These remain challenging times for the Minneapolis-St. Paul commercial real estate market. The Twin Cities, like the rest of the country, continue to suffer through the COVID-19 pandemic, with the market’s office, retail and hospitality sectors hit especially hard. The cities are also dealing with the aftermath of the murder of George Floyd and the unrest that followed it.
There are signs of hope here, though, in these early days of 2021. The industrial market in the Twin Cities enjoyed a boom year in 2020, and this sector looks to be even stronger this year. And the multifamily market has remained stable throughout the pandemic and also looks poised for a solid year in 2021.
Midwest Real Estate News recently spoke to two commercial real estate professionals in the St. Louis Park, Minnesota, office of Colliers International, Andy Heieie, senior vice president for land and investment services, and Andrew Odney, vice president of industrial brokerage. Both said that while challenges remain, the future looks bright for the Twin Cites commercial real estate market.
Here’s some of what these CRE veterans had to say.
This has been a challenging time across the country. How is the commercial real estate market performing today in the Twin Cities area?
Andy Heieie: I broker third-party deals for raw land and redevelopments, both urban and suburban in nature. I work on everything from multifamily deals in downtown to deals on 100 acres in Victoria, Minnesota. And I work on everything from retail and office to industrial and multifamily, all new development. The deals in my pipeline, then, can show what the future holds for market and development activity and what the construction market will bring and look like for the next two to three years. The development mindset and sentiment in the Twin Cities right now is very positive. What I’m seeing now is that a lot of the new development coming up is mostly suburban in nature. And we are talking more multifamily. That has been the gold star asset class in our market for the last decade.
It’s good that 2021 has the potential to be a promising year. How challenging was 2020 here?
Heieie: Last year didn’t start out all that well from a developer perspective. All new developments that were high-density in nature were now required to have a certain level of affordability. Developers didn’t necessarily like that. Then COVID happened and shut everything down. Then we had the social unrest with George Floyd and what followed. It has been the perfect storm. But I do think this year will be better, especially when it comes to development in the suburbs and the areas outside of downtown. In 2021, downtown Minneapolis will still struggle, though. Things will look better downtown in 2022. Offices will start to reopen. I think we will see positive activity for downtown Minneapolis in the early part of 2022.
And how about the industrial market? How strong has that been even during the pandemic?
Andrew Odney: It is holding up really well. Like everyone else, in the early spring, March and April, there was a bit of a pause from both occupiers and landlords. For those couple of months, everyone was waiting to see what was going to happen. Certainly, there were some companies, the smaller ones, the mom-and-pops, depending on the industry they were in, that didn’t have such a great time. They had a hard time paying rent. For the most part, though, the vast majority of industrial tenants remain strong. In some sectors, industrial tenants are even stronger today than they were before the pandemic. This strength has carried through summer and into the fall. In the fourth quarter, we saw quite a bit of absorption in the industrial market. We saw a lot of positivity surrounding the industrial sector.
Why has the industrial market performed so well?
Odney: It really has been fueled by all the common buzz words people talk about today. Near shoring manufacturing is one key component we are seeing coming online as we continue through the pandemic. Ecommerce and getting goods closer to consumers has fueled a lot of this. The way consumers have had to behave during the pandemic has played a role, too. They aren’t going to the mall or grocery store. They are ordering their food and goods online. That has all fueled a frankly insatiable demand for industrial real estate. Industrial real estate that is well-located is in great demand right now.
Do you think the industrial market will continue to benefit from these trends long after the pandemic ends?
Odney: I do. Think of the 65-year-old person who might have been stuck in their ways before this. That person would never dream of ordering something on Target.com or have their groceries delivered to their front door. They are forced to do that now as a result of the pandemic. I think people will go back to stores and malls and buying stuff in person. But the pandemic has also created a level of comfort with consumers who weren’t comfortable buying things online before, who were not comfortable putting their credit card information out there. The pandemic has helped these consumers break through that barrier. This will create a long-standing demand for industrial real estate.
