2017 Prospects for Commercial Real Estate in the Twin Cities

After years of substantial growth and good times, will 2017 be the year it all dies down in terms of commercial real estate growth in the Twin Cities? Some brokers see a slowdown, but that doesn't mean a stop sign. It may be more of a lane change, at least in some areas of the market.

The year just ended represented a milestone of a kind -- the first year since 2009 that the local market posted an absorption loss in total leased space. Preliminary estimates placed the loss at about 329 thousand square feet, compared to a loss of 1,831 thousands of square feet during the Great Recession. However, the net gain over the past five years has been substantial. In 2015 alone, more than 1 million square feet of office space were absorbed. 

Grocery stores have fueled growth in the retail sector, and e-commerce boosted absorption of industrial space used for bulk distribution centers. More than one broker views the projected slowdown no more worrisome than a curve in a naturally cyclical business. 

Downsizing or Building Efficiency?

Steve Shepherd, vice president of Colliers International, however, points to a softening of "both job growth and business confidence." Nationally, the trend is reflective of either better space utilization or a downsizing of space per employee for other reasons. Minneapolis firms, in addition to putting more people in less space, have shown a tendency to leave sprawling suburban spaces for more efficient, newer space Downtown. 

That's a mixed blessing for the companies and for the local business economy. Because moving is often expensive in terms of dollars and hassle, many firms would rather stay put, so there is increased emphasis on renewing leases, says Steve Chirhart of TaTonka Real Estate Advisors in Minneapolis. But there are new office buildings planned or under construction in many areas of the city, including Downtown East, the North Loop and the West End, and they are recruiting tenants.

Groceries Lead; Buying Continues

Over 50% of newly constructed retail real estate has been for grocery stores, the key anchors for such development, according to Mike Sturdivant, of St. Paul's Paster Properties. He points out that rising interest rates are a factor signaling new caution among investors. Hiring and staffing are additional concerns affecting corporate decisions about real estate, according to other brokers, who see the coming 12 months as somewhat uncertain.

One unexpected trend is that some former strictly e-commerce businesses, including giant Amazon, are taking a fresh new look at brick and mortar retail stores, a promising sign for new leasing and development. Others simply need more distribution space.

For industrial centers, although there is still "strong activity," says Brent Masica, Cushman and Wakefield executive director, the peak may have occurred as early as 2014. He expects 2017 to be a good year, but not a record-breaker, and reinforces the opinion that e-commerce is still the driver, whether they move back into traditional selling spaces, or simply need product and shipping centers.

Others see a slight slowdown for the industrial sector, partly because there are few spec projects in the mix, but the consensus is that the immediate road ahead for Twin Cities commercial real estate should be relatively smooth.