MinnesotaCRE Twin Cities’ hot CRE market showing no signs of a slowdown Dan Rafter November 14, 2018 Share on Facebook Share on Twitter Share on LinkedIn Share via email Outsiders tend to lump the cities of Minneapolis and St. Paul into one large metro. But while it’s true that these two cities, which make up the Twin Cities metropolitan area, have plenty in common, there are big differences, too. One of those differences? The type of commercial real estate development that is taking place in their urban cores. Mike Ohmes, managing principal with the Minneapolis-St. Paul office of Cushman & Wakefield, said that developers are transforming older office space in downtown St. Paul and converting these buildings into new uses, often turning an outdated office building into high-end apartment units. But in downtown Minneapolis? Much of the new construction here has been of the ground-up kind. “It’s interesting to watch that trend in downtown St. Paul,” Ohmes said. “There has been so much redevelopment of great-located real estate that once had a different purpose and use in a former life. Now it is being repurposed and updated. That has been a great trend to watch evolve here during the last five or six years.” And in downtown Minneapolis? Ohmes is equally excited about the new developments rising here from the ground up. “There was less outdated or old office space to reinvent in downtown Minneapolis,” Ohmes said. “Most of the new projects here are coming from the ground up. We have another three towers of residential proposed for downtown, so the activity is not slowing. It has been an exciting time here.” Ohmes isn’t alone in this excitement. Brokers working the Minneapolis and St. Paul markets agree that commercial real estate leases, sales and new developments are on the rise. Best of all? They aren’t seeing any signs that this activity is ready to taper off. A bustling market Murray Kornberg, executive vice president with the Minneapolis office of Dougherty Funding, said that the new development in the Minneapolis and St. Paul areas has been strong without outpacing demand. This has been especially true in the multifamily market and means that apartment vacancies remain low and asking rents continue to rise throughout the metro area, he said. “I think we are unique in that we are seeing an increase in supply but also an absorption level that has kept pace with this increase,” Kornberg said. “There are low vacancy rates throughout the area and landlords are able to maintain top rental growth. That makes our market unique.” What’s behind the strength of the Twin Cities’ market? The area’s low unemployment rate seems like an obvious factor. In the third quarter of this year, the unemployment rate for the Twin Cities metropolitan area stood at a low 2.7 percent. That’s lower than the national average and is indicative of the bustling economy here. That strong economy has encouraged developers to build new apartment towers and industrial facilities here. It’s encouraged others to update or reposition office space in the urban hearts of these two cities. Kornberg said that developers are a bit more conservative here, too, something that has helped demand remain high. Developers don’t flood the market with new product, even when that product, such as with multifamily, is in high demand. “The amount of new construction here is significant, but it’s not as much as you see in some other areas,” Kornberg said. “If you compare it to what you might see in an area like Dallas, our supply of new product is like a drop in the bucket. But that helps keep our market stable.” It’s not just the downtowns of Minneapolis and St. Paul that are busy today, either. Developers are building new projects in the suburbs, and many renters-by-choice are choosing to live in the communities surrounding the Twin Cities because of how easy it is to take public transit to their jobs or walk to nearby grocery stores, theaters and restaurants even in the inner-ring suburbs. One of the bigger projects in the Twin Cities area, for instance, is the West End Center at West End Office Park in the suburb of St. Louis Park, Minnesota. The Excelsior Group is coordinating and managing a large-scale redevelopment to this office park, which stands next to the West End retail and entertainment center. The office park includes about 560,000 square feet of office space. “This is one of the more exciting locations in the suburbs,” Ohmes said. “It has so many amenities. It is walkable. It includes residential, retail and hotels. There is a nice core density of office properties. It makes for an exciting project.” United Properties’ The Nordic development is another big one to watch. Located at 729 Washington Ave. N in the North Loop neighborhood of Minneapolis, the retail and mixed-use project is set to include 44 apartments, an office building, public plaza, street-level retail and seven-level parking garage. “That is a hot area of downtown right now,” Ohmes said. “People are looking for those cool space opportunities as well as a great place to live. The North Loop offers that. There are new restaurants opening there, new retailers. It is an exciting location to spend time in from an entertainment standpoint.” The Nordic is a good example of the excitement that mixed-use projects are bringing to the Twin Cities today. Ohmes said that including several different types of uses in one project is almost