. The land-price index increased slightly, moving from 31 in the previous survey to 35 in the May survey.

“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,” he said.

Building Materials

The building-material index moved from a negative 24 to a somewhat less pessimistic 29.

“That reflects the panel’s opinion that building-material price increases are expected to moderate sightly,” Tousley said. “A moderation in price increases will be favorable for future development.”

Return for Investors

The index for investors’ returns decreased from an essentially neutral 48 to a more pessimistic 41.

“The consensus of the panel indicates that investors will expect higher returns in two years, leaving less profit for the developers,” he said. “There was a concern that interest rates that have been at record-low levels for the past seven years will be higher two years from now, requiring higher rates of return on future investments.

“Higher interest rates will add to total project costs and higher project costs will squeeze project return on investment. 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.”

Required Equity

The index for the amount of equity required by lenders dropped from 57 to 53.

“This indicates the panel’s belief that credit will be available for good projects but lenders will increase their equity requirements in the coming two years,” he said.

“This indicates the panel’s belief that credit will still be available for good projects but that 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,” Tousley said.

Accuracy

With nine surveys completed since the Minnesota Commercial Real Estate Survey began in 2010, the researchers compared the panel’s past predictions with how things actually turned out.

It turns out that market conditions in May 2015 are very close to what the panel predicted in May 2013. Some examples:

  • In 2013 the panel predicted higher rents in 2015. The average net rents for all types of industrial properties in the Twin Cities went from $5.70 per square foot in 2013 to $6.15 per square foot in 2015.
  • In 2013 the panel predicted higher occupancy in 2015. The average direct vacancy for industrial properties in the Twin Cities went from 8.1 percent in 2013 to 7 in 2015.
  • In 2013 the panel predicted higher costs for building materials in 2015. Although the price for lumber decreased, the Mortenson Construction Cost Index for the Twin Cities increased from 104 in 2013 to 114 in 2015.

Summary

“It appears that our panel’s expectations of higher land costs and the higher cost of building materials are the primary culprits driving the composite index to its slightly below neutral level,” Tousley said.

“Despite the headwinds created by higher project and acquisition costs, the panel has strong expectations that general economic conditions in our area will continue to improve and there will be an increasing demand for space. The demand for more space will put upward pressure on rents. Higher revenues in the form of higher rent will offset most of the much of the expected increase in the price of land and building materials, allowing owners and investors to achieve their required returns and development to move forward.

“Conditions for development and acquisitions have definitely improved since the last survey. Based on the survey results our panel expects that even if interest rates increase modestly, development and acquisition activity will continue at near present levels for the next two years.”

Housing, Housing Trends, Minneapolis / St. Paul Housing

St. Thomas real estate analysis: Strong May and June helps return Twin Cities market to pre-crash levels

Minneapolis, Minn. – A strong first half of 2015 — and an especially robust second quarter — has for the most part returned the Twin Cities housing market to a level of health not seen here since the pre-crash years of 2005 and 2006.

Each month the Shenehon Center for Real Estate at the University of St. Thomas’ Opus College of Business looks for real estate trends in the 13-county Twin Cities region and tracks the median price for three types of sales: nondistressed or traditional; foreclosures; and short sales (when a home is sold for less than the outstanding mortgage balance).

Additionally, as part of its analysis, the center creates a monthly index score by tracking nine data elements for those three types of sales, including categories like the number of closed sales, how many days homes are on the market, and what percent of the asking price sellers receive. The researchers started the index at January 2005 and for that month gave each of the three indexes a value of 1,000.

For several years running, the Shenehon Center had to report some dismal news in its monthly analyses. Although there were both ups and downs along the way, the index for traditional homes (not short sales or foreclosures) dropped into the 900s in early 2007 and eventually bottomed out at 889 in February 2012.

The traditional home index has since rebounded and reached an all-time high in June 2015. “At a level of 1,120 the June index is the highest that has been observed since it was created in 2005,” said Herb Tousley, director of real estate programs at the university. The June 2015 index is up 4.2 percent from the same month a year ago, and is up 2.8 percent from May 2015.

“This monthly increase is the continued result of both a relatively low number of homes available for sale and a significant increase in the number of buyers in the market,” Tousley said.

