Twin Cities commercial real estate pros see gradual market improvement — in 2012

If you’re a commercial real estate developer, financier or landlord, you’ll have to wait until 2012 and beyond for the Twin Cities market to improve, but if you’re a tenant looking for office or industrial space, it’s a renters’ market right now.

That’s one conclusion to be drawn from a semi-annual survey (PDF) of 50 commercial real estate industry leaders across the region.

The Twin Cities’ commercial real estate market will remain “sluggish in the near term,” but real estate pros “see reasons for optimism in 2012 and 2013,” according to the Minnesota Commercial Real Estate Survey, released by the University of St. Thomas Opus College of Business. The survey measured a slightly improved sentiment overall, compared with the spring survey, which was the first the university has done.

“Markets may continue to be slow in the coming days; however, participants can see the light at the end of the tunnel,” said Herb Tousley, director of real estate programs at St. Thomas, in releasing the survey.

Respondents were asked to rank seven factors from 1 to 100, with scores above 50 rated as “more optimistic” and below 50 as “more pessimistic.” The seven categories included rents, occupancy rates, land prices, building material costs, rates of investment return, equity ratio and an overall composite score.

The survey is being developed as a forecasting tool for the commercial real estate market in the Twin Cities.

Spring , fall survey comparisons

Source: University of St. Thomas

The composite score (54.1) is a slight increase from the previous survey (53.5). The biggest improvement in sentiment came in the outlook for land values, moving from negative (i.e., land prices will increase) to neutral territory.

“This is a significant difference from the spring survey, when the panel expected a major price increase,” said Tousley.

Expectations for building material costs remained negative (i.e., costs will increase) but slightly less so than previously. While expectations for rental rates, occupancy levels and availability of credit financing all declined, they remained in optimistic territory.

“Building materials are thought to increase over the next few years; however, the industry is perceived to be on the mend with financing more obtainable than in the past,” Tousley added.

Survey respondents were optimistic about investor expectations being reasonable, but that was essentially unchanged from the previous survey. 

The research was conducted by Tousley and Thomas Hamilton, associate professor of real estate at St. Thomas.

The St. Thomas survey findings are echoed in a market analysis conducted by Chicago-based real estate financial and professional services firm Jones Lang LaSalle, which rates the Twin Cities office market as “bottoming” and the industrial market as not yet having entered the bottoming phase.

That Q3 assessment describes the Twin Cities market as starting to stabilize over 2010 as larger tenants are sitting back and smaller tenants relocating to find better lease terms. Jones Lang reports that 17.43 percent of office space and 14.3 percent of industrial space is either vacant or available for sublease.in the Twin Cities.

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Comments (4)

  1. Submitted by Paul Udstrand on 12/01/2010 - 12:24 pm.

    Yet another completely useless “forecasting” took- yay. They “expect” the market to improve. Huh, never heard that before. Well if you keep saying it eventually you’ll be right. I expect it to improve by 2015 myself.

  2. Submitted by Brad Allen on 12/01/2010 - 01:41 pm.

    Paul:

    Thanks for the coment.
    You may be right that it will take that long, as the survey is only a snapshot, was not wildly bullish and has no real track record here in the TC. Commercial real estate will continue to follow the unemployment rate and employment patterns which are the real wild cards.

    But other cities have started to see commercial real estate actually move into a growth mode again, most notably Pittsburgh and Washington DC. To me, what’s significant is that the people answering the questions will be making decisions about investments based on their judgment of the future, so I think it’s worth noting.

  3. Submitted by Richard Schulze on 12/01/2010 - 09:24 pm.

    Actually, this weekend I was looking at McMansions in foreclosure-land (hey, everyone needs a hobby) and ran into a critter that I hadn’t seen in quite a while – an enthusiastic real estate agent saying “It doesn’t matter if you pay an extra $10,000, just that you buy now because in 6 months you’ll be way ahead.” Also “It’s a seller’s market because banks are holding on to houses!” I know this is residential real estate, but it was still really funny.

  4. Submitted by Paul Udstrand on 12/11/2010 - 10:29 am.

    Actually Brad the problem with the survey is it’s not actually measuring anything. “Attitudes” have no physical substance or correlation to reality. You’ve been writing pieces about how the real estate community has been “expecting” a recovery for almost three years now. Optimism does not determine reality. Of course realtors “expect” a recovery, what else can they do? Measuring optimism is a waste of time. This is why this is a completely useless forcasting tool. This is not a personal attack, but stories like these always impress me more as cheer leading of some kind rather than news. Some guy saw a dollar sign in the foam of his latte this morning so we can expect a recovery! My attitude is a little colored by Barbara Ehrenreich’s “Bright-Sided How Optimism Crashed Our Economy” right now.

    Meanwhile property values continue to decline as do sales. Today’s headline:

    “Nation’s Real Estate Values See No Immediate Recovery: Property Prices Continue to Fall.”

    http://www.usnewssource.com/headlines/nations-real-estate-values-see-no-immediate-recovery-property-prices-continues-to-fall_17826.html

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