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Is the U.S. Over-Retailed?


When and where will we see the impact from the store closures?

Reposted from nreionline – Barbara Byrne Denham, Victor Calanog | May 15, 2017

When looking at the numbers, the story is not as bad as many have reported. The retail vacancy rate for neighborhood and community shopping centers was flat in the first quarter at 9.9 percent, the same as in the first quarter of 2016. Moreover, rent growth was positive, at 0.3 percent for the quarter. The mall vacancy rate only climbed to 7.9 percent from 7.8 percent at the end of 2016 and rent growth was 0.4 percent during the quarter.

So when and where will we see the impact from the store closures?

First, many of the store announcements have yet to translate into actual closings. Thus, we should see more vacancies in the next three or four quarters. Second, a number of other retailers are expanding into retail space, we are seeing quite a bit of this in the properties we survey. Third, many of the stores closing are in less densely populated or more rural areas beyond the 80 primary metros that we track. Indeed, our tertiary market statistics show an aggregate retail vacancy rate increase to 13.5 percent from 13.2 percent at the end of 2016 and no rent growth.

We are seeing consistent results in the employment numbers. That is, only 14 of 82 primary metros tracked by Reis show a year-over-year loss in retail jobs, but 35 tertiary markets show an employment loss as of the first quarter. It should be noted that nearly all of the retail losses at the national level are in “general merchandise” stores that include department stores as well as supercenters. It should also be noted that the U.S. added retail jobs in April, yet the media stayed mum.

 Still, anyone looking at this industry will say the same thing: we are over-retailed. Retail development exploded in the late 1980s through the 1990s. It has subsided in this last cycle as many developers and lenders got burned in the recession. But there are likely still more stores than we need. And with the overwhelming growth in e-commerce we probably need fewer than we currently have in a number of markets. But where to start?

A good way of measuring what markets may be over-retailed is to compare retail employment to population. The table below shows the markets with the highest and lowest ratios of retail employees per 1,000 people and the respective growth in retail rent over the last four years.

As the tables above show, there is a pretty wide gap between the metros that have a high retail employment per population ratio and those that have a low ratio (39 to 66). What’s more significant is the differences in the range of rent growth rates between the top and bottom tables. That is, those with a high ratio had persistently slower rent growth than those with a low ratio. In fact, for the 80 metros tracked by Reis, the correlation coefficient for the four-year retail rent growth and retail employment per 1,000 residents is -22.3 percent. In other words, markets that look to be over-retailed (i.e. with a high retail-employee-to-population ratio) have generally seen lower retail rent growth than those that seem to be relatively under-retailed.

While this correlation coefficient is negative as one would expect, it is still pretty low. This suggests that far more variables are impacting retail rent growth. In fact, the correlation coefficient between population growth and retail rent growth was significantly higher: 42 percent. Thus, population growth drives retail rent growth more than the saturation of the retail industry.

 While the numbers show that the retail industry could in fact be over-saturated, the impact of this saturation on the real estate industry may not be as troublesome as many would presume. Again, other businesses are expanding in formerly empty stores, especially non-traditional tenants such as yoga studios and urgent care medical centers. In sum, while the media may overreact to the next jobs report as doom and gloom for the retail industry, it is important to consider what is likely not being reported in the press, which is that the retail industry is performing better than many would assume.

Barbara Byrne Denham serves as an economist and Victor Calanog as chief economist with Reis, Inc, a provider of commercial real estate data and analytics.

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

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:

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.


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

Retail Real Estate, Think Outside The Box, Twin Cities Real Estate

Eagan Outlet Center to Feature Snow Melter

The new Twin Cities Premium Outlets center opening in Eagan next month will feature a unique piece of equipment to help manage snow in the winter. Rather than store snow on site or pay to have it hauled away, the property will use a stationary snow melter made by Trecan, a Canadian company which specializes in the design and manufacture of the machines. With capacity to melt 40 tons of snow an hour, the snow melter will help the property management keep the center’s sidewalks and 1,400 parking spaces accessible to customers during the winter months.