The St. Thomas researchers found six categories that had especially healthy numbers in June and contributed to that record-high composite index score:

  • Median price of all homes: The median price of the three types of sales (traditional, foreclosures and short sales) in June was $229,900, a level not seen since August 2007.
  • Median price of traditional-sale homes: The median price for a traditional-type sale (not a foreclosure or short sale) in June was $235,500, also the highest since August 2007.
  • Percent of distressed sales: The percent of distressed sales in June (foreclosures and short sales) was 7.7 percent of all sales. The percent has not been that low since mid-2007.
  • Number of closed sales: The 6,980 closed sales in June was the highest number since the St. Thomas index was created in January 2005.
  • Number of pending sales: The number of pending sales for the last 90 days was more than 6,200, the highest since spring 2005. This high number of pending sales indicates that the number of closed sales should remain strong for the rest of the summer.
  • Sale price as percentage of asking price: In June the sale price as a percentage of the original asking price increased to 98.6 percent, a level not seen since spring 2005. The inventory of homes for sale at 16,718 in June remains historically low, and is one reason for a higher number of multiple offers and, in some cases, homes that are sold for more than the asking price.

Construction of new homes

With such a shortage of homes on the market, the Shenehon Center checked on the number of new homes being built to meet the demand. It found that while there has been some improvement over the past three years, the number of single-family-home permits has been flat over the past year.

So far this year 2,224 permits were issued, compared to 2,270 for the first half of 2014. The dollar value of the permits, however, has increased from $319,254 per home last year to $335,295 this year.

Twin Cities Chart Residential Building Permits (Year to Date Through June 30th)

“There are several factors that explain this increase,” Tousley said. “There has been a marked increase in the price of building materials such as concrete and drywall. Secondly, due to a shortage of quality buildable lots, land prices have also increased considerably.”

He said the average sale price of a used home is $121 per square foot while the average sale price of a new home is $162 per square foot. That’s a 34 percent premium for a brand-new home.

“While many homebuilders have focused on building higher-priced homes because the profit margins are higher, the low supply of existing homes available for sale is creating a pent-up demand for construction of lower-priced homes,” Tousley said. “There are a number of homebuilders who are starting programs to profitably build entry-level homes that provide a bit more than the basics to entice first-time and entry-level buyers. An example of this is D.R. Horton’s Express Homes program. The company has been aggressively rolling out this program on a national basis as a way to add to the supply of moderately priced homes available for sale.”

Home Prices, Housing, Housing Trends, Minneapolis / St. Paul Housing, Residential Real Estate, Residential Real Estate Index, Twin Cities Real Estate

St. Thomas real estate analysis: Low inventory of homes for sale in the Twin Cities is creating a seller’s market

University researchers look at reasons why potential sellers are sitting on the sidelines.

Minneapolis, Minn. — An analysis of Twin Cities real estate data for the month of May found that while the housing market is continuing its recovery from the great recession, it remains plagued by a low inventory of homes for sale.

Each month the Shenehon Center for Real Estate at the University of St. Thomas’ Opus College of Business looks for real estate trends in the 13-county Twin Cities region and tracks the median price for three types of sales: nondistressed or traditional; foreclosures; and short sales (when a home is sold for less than the outstanding mortgage balance).

“The main story found in data for May is a significant increase in the number of traditional-type home sales and a continuation of the historically low number of homes available for sale,” said Herb Tousley, director of real estate programs at the university.

The number of homes for sale in the Twin Cities in May was 16,282. Normally there are between 20,000 and 25,000 homes on the market. On top of that, the 5,264 nondistressed homes sold in May 2015 was 25 percent more than in May 2014.

Price Distribution of Homes Sold in the Twin Cities

This combination of more sales and fewer homes “has created a seller’s market with instances of multiple offers and homes selling for more than the asking price becoming more common,” Tousley said.

Why are there fewer homes on the market?

“There are many homeowners who are considering selling now that values have recovered over the last three years. The question then is, what they do after they have sold their home. They have now turned from sellers into buyers in a market that offers them limited choices for their replacement home and the fact that obtaining a new mortgage is still relatively difficult,” Tousley said.

“The other reason is that although the number of homeowners who are underwater has decreased significantly there are still a considerable number of homeowners who are near negative equity. That means that even though they are not underwater they have very little equity and when they sell their home they do not have enough equity to buy a new home.

“These factors along with more restrictive credit standards and little-to-no wage growth in the last several years are keeping many potential sellers on the sidelines.”

The median sale price for a traditional or “nondistressed” home in May was $229,900, up 2.18 percent from April’s $225,000.

“Originally, we had been expecting an annual median sale price increase in 2015 of 4 percent to 6 percent. However, if the current trend of strong sales numbers and a persistently low inventory of homes for sale continues through the summer and into the early fall, we expect to see higher-than-expected increases in median sale prices,” Tousley said.

Traditional Home - Median

Overall, how is the market doing?

To answer that question, the Shenehon Center tracks nine data elements each month, including the median price for three types of sales (traditional, foreclosure and short sales) and creates an index for each. The St. Thomas Traditional Sale Composite Index hit 1109 in May, which is the highest level seen since the index was created in 2005. The index increased 2.8 percent from April 2015 to May 2015, and it increased 5.6 percent from May 2014 to May 2015.

