Minneapolis Report: Forecast for 2020

Posted by Kris Lindahl on Wednesday, December 18th, 2019 at 9:49am.

Office Space, Multi-family Development Become the Focus for 2020 MinneapolisDespite some mixed reports earlier in the year, and the sometimes conflicting assessments of those who track statistics and trends, the end of year forecast for the coming year—across the nation—is relatively bright.

According to Kiplinger's economic outlook, states face challenges on several fronts, but U.S. revenue is on the rise—both from sales of goods and personal and corporate taxes—marking serious and robust growth not experienced since before the Great Recession. That's good news, but the forecast isn't equally encouraging for all states and regions.

Healthy tax revenues are expected to continue for the next several quarters, due to continuing low employment and slowly rising incomes. Coupled with modest inflation and high energy prices, many states are cautiously planning to increase budgets, considering reversing spending cuts made following the economic turndown.

Concerns nationwide continue to be trade wars, weather events, worker shortages and a widespread manufacturing slowdown attributed to lackluster global growth that has affected exports. The report notes that most states plan to rathole some expected tax revenue into "rainy-day" funds and approve only modest spending increases.

Identifying Local Trends

As an adjunct to the nationwide forecast, Kiplinger also prepared a list of 11 states facing the biggest challenges in the year ahead. Minnesota was not included on that watchlist. So what's the picture for the state, and particularly for the Minneapolis-St. Paul area? Essentially, it's a good one.

Construction spending is up, overall. In Minneapolis, however, while total construction volume was down by about five percent over the previous year, second quarter figures show the city continuing to track as expected in all areas, based on data collected. While the residential sector is expected to be down by about 16% when year-end figures are come in, commercial construction is expected to end 2019 only about 2.2% under the 2018 tally.

In general, the local commercial real estate market continues to outperform the national average. In particular, a steady demand for new and refurbished office space continues to push activity, especially in the downtown Minneapolis core and its close-in suburbs. Strong demand is met by steady developer delivery, and asking rents increased by 1.5% in the second quarter.

The Yardi Matrix Report notes that the city's record represents one of the strongest growth rates in the nation. Even though year-over-year activity was slightly lower in June than the previous year's record, annual sales are expected to surpass 2018's volume of $1.4 billion.

Modest job growth numbers were reported, with gains in the business and professional services sector compensating for job losses in retail and manufacturing. Local office absorption continues to be "healthy," with a vacancy rate of 12.6%, well below the national average. Finally, pre-completion leasing activity for new space continues strong, with the RBC Gateway project in Minneapolis claiming an 85% lease rate prior to groundbreaking.

What to Expect in 2020

Although we have seen that expectations can change rapidly, Minneapolis and the entire state are primed for continued growth in 2020, even though there are unique problems to be addressed.

Continued job growth and affordable housing are two prime concerns for a state that has, over the past several years, been a leader of regional growth, real estate development, and innovative problem solving. Especially in the fast-changing urban cores of Minneapolis and St. Paul, targeted programs have served as inspiration to other cities tackling transportation needs, aging infrastructure, effective reuse of older buildings, mixed-use development and ways to attract a qualified labor force.

In December, Minneapolis became the first city in the country to ban new single-family home construction in an effort to spur multi-family growth and reduce housing costs. How that will affect the market economically is yet to be seen. Job-seekers have been attracted to the metro area because of low unemployment and the availability of attractive employment with stable companies. However, the unemployment rate rose from an extremely low 2.9% to 3.3% earlier this year. Job growth in 2019 has been modest, but is expected to pick up in 2020, according to Kiplinger.

Problem areas continue to be food manufacturing and the non-durable sector represented by 3-M, and healthcare-related firms that constitute a major force of the Minnesota industry. The Mayo Clinic, headquartered in Rochester, remains the flagship of healthcare providers. Following what may be a challenging Midwest winter, major new construction projects promise a busy spring in terms of construction and development.

In summary, 2020 should unfold as another good year for commercial real estate, with only a handful of warning signs currently visible. As in the past, Minneapolis and St. Paul should be able to adapt to changing conditions and respond to challenges. The groundwork for another good year has seemingly already been laid.

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