The snow melter at the new Twin Cities Premium Outlets in Eagan (source: MSP Business Journal)

The Trecan snow melter at the new Twin Cities Premium Outlets in Eagan (source: MSP Business Journal)

The Trecan machine melts snow that is dumped in by plows by mixing it with hot water heated by a natural gas burner. The snow melt then drains directly to the municipal storm sewer. A filter collects trash and other debris before it enters the sewer.

The Twin Cities Premium Outlet will be (surprisingly) the first shopping center in Minnesota to feature an on-site snow melter. It will also be the first in Simon Property Group’s portfolio of 300 shopping centers worldwide, although the company also plans to install one in a Montreal mall opening later this year.

By using the snow melter, Simon hopes to keep operating costs lower for tenants. The machine can melt 200 cubic yards of snow per hour at a cost of about $110, substantially less than the cost for haul away and off-site disposal of a comparable amount of snow. Additionally, because the property won’t need space for snow mounds the developer was able to build fewer parking spaces and keep more of them available for customers during the winter months.

The 409,000-square-foot outlet mall is set to open Aug. 14th and will have more than 100 stores. It was developed by Simon Property Group and Paragon Outlet Partners.

Retail Real Estate, Twin Cities Real Estate

Walgreens Considering Flagship Store for Downtown Minneapolis

The MSP Business Journal recently broke the news that Walgreens is considering adding a “flagship” store on Nicollet Mall in downtown Minneapolis. The news come off the heels of the announcement that Saks Off 5th will close its current downtown Minneapolis location when its lease expires next January. United Properties hopes that a Walgreens flagship store could absorb part of that space when it is vacated.

Walgreens Flagship Store in Chicago (Source: MSP Business Journal)

The move would add to Walgreen’s growing portfolio of flagship locations, which have more upscale finishes, wider variety of retail offerings, and different layouts than its typical stores. The flagship locations are all located in dense urban areas, with stores already open in Chicago, Boston, L.A., D.C., and Philadelphia. While formats vary, most feature expanded food offerings such as juice bars, grab-and-go sandwiches & sushi, and self-serve froyo. Some stores even sell beer and liquor where allowed by local law.

In an interview with NPR, Walgreens Vice President Beth Stiller said that the flagship stores are somewhat of a Continue Reading

Commercial Real Estate, Industry News, Investment Real Estate, Medical Office, Office Real Estate, Real Estate Brokerage, Retail Real Estate

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

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

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

Retail Real Estate, Twin Cities Real Estate

Twin Cities Retail Vacancy at Lowest Point Since 2008

The latest Colliers Retail Market Report for the Twin Cities pegs vacancy at 5.2%, the lowest its been in six years. This continues the downward trend from a peak of 7.3% in 2010. Trade areas with the lowest vacancy included Ridgedale (0%), Rosedale (1.7%), and Eden Prairie (1.9%). The highest vacancy was in the Maplewood trade area, at 8.8%. Net absorption during the first quarter of 2014 was 168,000 square feet, setting pace to top the 2013 absorption of 432,000 s.f.

Minneapolis - St. Paul Retail Trade Area Vacancy (1st Quarter 2014, source: Colliers)

Minneapolis – St. Paul Retail Trade Area Vacancy (1st Quarter 2014, source: Colliers)

Leasing activity in the quarter was led by the opening of a 49,000 s.f. Hobby Lobby in Woodbury, its first store in the Twin Cities market. The Oklahoma-based arts and crafts retailer is also planning locations in Blaine and Maplewood in the coming months. Additional lease commencements included the 400 Bar’s relocation to 25,000 sf at the Mall of America, DSW Shoes’ new 18,000 sf location at Eden Prairie Center, and a Cost Plus World Market at Arbor Lakes (also 18,000 sf).