“The continued increase in the Traditional Sale Composite Index is an indicator of the ongoing improvement in the health and resurgence of the Twin Cities housing market,” Tousley said.

Things also are continuing to look better for the two “distressed sales” indexes. In May, the short-sale index increased 5.1 percent from a year ago, and the foreclosure index moved up 5.6 percent. Several years ago these two indexes represented a significant portion of the all home sales in the Twin Cities. In May, short sales were just 3.1 percent of the total while foreclosures were 8.6 percent.

St. Thomas researchers did find some interesting results when looking at changes in the number of homes sold at different price levels. For example, three years ago, in May 2012, 40 percent of homes sold for less than $150,000. But in May 2015, less than 15 percent of the homes sold for less than $150,000. Meanwhile, the number of homes that sold for more than $450,000 in May 2015 is nearly double what it was back in May 2012.

“This shift is a reflection of the high number of foreclosures three years ago as well as the general decline in the value of all homes during the crash. Moving to 2015, as we are recovering from the recession, the economy is beginning to improve and home values are increasing,” Tousley said.

He added that this trend is expected to continue, but the differences will not be as stark as the market continues to stabilize over time.

Architecture & Design, Development

Expansion and Renovation at St. Catherine University in St. Paul, MN

Last week, The Opus Group officially announced the full completion of a two-phased project involving a 41,500-square-foot expansion and renovation at St. Catherine University’s Aimee and Patrick Butler Center for Sports and Fitness in St. Paul, MN. Phase I, which went from May 2014 to August of the same year, was specifically about renovating approximately 10,000 square feet in Fontbonne Hall, thus transforming existing gymnasium space into additional classrooms and connecting building with the adjacent Butler Center. Phase II, which began construction in fall of 2014 and ended in January 2015, created 31,500 square feet of new space inside the Butler Center, featuring separate varsity locker rooms and lounge space, a cardio room with fitness equipment, a dance studio and a one-story, multipurpose training center and field house. In addition, The Opus Group redesigned the primary point of entry and also added an elevator in order to enhance both accessibility and security.

St. Catherine University’s Aimee and Patrick Butler Center for Sports and Fitness in St. Paul, MN (Source: The Opus Group)

St. Catherine University’s Aimee and Patrick Butler Center for Sports and Fitness in St. Paul, MN (Source: The Opus Group)

The ahead-of-schedule completion of phase II enabled St. Catherine University’s students, faculty and athletic department officials to have access to the new facilities right in time for the spring semester. Satisfied by the work results, St. Catherine University’s vice president and chief financial officer Tom Rooney stated “A strong collaborative working relationship between Opus and St. Kate’s was the key to reaching our goal of improving and creating new spaces in this nine million dollar project, which benefits our entire campus community”.

Development, Housing, Minneapolis / St. Paul Housing, Twin Cities Real Estate

New Minneapolis Apartment Building Plan

According to Finance & Commerce, Minneapolis-based Hunt Associates and Washington-based Weidner Apartment Homes teamed up and presented on Thursday, June 18th, 2015 preliminary plans for a new six-story Minneapolis apartment building expected to replace the existing building on the 1.7-acre site which is currently home to the nonprofit Minnesota AIDS Project.

The Minnesota AIDS project building, at 1400 Park Ave. S. in Minneapolis, could be torn down late this year or early next year. (Staff photo: Bill Klotz)

The Minnesota AIDS project building, at 1400 Park Ave. S. in Minneapolis, could be torn down late this year or early next year. (Staff photo: Bill Klotz)

The new building will also have two levels of below-ground parking along with significant amount of amenities, including an outdoor courtyard. Hunt added that the developers are working with the project architect BKV Group to create a design similar to what you might find near the University of Minnesota today, with upper floors that “bend in the same time as they stand out.” Located at 1400 Park Ave. S., the site seems to be at an attractive location given that it’s at five blocks southwest of the new Minnesota Vikings stadium and also near the Minneapolis Convention Center (About three blocks to the west, across Interstate 35W). The project is owned by Weidner while Hunt Associates would act as a fee developer.

Commercial Real Estate

Minnesota United FC Outdoor Soccer Stadium Plan

Minnesota United FC is a professional soccer team that plays in the North American Soccer League (NASL), a division II league in the American league system. On March 25th, 2015, the team finally got the long-awaited opportunity to move up to division I by officially being awarded the 23rd MLS franchise. Minnesota United FC MLS debut is set for either the 2017 or 2018 season, thus giving the organization enough time to build a new stadium with higher capacity than the current one as the team will be welcoming more Minnesotan fans.

