Twin Cities Office Market Surges Forward in First Half; New Development Moving Forward at a Cautious Pace

• Office vacancy rate declines 1.2% to 14.9% fueled by large user demand
• Investment market remains strong, office properties in strong supply
• Industrial demand slows as market adjusts to cost of new construction 
• Medical office development at record-high level
• Discount store wars driving community center expansion

Strong regional job growth, combined with ongoing improvement in the fundamentals of the commercial office market in particular, resulted in very solid first-half performance for the Twin Cities commercial real estate markets.

Speculative office development is returning to the market on a limited basis. As expected, developers are moving cautiously toward launching new projects in the face of rising construction and land costs. Costs have risen significantly since the last major period of new development in the late 1990s. Some estimate that the cost of new commercial office and industrial buildings is 25% higher than 10 years ago, especially for projects within the I-494/I-694 core of the metro market.  Rental rates will need to reflect these added costs, and developers are expected to tread lightly until there is assurance that the market is ready to accept these higher costs.

Funding was approved for a new outdoor baseball park in downtown Minneapolis, with construction due to begin in 2007—delivering a significant boost to the Minneapolis Central Business District. The State Legislature also approved funding that will move development of new regional mass transit solutions forward, including $60 million to complete a 40-mile commuter rail system between downtown Minneapolis and the far northern suburban area and $7.8 million to create engineering studies for a proposed new Central Corridor Transitway between Minneapolis and St. Paul.

Large Space Users Drive Demand in Major Office Submarkets

The Twin Cities office market continued to strengthen during the first half of the year, fueled by increasing demand from large corporate space users in the Southwest and West submarkets and the Minneapolis CBD. The market showed positive absorption of one million square feet, 643,000 square feet of which was Class A space.    Read more

Slower Pace in Industrial Following 2005 Boom in Demand

Demand for industrial space slowed to a more even pace following last year’s robust results. Most submarkets experienced a moderate slowdown in demand, although the level of tenant interest in exploring the market for space options was intense. With overall vacancy at 13.7%, the market began to see more new product come on line and rental rates reflect the higher cost of new construction. Tenants are taking more time to make decisions on new space in part due to perceptions of sticker shock for new product.   Read more

Medical Office Development in High Gear

New construction activity is at an all-time high in the Twin Cities medical office market, with 835,000 sq. ft. of new product in the pipeline and more on the way in the second half. Overall vacancy is tight at 9.0%; several hospital campuses report virtually 100% occupancy for multi-tenant space at mid-year. The on-campus vacancy rate is 6.3% at mid-year, while the off-campus rate is 13.9%.    Read more

Discount Stores Driving Rapid Community Center Expansion

Growth is strongest in the community retail center area, with 1.7 million square feet of new space currently under construction and a 2.8% vacancy rate. Discount retailers such as Target and Wal-Mart are driving the category, with continued expansion in the market. Both companies are moving aggressively to expand their super-center concepts, including tear-down and redevelopment of traditional stores at existing sites within the inner-ring and first-ring communities. Costco is also looking to grow its presence.    Read more

Twin Cities on Course for 25,000-30,000 New Jobs in 2006

Employment growth was strong throughout Minnesota during the past year, as the state added 47,000 new jobs from May 2005 to May 2006. The state is on pace to add 40,000 to 50,000 new jobs in this year. The state unemployment rate was 3.3% in May. The Twin Cities will likely add 25,000 to 30,000 new jobs in 2006, based on the fact that the metropolitan region accounts for 63% of the state’s economic activity.    Read more

CBD Office Properties Command Investor Interest 

Investment sales activity in the Twin Cities commercial office market is red hot, particularly in the Minneapolis CBD where several large Class A properties were on the market at mid-year. Suburban office properties are also in demand, but the supply of buildings on the market is more limited.   Read more