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January 2018 
Executive Summary 

Twin Cities Absorption Surges in Second Half of 2017; Demand Drives Competition in Sales and Leasing  

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The Twin Cities multi-tenant commercial real estate market exceeded already optimistic expectations in the second half of 2017, besting projected absorption by nearly 50% and keeping vacancy rates steady at around 10.8% across all product types – office, industrial, and retail.

The most encouraging data point from the second half of 2017 was 2.3 million. That was the number of square feet (sf) absorbed by tenants in all multi-tenant properties. Especially when accounting for the “right-sizing” trend in the office market and the long list of national retailers giving back large spaces in the retail sector, such a total is highly encouraging.

The leasing market continued in the second half to be led by the industrial sector, where strong demand is driving tenants to consider spaces that had previously been passed over, particularly in the overbuilt Rogers market. The office and retail markets are both seeing considerable activity and competition for key spaces, much of which isn’t recorded in the Compass data yet as absorption is tracked upon occupancy, which lags lease signing by 6-12 months in many cases. Investment Sales activity continued at a near-record level for several property types, with multifamily sales setting yet another new annual record, and investors clamoring for more properties to buy.

Total absorption in the second half dwarfed the first half of the year, where only 332,000 sf was absorbed. The market delivered 2.58 million sf of new construction in 2017, the second-highest number recorded since the end of the last recession, and much of that space was leased or spoken for prior to or early on during the construction process. Rental rates in some sectors are at or above pre-recession highs, and are starting to level off in most property types. 

Hot Hotel Market Cools Down
Following seven years of unprecedented growth in occupancy and average daily rates, the hotel market’s hot streak is finally cooling. The slowdown is primarily due to the flood of new rooms as supply growth is finally outpacing demand. The market will experience slower growth until it absorbs the new product. 

Expanding Retailers Seize Prime Vacancies as Store Closures Continue
Retailers, developers, and landlords continue to grapple with changing consumer shopping behaviors, mounting e-commerce competition, and store closings/downsizings, but demand for new space remains competitive. Rental rates remain high, although they are leveling off.

Medical Office Vital Signs Are Strong, Despite Uncertainties
The medical office market appears unwavering as the vacancy rate dropped more than a point, absorption increased, rental rates held firm, and 178,710 sf of multi-tenant space was delivered. However, healthcare delivery continues evolving to meet patients’ needs, and facilities must continually adapt to meet new requirements. Other factors impacting real estate requirements include continuing consolidations, uncertainty surrounding the Affordable Care Act, physician shortages, and changing technology including telemedicine.   

Strong Demand Fuels Industrial Market; Rogers Poised for Recovery
Despite the delivery of approximately 2 million square feet (msf) of new multi-tenant space in 2017, the industrial market held firm with an 8.3% vacancy rate. This construction delivery marked the second-highest level of new competitive industrial space in the Twin Cities in the last decade..

Residential, Industrial Remain Hottest Land Markets 
The Twin Cities land market remains extremely active, with values in many cases hitting post-recession highs and deals closing swiftly, particularly in the residential and industrial markets. Dominating activity is the single-family residential market, where homebuilders are aggressively staking out large positions in suburban cities known for their excellent school districts. Builders are willing to compete and bid up prices to seize the best parcels. 

Apartment Market ‘Defies Gravity’ as Rental Boom Continues 
The Twin Cities continues to rank among the nation’s strongest apartment markets. Robust renter demand can be attributed to several factors, including healthy job growth, in-migration of new residents, desirable demographics, and a lack of good starter home options.
 
Office Market Stays the Course
Activity surged in 2017, but absorption finished the year at a modest level. While companies are relocating, expanding, and trading into more efficient space, this positive momentum has been offset by space coming back to the market due to downsizing and consolidation, resulting in modest net absorption.

Deep Investor Pool Continues Chasing Assets
Plenty of capital continues to pursue real estate. However, with the last economic downturn still fresh in their minds, investors are sticking to their criteria. Many are focused on steady cash flow while others are pursuing opportunities to add value. Meanwhile, the investor pool for best-in-class assets is deep and well-balanced across private equity funds, institutions, and foreign capital.

Outlook
Shifts in some sectors will impact absorption totals in early 2018, especially in Office, Medical Office and Retail, all of which are projecting flat or moderate positive absorption for the first half of the year. Industrial demand will continue to push overall absorption, with another 1.5 msf expected to be absorbed. Rogers and the rest of the Northwest market are expected to lead the way with nearly half of that activity.

In the Retail sector, more national retailers are expected to go bankrupt and/or give large spaces back in the first half of next year, but those spaces have already been shown to attract strong leasing activity and could be filled in short order. In the Office sector, some large spaces will come back to the market – particularly in the suburbs – as large tenants consolidate into either one multi-tenant building or a new single-tenant development, a negative for absorption data but positive for the economy. Meanwhile, rental rates have reached high enough points to justify new construction in some submarkets.

New construction will keep up at a healthy rate, with 1.3 million sf of new multitenant space expected to be delivered in the first six months of 2018.
Transaction volumes, especially in Office and Multifamily, will be healthy in the first few months of the year, with several major deals nearly across the goal line at year-end and several more trophy assets eyeing a potential 2018 listing.  

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DISCLAIMER 
The Compass report, published since 1997, is created by Cushman & Wakefield experts using Twin Cities commercial property data from the last six months of 2017. The data used for this report has been obtained from sources which we deem reliable. While every effort has been made to report accurate data, Cushman & Wakefield cannot guarantee the accuracy of this market report. Furthermore, we cannot assume responsibility for any omission of data which may occur. It is our intent to provide the best possible information regarding the office, industrial, land, retail, multi-family and investment markets while leaving the reader the responsibility of further verification before using this report for business and/or financial decisions.

This report includes information for multi-tenant office, industrial and retail projects greater than 20,000 square feet and multifamily for-rent properties. Not included are owner-occupied, government or single-tenant buildings. Not all information and insights we've collected can be published in any given volume.

 
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