Guest post by Mike Ohmes, Cushman & Wakefield/NorthMarq
The Twin Cities commercial real estate market recorded a solid first half of the year.
According to the latest Cushman & Wakefield/NorthMarq semi-annual Compass report, which comprehensively tracks and analyzes commercial real estate in the Twin Cities, the improving economy led to a significant increase in development activity. Overall, vacancy rate across all property types declined to 12.3 percent, the lowest since 2008. In addition, the market recorded 1.7 million square feet (msf) of positive absorption, primarily due to a robust industrial market.
While the Compass report covers all commercial property types, including office, retail, industrial, multi-family, medical office and land, let us turn our attention to the retail and land market sectors, which provide key insights into the state of the entire Twin Cities commercial real estate market.
The retail sector underscored the strength of the broader market, continuing to improve in the first half of 2013. Increased leasing activity in community and neighborhood centers led the rise in retail activity. Vacancy decreased from 8.3 percent at the end 2012 to 7.8 percent, a new five-year low. This was largely attributable to the 434,000 square feet (sf) of positive absorption.
Community centers accounted for more than 600,000 sf of positive absorption. Rental rates increased nearly $1.00 per square foot (psf) to an average of $27.73 psf. The Twin Cities market is now seeing rates that have not been achieved since 2008.
Big-box and junior-box spaces helped fuel the growth. Specialty grocers such as Trader Joes and Whole Foods and fitness user like LA Fitness and Planet Fitness increased their presence in the Twin Cities. Other larger retailers that expanded into the market in the first-half of 2013 included Big Thrill Factory, Fleet Farm, Gander Mountain, HOM Furniture, HomeGoods, Savers and TJ Maxx. Walmart continued to be a major player as it prepared for a summer opening of its new store in Blaine and broke ground on Andover, Cottage Grove and Roseville supercenters in Minnesota.
Beyond the retail sector, the revival of the Twin Cities land market persisted as developers took strategic land positions in sought-after markets. With market fundamentals improving across all categories, increasing transaction volume and rebounding values characterized the land market.
Driven by a recovering housing market, single-family residential is the hottest land sector as national homebuilders acquired raw land in first-, second- and now even some third-tier communities. Record-low apartment vacancy rates drove multi-family developers to compete for prime urban in-fill and select inner-ring suburban sites.
Build-to-suit and select speculative development drove industrial land sales as developers staked out the next wave of inventory. Retail developers sought urban in-fill redevelopment sites, while the agricultural land market continued to stabilize.
As we look ahead to the remainder of the year, expect increased single-family residential activity, including more acquisitions in tertiary markets, as the housing market recovers further. First-tier residential markets are being redefined due to the lack of available prime land. Pricing for first-tier markets may top out while second-tier market values increase.
Mike Ohmes is executive vice president of transaction and advisory services for Cushman & Wakefield/NorthMarq