At a recent meeting of the Minnesota NAIOP in Golden Valley, a Los Angeles-based consultant outlined his predictions for the future of commercial development, warning that the current cycle will be ending next year. He sees big changes ahead, and he thinks the "shift" will signal a five-year downturn in the market, based partly on generational factors. But he also noted that the next uptick should begin in 2023.

The Changing Market

Christopher Lee still thinks it's "a great time to be in real estate," and here's why:

He believes that data and analytics will play a much more important role in real estate decisions in the coming five years. Since the great recession, Lee said, real estate transactions have been focused on “capital, asset and entity rebalancing,” adding that brokers have relied on "intuition" and "gut feel." The new cycle will be more fact-based, he predicts.

Lee, who is president and CEO of Los Angeles-based commercial real estate consultancy CEL & Associates, was brought to Minnesota to offer local NAIOP members a "wider market prospective." The commercial real estate market has been booming in Minnesota, particularly in the Twin Cities, but Lee's predictions for a slowing of the post-recession boom are based on the following factors:

• Younger workers, who will be more apt to work from home or from remote locations, reducing the need for office space;
• A dropping home ownership rate, currently about 10 points below its peak in the "mid-2000s" and;
• New automation and robotics, eliminating jobs and adding to a manufacturing productivity increase.

“It’s a wake-up call to hear there’s danger in the comfort zone,” said Mark Reiling, president of SR Realty Trust and a director on NAIOP Minnesota's board.

What to Expect

Lee's presentation, “Megashifts & Real Estate Cycles,” included an assessment of expectations for each market segment:

• Retail: Internet sales are expected to have the biggest impact, growing to a record $532 million by 2020, and leading to lower prices for brick and mortar space. However, Minnesota's retail sales volume increased substantially between 2015 and 2016. An anomaly, perhaps?
• Office: Nationally, the square footage to employee ratio has dropped, and is expected to drop even further. Minneapolis-area office sales between 2015 and 2016 dropped approximately 12 percent.
• Industrial: During the same period, industrial sales in Minneapolis were down 23 percent, and the decline will continue, according to Lee, because human workers are being replaced by machines.
• Multifamily: Termed the "darling of investment capital," sales in the Minneapolis market increased  by 65 percent between 2015 and 2016. Lee expects this segment to remain strong even as sales of single-family homes continue to drop based on Millennial preferences, and the current apartment building boom in the Twin Cities seems to bear out the assessment.

A Good Time to Sell

Even though reactions to the presentation were mixed, most agreed that the signs are hard to dispute. Colliers International Senior Vice President Mark Kolsrud noted that although premium prices are still being charged for commercial properties, he needs no convincing that the current cycle is coming to a close. He believes that prices for both leasing and selling will "soften" over the next two years, and that property owners should sell while the market is strong.

Another attendee, Bloomington-based Frauenshuh Vice President Wayne Kuykendall, sees the need for a better amenity package that will attract commercial lessees. The decreasing need for physical space will mean stiffer leasing competition, he believes, but perks such as on-site food service, child care, and proximity to transportation will be valuable commodities in attracting new tenants and might offer a way for older building owners to compete successfully in the changing marketplace.

Lee also predicts a series of sweeping changes in the real estate industry. During the next 10 years, he believes there will be mass consolidations, leaving power in the hands of just a few brokerages. Further in the future, in terms of megashifts and cycles, he predicted artificial intelligence will have a major effect on transactions. Look ahead to the period between 2033 and 2038, he also envisions the possibility of "leasing in the oceans and in outer space." 

Formed in 1967, NAIOP provides networking, advocacy and educational opportunities for its more than 18,000 members nationwide. The Commercial Real Estate Development Association is a leading organization for developers, owners and investors of office, industrial, retail and mixed-use real estate. This Minnesota chapter meeting was held in March 2017.