New construction openings included a 178,000-square-foot Walmart in Cottage Grove and a 17,000-square-foot Lunds Kitchen in Wayzata. Construction continued on the Paragon Outlet’s new center in Eagan, set to come online this Fall with 409,000 square feet of space. The center is expected to open 90% leased, with retailers Saks off 5th, Gap Outlet, and Michael Kors already signed. Construction also began this quarter on the Mall of Americas Phase 1C expansion, which will include 150,000 square feet of new retail space.

The Mall of America Phase 1C expansion will add 150,000 SF of retail space as well as a new hotel

Sales activity included the Ackerberg Group’s purchase of 177,00 sf Calhoun Square for $69.5 million. Addtionally, the closed downtown St. Paul Macy’s was bought by the St. Paul Port Authority for $3 milion, or about $8/sf. The property fetching the highest premium this quarter was a 14,500 sf Walgreens in Chanhassen, which sold for $8.5 million, or about $590/sf.

Going forward, Colliers expects continued strong absorption during the remainder of 2014, led by the opening of the outlet center in Eagan. The grocery sector will continue to be particularly active, with several national and local retailers all expanding, including Target, Walmart, Lunds, Whole Foods, Trader Joe’s, and Aldi. Also, Iowa-based Hy-Vee has announced plans to expand into the market, while Rainbow announced plans to close or sell many of its remaining Twin Cities locations.

Retail Real Estate

Walmart to Double Small-Format Expansion

Walmart recently announced it will double the number of small-format stores it plans to open in the U.S. this  year. The company now plans to open about 300 such locations, up from the 150 it announced last October. It will increase its capital spending by about $600 million to fund the additional expansion.

Walmart Express in Chicago (source: Better Cities)

Walmart’s small-format concepts include Neighborhood Markets and Walmart Express. At around 40,000 sf. and 15,000 sf respectively, each is substantially smaller than a typical Supercenter which are about 185,000 sf. Walmart CEO Bill  Simon said the decision to accelerate the  number of smaller stores will fuel growth as the company enters “the next generation of  retail.”

Evolution in Walmart Store Size (source: ULI)

Evolution in Walmart Store Size (source: ULI)

Target also recently announced plans for a smaller format concept store in Minneapolis and has tested urban format stores in several cities, but thus far has not expanded the concepts as aggressively as its competitor. Both companies are increasingly looking to urban locations for growth.

Walmart’s foray into smaller, urban format locations is in some cases Continue Reading

Real Estate Trends, Retail Real Estate, Twin Cities Real Estate

Target to Test Small Format “Express” Store Concept

A New York Times article yesterday broke the news that Target has signed a lease for its smallest store ever. The 20,000 sf retail space is in an under-construction mixed-use development in the Dinkytown neighboorhood of Minneapolis. This summer, Target will roll out its first “Target Express” store at the site. At about a tenth the size of a typical Super Target, the Target Express will be the first of kind, and will feature a mix of grocery, pharmacy, and basic home goods.



The experiment with smaller stores is part of an effort by Target to have a bigger presence in urban areas. According to John Griffith, Target’s vice president of property development, Target wants to remain convenient as more people decide to live in cities rather than suburbs. Mr. Griffith pointed out that many shoppers “grew up with a Target experience. Now, they show up at their cool little bungalow they’re redoing, they’re close to downtown, and yet Target is a little bit of an effort to get to.”

The location was chosen in part to capture on the surround University of Minnesota student market. However, Target also wanted something close to theird downtown Minneapolis headquarters, which will allow the company to easily monitor and experiment with the new concept prior to rolling out additional locations.

Target is somewhat late to the game in introducing a smaller urban format store concept. Major competitor Wal-Mart opened is first small-format “Wal-Mart Express” in 2011. It has since opened a handful of smaller-format stores that experiment with a variety of sizes, ranging from 40,000 sf “neighborhood markets” to a 3,700 sf location near the University of Missouri. Until now, Target’s smallest format has been CityTarget, stores that range from about 80,000 to 125,000 square feet.

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