becoming a necessity for developers today. “It is almost what you have to do today to make things work,” Ohmes said. “You have to address density issues so that your economics work. You have to address amenity issues. Having a mixed-use component makes projects interesting and attractive. It’s become more and more of an important aspect of commercial development.” This doesn’t mean that mixed-use developments don’t come without challenges. As Ohmes says, these developments are often more difficult to put together. Instead of negotiating one lease with an anchor tenant, developers often must juggle retail, office, residential and hospitality components with the same project. That can be more of a challenge. But the work is worth it, as demand for mixed-use developments, both in the Twin Cities market and across the Midwest, has steadily risen. Multifamily still hot The multifamily sector remains a strong one in Minneapolis and St. Paul. This isn’t surprising: Multifamily is thriving across the Midwest as people seek to live a more urban lifestyle. People who choose to rent want to talk to public transportation, shops, restaurants and entertainment. Kornberg said that the Twin Cities’ multifamily market continues to benefit from a growing demographic base that is interested in apartment living. “We have a lot of renters by choice in this market,” Kornberg said. “We also have good job growth here. Our unemployment rate is low and we have a very strong jobs economy right now. That is attracting people to downtown. There are a lot of people now who want to live in downtown Minneapolis so that they can be close to work.” Kornberg said that Minneapolis is close to becoming a 24-hour city. There are new apartment developments here that offer modern amenities, luxuries that the Minneapolis and St. Paul markets might not have had just five years ago. At the same time, new restaurants and bars are opening in the downtown area. The CBD here is definitely in a growth mode, Kornberg said. “The fact that people want to live downtown has spurred private investment in the CBD,” Kornberg said. “There has been a lot of demand for city living. And it’s not just Millennials. We are seeing empty nesters move downtown. We are seeing a lot of people moving downtown.” Then there are the suburbs. Kornberg said that multifamily is performing well in suburban locations near the Twin Cities metro area, too. Many of these suburbs offer their own walking-friendly environments in which renters can walk to shops, restaurants and public transportation. These walkable areas might not be as big as they are in downtown St. Paul or Minneapolis, but they are still attractive to renters, Kornberg said. The reinvention of retail Not all commercial sectors are thriving on an equal basis in St. Paul and Minneapolis, of course. Physical retailers here face the same challenges with which they are grappling across the country: Ecommerce is siphoning off their business, while the shopping habits of consumers continue to evolve. Ohmes says that the retail market in Minneapolis and St. Paul, then, is evolving. Those retailers who are doing well are getting more creative, offering experiences to shoppers that they can’t get online. Restaurants are doing well, too, as are fitness centers and immersive entertainment centers. “We are seeing other uses coming into the equation when it comes to regional malls,” Ohmes said. “We are seeing office uses opening in these malls. We are seeing new tenants who can take the best-located real estate and give it a new life.” A good example? The former Life Time Fitness has dropped the word “fitness” from its name. Life Time, which is based in Chanhassen, about 20 miles from Minneapolis, will now call its fitness centers Life Time Athletic. The company is adding healthcare components such as physical therapists, chiropractors and family-practice doctors in some locations, branding these spots as Life Time Proactive Care. What’s most interesting, though, is Life Time’s launch of Life Time Work, sites that offer co-working opportunities. These sites will offer both fitness centers and co-working spaces in the same building. It’s an example of a retailer that is getting creative to meet the changing needs of consumers. “Retail continues to evolve,” Ohmes said. “Retail has always been reinventing itself. We are in that mode right now. But we are seeing it on a littler larger scale than in the past.” Another example? Some retailers are converting portions of their physical stores and turning them into fulfillment centers, Ohmes said. This gives them a last-mile presence to help developer orders to their customers as quickly as possible. “It is much easier to get a particular product that has been ordered in the morning to a customer’s home when that product is coming out of the back of the store located just one to five miles from that home,” Ohmes said. “That is an ongoing trend. We will see more of that going forward.” You can’t talk about retail in the Twin Cities without talking about the sprawling Mall of America in the suburb of Bloomington. The mall’s ownership has embraced the concept of mixed-use, too, adding hospitality concepts in the last several years. A new office tower has also risen on the mall’s property. This has kept the Mall of America fresh, Ohmes said. Now in its third decade, the mall continues to attract a steady stream of customers each day.