Source: Minnesota United FC

Source: Minnesota United FC

According to MLS, Minnesota United FC owner Bill McGuire met with Minnesota governor Mark Dayton and state legislators last Tuesday, April 14, 2015 to explain his group’s plan of an 18,500-capacity outdoor soccer stadium in an area of Minneapolis known as West Loop. The stadium construction will cost $120 million, with $30 million allotted for land acquisition.

Commercial Real Estate

RadioShack Closing Stores

After 94 years of operation, American electronics retail chain RadioShack filed for bankruptcy with $1.2 billion in assets and $1.38 billion in liabilities in a Delaware court on Thursday, 2/5. Changing technology and consumer habits seem to have been a tougher challenge for RadioShack as e-commerce giants such as Amazon and eBay continue to take over. Standard General, a private equity fund, announced that it will acquire 2,400 RadioShack stores and will work with Sprint to create 1,750 store-within-a store concepts nationwide. In Minnesota, over 20 RadioShack stores are expected to close as a result of this bankruptcy filing.

Source: Forbes

RadioShack filed for bankruptcy (Source: Forbes)

 

 

Commercial Real Estate, International Real Estate

Future of Target’s 133 soon-to-be Vacant Stores in Canada

On Thursday, January 15, 2015, Target Corp. announced that it will exit the Canadian market by closing its 133 stores due to disappointing financial results from this past holiday season. Target Corp. CEO Brian Cornell described it as a failure to seduce Canadian consumers since the company’s 2013 expansion. He added that this market exit decision also came after concluding that the company would not become profitable until 2021.

Source: Nathan Denette / THE CANADIAN PRESS

Source: Nathan Denette / THE CANADIAN PRESS

From a real-estate perspective, the question now is “What will happen to Target’s 133 soon-to-be vacant stores in Canada?” The Toronto Star just reported that Canada-based GoodLife Fitness and New Hampshire-based Planet Fitness are both interested in some of the spaces that will be vacated by Target Canada as it’s expecting to complete its stores shut down by May or June of this year.

Minnesota Real Estate Hall of Fame

2014 Minnesota Real Estate Hall of Fame Induction Ceremony Recap

Keynote speaker Robert Senkler, CEO of Securian Financial Group, shared some great advice with the crowd at the 2014 Minnesota Real Estate Hall of Fame Induction Ceremony during his address. He stated:

Ask: Would this look good on the front page?

Mr. Senkler was talking specifically about undocumented compensation in the insurance industry but this applies to many decisions. If a decision made the front page of the newspaper, would it look good for you, your company, your employees and your client? If not, take the time to really think about why.

Check your balance sheet.

In 2005 and 2006, Securian made sure that if the unthinkable happened, they’d be ready. Now, they call the unthinkable 2008. Because they created scenarios to test their business, they were ready. Rather than having to be reactive, they had a plan in place. This helped them to weather the storm through 2008 and 2009 for their company by saving jobs and keeping their business afloat.

Do the simple things well.

With this real estate group, Mr. Senkler used the example of checking financial records and receiving solid valuations. While that is something much less complex than coming up with a development plan, many smart people missed the simple step in the last few years which caused big problems. In other words, don’t forget the details and how important they are in the overall scope of business.

Ethics.

All employers have to pay people to come to work for them. But, they don’t all make their employees feel good about what they are contributing to the company. Community service and the ability to give back as part of a job is a great way to differentiate among other employers. It helps to build a work environment routed in ethical business practice and hardworking people who give back not only because they are being paid to do so but because they want to do so.

Once again, congratulations to the 2014 Minnesota Real Estate Hall of Fame inductees:

George R. Karvel, Ph.D.


Cyril “Cy” Kuefler, Sr.

Jim Stanton

Architecture & Design, Minneapolis / St. Paul Housing, Twin Cities Real Estate, Urban Planning

Completion of 26-Story Apartment Building Brings Luxury Living to Minneapolis’ Nicollet Mall

The Nic on Fifth™ is the first high-rise luxury apartment development in downtown Minneapolis in nearly three decades. Recently completed by Minnetonka-based Opus Group, the 26-story luxury apartment building is located on the corner of Fifth Street and Nicollet Mall. It features 20,000 square feet of retail space and skyway levels with 253 apartment units above (including 26 penthouses). The building already started welcoming new residents since September 12 of this year and so far, it is more than 60 percent leased. The Opus Group adds that The Nic on Fifth™ reflects current and future needs of the urban center of more than 35,000 residents and aligns with the city of Minneapolis’ vision of expanding the downtown population to 70,000 by 2025.