There seem to be abundant signs globally that the availability of cheap money that followed the financial crisis of a decade ago is ending, and that a slowdown in all real estate sectors will arrive sooner rather than later. But, is it true? And if a slowdown becomes reality, what effect will it have on Twin Cities development and the local economy as a whole?
The answer is by no means simple, and opinions are far from united: Here's an overview from those who are trying to sort it all out:
No one is yet predicting a crash, but signs of a softening are everywhere, despite record high prices and plenty, perhaps too much, financial liquidity. The opportunities, according to some, aren't in balance with the demand. The noted Chicago-based investor, Sam Zell, notes: "There is too much capital chasing too few opportunities,” adding that real estate values are unclear, income is lower because of low interest rates, and investors are looking elsewhere.
Volatility Spurred by Globalism
In previous decades, the bulk of real estate investment dollars originated locally. Today, however, investment funds for a Minneapolis real estate development are as likely to come from Asia or China as from the United States. In addition, institutional investors with vast sums to place are in search of high returns, and they are extremely cautious about the potential risks of real estate investment, fearing a repeat of the previous meltdown. A record-high sum of available real estate investment capital exists, but real estate prices are nearly 50 percent higher than in 2007.
A spokesman for Morgan Stanley's real estate investment division explains that the firm is looking at investment with a focus on "downside protection." Other analysts point to a sense of desperation on the part of worldwide investors, pointing to the growth of special markets that include student and retirement housing, healthcare building construction and other unique markets.
In many locations, including Minneapolis, ambitious new retail and office development has stalled, while investors seek pre-construction commitments from potential tenants, and/or additional governmental incentives. Many investors see potential cracks in the system, fearing that instability and lightly-regulated debt funds are creating new bubbles with a potential to burst, according to Judith Evans in London, writing in the Financial Times.
Developments Closer to Home
Dayton's Redevelopment: Minneapolis
The timeline for the major redevelopment of the former Dayton's flagship in downtown Minneapolis has now been pushed back, and no new project announcements have been made other than for the planned food court of the 1.2 million square feet of space. When plans were announced for the redo, the new Nicollet Center was heralded as a breath of fresh air for the city, with new retail space joining offices, eateries and entertainment venues to bring new life to downtown.
However, office vacancies in the central business district at the end of 2018 held at almost 20 percent, and new retail enterprises have been slow to commit to the plans. The former Dayton's building has stood empty since the store's closure in 2017; original plans called for parts of the refurbished building, including the food court, to open in 2019, even though it was acknowledged at the outset that it was a long-term project.
Riverfront Redevelopment: St. Paul
The visionary $900 million mixed-use update along the Ramsey County downtown commercial riverfront that won the approval of Ramsey County commissioners in late 2018, has run into some potential snags, even as AECOM, the developer, unveiled more plans to the county board just recently. In fact, AECOM was faced with more questions about details of the plan, and some have voiced an opinion that the redevelopment will never occur, at least not as currently envisioned.
In fact, this is the fourth such effort to modernize the riverfront presented to authorities since 1992. The current plan would be built in stages, with a massive parking ramp slated to go under residential and hotel space and office towers, as well as an eight-acre landscaped park and other public realm development.
The distinctive plan would alter the city's skyline, with one of four proposed towers to become St. Paul's tallest, at 40 stories. The proposal also features a massive "lid" over existing topography, and would provide more ready access to the river from the current bluffs that stretch down to the water. If approved in its entirety, the project will continue well into the next decade, according to the out-of-state developers, who view it as both challenging and catalytic for St. Paul.
These are just two of the Twin Cities projects that bear watching over the next year or two, in terms of investment, development and the future of local real estate opportunity. Even if the boom is over, exciting times seem to be ahead.