Introduction
It’s no secret that the Twin Cities is in the midst of a national economic crisis. In the last year, almost all facets of the office, retail and industrial markets have experienced negative absorption and sky rocketing vacancies, leading to strained financial relationships as the year moved ahead. In the last few months, top brokerage firms like NorthMarq and Colliers Turley Martin Tucker released extensive reports detailing the all too tangible difficulties currently facing investors today and offering some points of optimism for the future, along with a handful of grim realities.Office Market Trends
Employment rates declined throughout the year, topping 6.4 percent in January, and are projected to rise to 8 percent by the end of the year according to Northmarq’s January 2009 Compass report. Compounded with a number of speculative development projects placed on indefinite hold, Colliers Turley Martin Tucker’s 2009 Market Research report said it believes the current environment will affect office market sales for at least a year after economic recovery. The Minneapolis Central Business District (CBD) is faring well as suburban tenants continue to relocate to the city seeking easy access to the light rail line Cory J. Miller from Coldwell Banker Commercial Griffin noted. Though subleasing space increased in the area, the CBD also experienced positive absorption of 389,660-square-feet and a 1.6 percent decline in vacancy, said Colliers Turley Martin Tucker. Finding space above the 25th floor also continues to be challenging, though space below is relatively available, Miller reported. The warehouse and North Loop district remains strong, especially in the sale of condominium units, retail and office space. Educational development prospects are strong in Minneapolis as private colleges are expanding campuses around the metro area. Despite St. Paul’s high level of media exposure during the Republican National Convention in September 2008, the city continued to struggle on many levels. A number of prominent companies left their office spaces in the last year, including the Educational Credit Management Corporation and the Republican National Convention, impacting the city’s vacancy rate by an increase of 2.5 percent according to Colliers Turley Martin Tucker. There are currently no new developments in St. Paul’s CBD, and even previous purchase negotiations - such as those between Opus Northwest and the Ramsey County Jail - are being snuffed as no appropriate tenant could be secured. Two bright spots in St. Paul are the Midway and Energy Park areas, where vacancy is extremely low.Retail Market
With further layoffs looming and the economy in decline, people are becoming more wary about spending their already shrinking disposable income - translating to retail vacancy peaking at its highest in 10 years, according to NorthMarq. Previously strong companies are struggling to survive, with prominent names like Wicks Furniture, Wilson’s Leather, Starbucks, Ethan Allen, KB Toys and Talbot’s closing Twin Cities locations in the last year. The Twins Cities restaurant circle was also deeply affected with the closings of Don Pablo’s, Baker’s Square and Joe’s Crab Shack locations. Despite Minneapolis introducing a number of posh restaurants such as Hell’s Kitchen, Restaurant Max, Seven and Barrios, vacancy still rose .9 percent in 2008, cites Colliers Turley Martin Tucker. Downtown is consistently changing as the development of the new Twins baseball stadium, expansion of Orchestra Hall, and the possibility of adding a planetarium to the Central Library bring both hope and skepticism to the area. The Lyndale-Lake neighborhood saw improvement with the construction of the environmentally friendly Blue apartments, and addition of two restaurants, Moto-I and Tiger Sushi, said Colliers Turley Martin Tucker. Even with these foreboding trends, St. Paul dropped their vacancy rate by .9 percent and added a handful of new businesses like the Bulldog, Salute and Pop! The more significant positive affecter for the city was the boost in health related jobs, which bounced from 5 percent to 9 percent in 2008, said Colliers Turley Martin Tucker.Investment Market
Most commercial real estate brokers agree the investment market at a standstill with institutions increasingly cautious about dolling out funds. The National Association of Industrial and Office Properties of Minnesota (NAIOP) released the 2008 “Vital Signs” survey, detailing the scope of which the market and economy stalled prior to September 2008. 92 percent of the respondents revealed that borrowing was tougher in 2008 than in 2007, and believed that it would be even more difficult in 2009. The survey also determined that lack of available debt and deteriorating property fundamentals are the two biggest reasons for the upward cap rate movement. To make matters worse, according to Real Capital Analytics, US investments sales over $5,000,000 fell 56 percent from 2007 to $1,518,600,000. The retail sector is least favored by investors today, especially considering 2008 presented a record number of store closes and lease restructuring requests. There is also growing concern that local community banks could fail in the near future as property values nosedive and payment delinquencies rise. Many loans were made during the real estate boom, but over the course of 2008, the housing market crisis began transferring its potency to commercial real estate. The Minnesota Department of Commerce has created a list of potentially faulty banks and said they will monitor the situation closely.Lowlights:
The Edina office market was hit hard as Southdale Office, France Place, Dain Eauscher Plaza, City Center, Edina Office Center and Midwest Plaza were taken off the market after sellers failed to reach their target prices. Southdale Shopping Center continues to struggle with vacancy over 12 percent, though the owners, Simon Property Group Inc., plan to renovate the mall by 2010. Macy’s department store left the Brookdale Shopping Center in mid-January 2009, bringing its vacancy rate to about 50 percent. General Growth, owner of Ridgedale Center, Eden Prairie Center and Knollwood Mall, and hundreds of malls nationally may file Chapter 11 bankruptcy. Furthermore, the International Council of Shopping Centers predicts there could be twice as many closings in 2009. The developer of the chic Loop Calhoun condominiums, Troy Mathwig, filed for Chapter 7 bankruptcy, due to financial troubles brought on through ongoing litigation between Mathwig, creditors and contractors. The Opus Group eliminated 200 positions nationwide in January due to the crisis facing the commercial real estate market. Statewide business property taxes are posed to increase 8 percent according to NAIOP. The organization is working to develop a resistance campaign with a Business Morning at the Capitol event on March 18, 2009.Highlights:
Capella University, Hamline University, Minnesota State University-Mankato and Rasmussen College have all expanded in the last year, signaling potential future growth in educational entities reported Colliers Turley Martin Tucker. The $88 million Penfield project in St. Paul presented new designs after developers withdrew initial plans late last summer. They now include plans for luxury condominiums, hotel and Lund’s grocery store. Wall Companies is looking to create a 251,000-square-foot Minnesota Innovation Center near the University of Minnesota, according to Colliers Turley Martin Tucker. The St. Paul Port Authority close on land previously owned by 3M in September 2008, with the option of purchasing 10 addition acres. The Port Authority plans on redeveloping the site.
Minnesota Commercial Real Estate Magazine