How has the multifamily market performed throughout the pandemic?
Heieie: Multifamily has been very active. There might not be more demand for multifamily development than there was pre-pandemic. But it has still been very active. Development is now focusing on the first- and second-tier markets in the Twin Cities area, places like St. Louis Park, Minnetonka, Hopkins, Maple Grove and Eden Prairie. Those markets are all still very strong. These markets are all on the light-rail transit line that is under construction. A lot of projects are going on right now around the stations on that line. We are very excited to see the future potential growth along the light rail line and in these suburban markets. Things are very active there.
Is it true, then, to say that for now, the suburbs will see more new development in the near future than the CBD?
Heieie: When people hear Minneapolis, they think of the city. But the downtown CBD is not seeing the activity right now. Certain neighborhoods like the North Loop, Mill District and Linden Hills are still attractive. But Minneapolis is not seeing the level of interest that the suburbs are seeing now. That is a reversal from what we had been seeing. Dating back to 2012, we really started seeing downtown Minneapolis take off. In 2012, there was a tipping point, and it grew exponentially. Downtown became very attractive. You had new bars and restaurants. We got Target Field and U.S. Bank Stadium. Downtown became a destination. People loved going there. Since March of 2020, it’s been a reversal. It’s been quiet. No one is going to work physically at the office. Bars and restaurants are closed or are only offering takeout. There is no extra foot traffic.
Will that activity come back to downtown?
Heieie: Yes. 100 percent. There is built-up demand mentally for all these people who have been working from home for nearly a year. They want to go out and spend money on restaurants. They want to go to Vikings and Twins games, once it is safe to do so.
What about the suburbs? Do you think they will continue to see a boost in CRE activity even after downtown comes back to life?
Heieie: Definitely. People are coming to the realization as they hit their upper 20s and low 30s that they can buy a house for what they are paying in rent. They can have access to good schools. Our homebuilders here locally can’t build homes fast enough. Since May or June of 2020, they have been going full steam. There is so much demand.
What amenities are developers adding to new apartment developments today?
Heieie: That’s a good question. Are you just building the same thing the other guy did? How are you differentiating yourself? We have been getting to the point were everyone is doubling the size of their rooftop decks. They are adding movie theaters or bowling alleys. Everyone is trying to offer something different. Now we are seeing co-working space in these developments as a lot of renters might continue to work at least part of the time from home. A lot of renters want a different place to work other than their apartment unit. Then there is safety. That is the biggest concern for many renters. If they move out of Minneapolis to St. Louis Park, they want the feeling of being safe. In their units, they want 9-foot to 10-foot ceilings and stainless-steel appliances. They want to be close to retail. That’s what they expect in these new buildings.
When it comes to industrial, what makes the Twin Cities area an attractive place for industrial tenants to do business?
Odney: We have a very strong medical device industry. The proximity to the Mayo Clinic has always been a driver for our industrial market. In 2021, the industrial market is all about getting goods closer to the consumers. It’s all about having functional real estate that is well-located and has ease of access so that companies can get their trucks in and out efficiently. We can offer that to industrial tenants.
What amenities are industrial tenants looking for today?
Odney: Location is key. They want proximity to their customers. What we are seeing more of, and what is maybe becoming more of a trend, are industrial parks that have the ability to drop trailers. As these companies come into the market, they have so many goods on their trucks. They have to be able to drop them off and switch them. The ability to do this is not always a necessity, but it is nice to have. If one building has the ability to drop some trailers and the other doesn’t, tenants will choose the one that has that ability.
What kind of year will 2021 be for the industrial market in the Twin Cities?
Odney: Developers are very bullish on this market. Investors have certainly been bullish on Minneapolis for the past couple of years. That will continue into 2021. A lot of brand-new buildings will be coming online this year. Speculative development projects are slated all over the metro from the main developers in this town. It has been a narrative for the past four or five years. We will at least keep that same level of growth if not accelerate into this year, especially with all this COVID-driven demand for industrial real estate.