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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.


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

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

Green Building, Industrial Real Estate

Rent Premium for Green Warehouses? It Depends on Local Politics

A 2011 study on the political economy of “green” industrial warehouses found that local political ideology plays a role in rent and occupancy levels. The research was funded by NAIOP and looked at 20,000 industrial warehouse properties across the nation. The study authors found that the effect of environmental certification (such as LEED or Energy Star) on rents and occupancy for industrial warehouses was contingent upon local politics. “Green” certified warehouses in politically liberal areas received rent and occupancy premiums, renting for 10% more than their counterparts. However, environmentally certified warehouses in conservative-leaning areas rented for 20% lower and had 25% higher vacancy than non-certified competing properties in the same area.

The results suggest that environmental amenities in real estate are not valued solely for monetary factors, such as their impact on energy bills. Instead, green features in industrial warehouses appear to be valued (or not) just as much for political purposes, marketing, or other factors. The study also highlights the importance of knowing your market. The authors note that the pattern they found may not hold true in other real estate sectors, and that results might change over time as environmental certification programs grow in popularity.

Click here to view the study article in its entirety. 

Commercial Real Estate, Industrial Real Estate, Multifamily, Retail Real Estate

Outlook 2012: Where Minneapolis Stands in the CRE Cycle

This article was written by Catherine Davies-Nelson, a student in the UST MS degree in Real Estate.

Early January, Integra Realty Resource (Integra) served as a co-sponsor of the 2012 Real Estate Outlook.

At the event, Integra presented their comprehensive data detailing market conditions and forecasts as presented in the organization’s outlook Viewpoint 2012. The panelists, who consisted of local and national experts in the areas of office, retail, multi-family and industrial real estate, discussed Integra’s findings and issues surrounding each of the 4 commercial sectors.

As depicted on the graph below, the CRE cycle as presented by Integra has 4 main cycles/phases termed Recovery, Expansion, Hypersupply, and Recession. There are 3 stages (Stages 1, 2, and 3) with each market phase. The 1st stage indicates the entry of the new phase, and the 3rd stage indicating the near exit of the phase.

Photosource: Integra Realty Resources

(Click here to Download a copy of Viewpoint 2012)

These four main phases of the RE cycle are defined by Integra are as follows: Continue Reading

Economics, Government Policy, Industrial Real Estate, Industry News, Multifamily, Property Management, Real Estate Trends, Retail Real Estate, Senior Housing

Treasury Instructs IRS to Increase Audits of Returns with Rental Real Estate Income

Property Owners: As If You Didn’t Have Enough Issues To Deal With Already.

Apparently, the Department of the Treasury feels that a significant number of real estate property owners have mis-reported rental income.  They, as a group, have been singled out for special attention by the IRS.  See the article below by Steven Katkov.  Steven is an adjunct instructor who teaches Real Estate Law at the University of St Thomas.  He is also the Senior Partner in the Katkov Law Group.

The Internal Revenue Service (IRS) should increase its examinations of personal tax returns that report losses from rental real estate activity, according to a new audit report released publicly today by the Treasury Inspector General for Tax Administration (TIGTA).

TIGTA’s report, “Actions are Needed in the Identification, Selection, and Examination of Individual Tax Returns with Rental Real Estate Activity,” was conducted because a Government Accountability Office report in August 2008 stated that at least 53 percent of individual taxpayers with rental real estate activity for Tax Year 2001 misreported their rental real estate activity, resulting in an estimated $12.4 billion of net misreported income. Continue Reading

Commercial Real Estate, Development, Industrial Real Estate, Multifamily, Retail Real Estate

2012 Real Estate Outlook – Minnesota State Economist forecast

2012 Outlook

This article was written by Catherine Davies-Nelson, a student in the UST MS degree in Real Estate.

Dr. Tom Stinson, Minnesota State Economist, recently spoke at the University of St. Thomas Shenehon Center for Real Estate on the 2012 Real Estate Outlook.   He communicated 2012 will look much like 2011, and likely to improve in 2013 and 2014.  Looking at the big picture and as noted by many economists, this recovery is a long slow recovery, slower than the past recoveries.

Regarding the real estate recovery, Dr. Stinson asserted that “household formation is key” as the demand for residential housing ultimately drives demand for commercial development. Lackluster economic growth has encouraged people to move in with friends and family.  When the economy improves enough to encourage these individuals to move out and help clear the oversupply of properties, real estate prices will recover, however they will recover to a new normal.  Favorable to this household formation growth, is an approved consumer sentiment and a declining unemployment rate.  Minnesota’s current unemployment rate is at 6.5% (2% below the national average).  Additionally, there is more confidence (30% more) the U.S. won’t go back into a recession. Continue Reading