Downtown Appeal Keeps Growing, Especially in Minneapolis

After an especially long winter, there seems to be good reason to be optimistic about the future of commercial real estate, especially office space, in downtown Minneapolis, according to April reports. The urban core, apparently, is where workers want to be.

The buzz for a couple of seasons now has been that the current cycle is in its end stages. Since it is common wisdom that real estate is cyclical, that led to some foreboding and “what if” discussions. However, there is now, based on data from the National Real Estate Institute, ample reason to believe that the good times are not slated to end just yet, particularly in the office sector. The expectation is upbeat; forecasts remain bullish for rents and occupancies.

Investor Outlook for 2018

Respondents placed areas such as Carver County and others the Midwest only in fourth position among U.S. regions, but that doesn’t tell the whole story. Relative market strength for the middle of the country, rated between 1 and 10, earned a score of 6.8, while the West was rated 8.3, the South 7.9, and the Eastern region 7.4. Interestingly, all but the west posted gains over the previous year’s position, while the West remained flat. The survey has been conducted for the past four years.

Most of the Midwest has been stable over the past few years, but Minneapolis enjoyed unusual strength, with new office space available from both new construction and renovation. Occupancy rates remain correspondingly high.

This year, most analysts share a general sense that cap rates will rise during the course of the year, but that is not alarming. In fact, the majority of respondents have consistently voiced such expectations. This year, though, the truth bears out the forecast. Cap rates have risen, and to a slightly higher than expected point.

Another consistent finding over the four-year survey is the number of of investors who expect to hold property over the coming year—47%—with about one-fifth hoping to sell and an almost identical 22% wanting to buy. Reports indicate that capital markets are stable, but there is also an expectation that financing rates will rise, not a surprise.

Optimism Despite Rumbles

In Minneapolis, specifically, optimism reigns, although it is not unbridled. Commercial market forecasts are tempered by pending trade and tariff restrictions, by natural fluctuations, and by the relative strength of other sectors, even infill housing that can provoke effects in the urban office market.

One of the positive signs for continued local strength is the seemingly boundless enthusiasm younger workers have for the urban core. At a Bisnow Minneapolis State of the Market event held in March, speakers one after another confirmed that a growing downtown population of younger workers will help keep the downtown office market strong. The prevailing opinion is that employers will go where the workers want to be.

In Minneapolis, the urban core is the place. Population growth over the past year was 2,600, a growth of six percent over the previous year, totaling more than 13,000 over the past 10 years. That, of course, spawned the uptick in condo building and apartment renovation which, in turn, resulted in new downtown hires and produced the need for new offices.

The trend is still spiraling upward. So, the forecast for commercial sector health in Minneapolis remains positive. And that is positively good news for Twin Cities real estate! But the face of development and renovation may change.

The New Focus of Development

It appears, though, that there are some expectations this new breed of downtown resident/worker brings along. Amenities are all-important. While residents seem to be finding a lot to love in redeveloped residential communities, and Minneapolis dining, shopping and leisure attractions are first-rate, some work environments are not yet keeping pace.

Some of the attractive features already exist: Conference centers and wellness areas, bike parking, tenant lounges and access to the outdoors are quite standard.

But some are new, and office developers would be wise to take note: Building wellness certifications will likely spread from the coasts to the Heartland, according to all reports. Younger people want to both live and work in healthy spaces. Yoga centers and workout rooms, nap pods and quiet rooms, according to some speakers, would be welcome, but buildings and workspaces that are light, bright, comfortable and filled with clean air will become non-negotiable.

Finally, these younger workers want a company culture that conforms to their belief system that work should be fun; and they want to associate with other of a similar mindset. So, offices of the future will evolve in accord with the way jobs are changing. Actually, that’s not really surprising, either, but it is exciting.