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July 2018 
Executive Summary 

Twin Cities Absorption Exceeds Expectations in Dynamic, Competitive Commercial Real Estate Market   

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The Twin Cities multi-tenant commercial real estate market exceeded expectations in the first half of 2018, outpacing projected absorption by about 20 percent even as the retail and office sectors slowed significantly. At the end of June, the market’s multitenant properties had a measured vacancy rate of 10.6 percent, 20 basis points lower than six months ago.

A total of 1.8 million square feet (sf) was absorbed across office, industrial and retail properties in the first half of 2018, a positive sign for a market contending with the ongoing “right-sizing” trend in the office market and the long list of national retailers giving back large spaces due to bankruptcy or structural changes. That number is down from 2.3 million sf of absorption in the second half of 2017. As in prior reporting cycles, the industrial property type continued to provide most of the absorption on record, totaling 1.6 million sf over the last six months.

New construction of multi-tenant properties continues to bull forward, with 2.3 million square feet due for delivery by the end of the year. That number on its own would nearly match 2017’s total for the year and bring 2018’s total to just about 3 msf.  

Hotel Market 'Cooling its Heels,' Yet Demand Continues
While demand remains strong and rates continued to climb, growth slowed due to the surge in room supply. Average occupancy in the metro area was 70.1% in May. The market will have to play some catch-up until it can absorb new inventory. 

Pulse Remains Strong as Medical Office Continues Evolving
While the Twin Cities medical office market reported solid demand for new space and stable occupancies, healthcare continues changing, and the real estate must adapt. Changes include new technology, the aging population, uncertainty around healthcare policy, and a shift in how space is being used. Health systems are evolving to better meet patients’ needs and are locating facilities in easily accessible, retail areas.

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.   

Expanding Retailers Backfill Prime Space as More Stores Close
Despite ongoing turmoil in a rapidly changing retail environment, the Twin Cities retail market experienced positive absorption and competitive demand for new space. Challenges include bankruptcies/store closures, changing consumer habits, e-commerce competition, and increasing demand for experiential retail. Rates were stable although they are expected to dip as more space comes back on the market. .

Robust Demand for Space Continues to Drive Industrial Market 
Led by the revived Northwest submarket -- particularly the comeback of Rogers -- the Twin Cities industrial market continued its positive momentum posting a tightening 7.9% vacancy rate. A steady pace of new construction continues and is anticipated to result in more than 1 msf of new space by year-end 2018. 

Strong Demand for Mid-Density Housing, Industrial Uses Fuels Land Market
Following the year-end 2017 trend, the land market for both residential and industrial uses enjoyed the spotlight, drawing interest from developers, and with few signs of a slowdown. Prospective buyers showed confidence in their markets by aggressively staking out new land positions for future use.
 
Insatiable Renter Appetite Exceeds Supply
Even with thousands of new units delivered over the past five years and new properties still undergoing lease-up, the Twin Cities multifamily vacancy rate hovers at a remarkably low 2.8%. It is a perfect storm for the apartment sector as it benefits from a healthy economy, job and population growth, strong renter demand by both Millennials and Empty Nesters, and a limited inventory of for-sale homes. Construction is on pace for a record year with more than 5,500 new units projected.

Office Leasing Remains Active, But Tenants Continue Downsizing
The Twin Cities office market could be described as a tale of two markets. Despite a healthy economy, high employment, and steady job growth, the market has had a tough time capitalizing on that robust business expansion, and therefore, has experienced lackluster growth. Although leasing activity remains active, tenants continue to give back space as they shrink footprints and squeeze more employees into smaller spaces. That densification, along with big users that have traded multi-tenant space for build-to-suits and corporate campuses, continues to offset positive absorption.

Outlook
Absorption is expected to slow in the second half of the year, with approximately 200,000 sf projected across all property types. That number is largely deflated by Retail properties, where -925,000 sf of absorption is expected as the market adjusts to the growing list of closing national chains. Industrial is projected for another strong half, with 1.1 msf of absorption forecast, while Office is expected to show flat to slightly positive absorption.

Construction continues at a strong pace, and 2.3 msf of properties are expected for delivery before year-end. The investment sales market is also expected to be active in the second half, with Multifamily properties expected to top $1 billion in trades for the fifth year running.

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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 first six months of 2018. 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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