February 2007
Minneapolis/St.Paul Market Report – 2007
By Jim Mayland, Research Manager
Jim Mayland
Office
The Twin Cities office market had another solid year in 2006. The overall absorption for the market was 741,358 SF, down from the 1,402,548 SF from 2005. The overall vacancy in the market dropped from 18.7% in 2005 to 16.9% in 2006.
2007 Forecast
- Reemergence of new construction, with the first significant spec office building being delivered since 2001
- Light rail-driven new construction will also start to boom in 2007.
- Decreasing concessions, rising rental rates – the beginning of the shift to a Landlord's market.
- The inflated value of office sales will drive the cost of taxes up by an estimate average of 9%.
- Limited amounts of large contiguous blocks of space available in the market. There could be an announcement of a new office building for downtown Minneapolis before year end 2007.
Industrial
The Twin Cities industrial market had another year of positive absorption, building on the gains from 2005. For 2006, overall absorption for the market was 1,255,543 SF, down from 4,523,000 SF in 2005. While some might consider this a significant drop off from the year before, the high absorption in 2005 was primarily due to pent up demand that had existed in the marketplace since 2001. The overall vacancy for the market declined from 13.2% to 11.2%.
2007 Forecast
- Rents will continue to increase as remaining available space declines in the market.
- While there will be more proposed developments, actual groundbreaking will depend on pre-leasing for most developers.
- Gap between new construction rent and existing building rent will continue narrowing.
- Limited quantity of single-user for sale buildings will continue to decrease, driving users to multi-tenant buildings.
- Downturn in residential market may potentially free up land for industrial development.
Retail
The Twin Cities retail market continues to be a strong and vibrant market. The overall retail market saw negative absorption this year of 348,095 SF. One of the biggest contributors to the negative absorption is the influx of new development totaling more than 1.2 million SF. Vacancy in the overall market had a slight increase from 5.8% at the beginning of the year to 6.2% by year end.
2007 Forecast
- Continued vibrancy of retail development in both the metro area and outstate.
- Downtown retail continues to be refreshed and updated.
- Transit-oriented retail development will begin.
- Continued opportunity for redevelopment throughout the metro area.
Multi-family Housing
2006 was a good year for metro apartment owners and 2007 is shaping up to be even better. The metro-wide vacancy fell again in 2006, dropping from 5.6% in 2005 down to 4.0%. Average rent in 2006 rose in all market sectors. The increases ranged anywhere from 0.99% in the Northwest Sector to 3.95% in the Northeast Sector depending largely on product class.
2007 Forecast
- The median home price and mortgage loan interest rates grew, while apartment rents only increased slightly.
- Less than 1000 units will be added in 2007, about the same as 2006. There will be some “broken” condos going rental, but it is a relatively small number. Those will generally compete with Class A apartments.
- The demand for apartments will continue to grow as the metro adds new jobs and a smaller percentage of young people buy homes.
Investment
The Twin Cities investment market had another big year, led by office building sales. Trophy CBD buildings ran up the dollar volume numbers quickly with such sales as the IDS Center, 225 South 6th Street, LaSalle Plaza, Campbell Mithun Tower and 50 South 10th Street (fka Retek Plaza) in Minneapolis and Wells Fargo Place and US Bank Plaza in St. Paul. Large suburban sales included International Plaza in Bloomington, Broadway Place Buildings in northeast Minneapolis. 20% of the Minneapolis CBD office buildings sold in terms of square footage and 19% in downtown St. Paul. This metro is highly regarded by institutional investors and great properties were put up for sale.
2007 Forecast
- Investments continue to be desirable due to: (1) Decreasing vacancies, increasing rents, and little new development now and in the foreseeable future and (2) High construction costs for new developments require rents much higher than currently being achieved in the market.
- National capital is still searching for real estate to invest in.
- The Twin Cities Market continues to be attractive to national investors due to job growth and market stability.
Medical
The Twin Cities and surrounding suburbs have seen a large amount of new medical buildings come online in the last 12 months, especially in the suburban market. The total medical office space market in the Twin Cities is approximately 4,600,000 SF and will likely grow by approximately 9% with new projects being completed during 2007. Average net rents in new medical office buildings are ranging from approximately $21.50 to $23.00 per square foot. Average rental rents for off-campus facilities were at approximately $16.00 per square foot with operating expenses and real estate taxes at approximately $10.38 per square foot. On-campus buildings averaged $17.00 or more per square foot in net rents and $12.21 per square foot in expenses and taxes.
2007 Forecast
- With the nation’s population of persons 55 years and older growing three times faster than any other age group, demand for better health care is greater than ever.
- Specialty groups have developed partnerships with hospitals and developers to build medical buildings with same day surgery centers, which is not only a trend here but throughout the United States.
- Currently the Maple Grove market is experiencing the largest amount of growth.
- North Memorial Health Care and Fairview Hospital have partnered together and received approval to build a new hospital. This hospital will be completed and open to receive patients by 2009.
- Both North Memorial and Fairview are opening new clinics and surgery centers adjacent to the new hospital site totaling over 350,000 SF.
- Rental rates are already increasing as building and land costs rise.
- Landlords in older medical buildings are also starting to move their rental rates up as they take advantage of the increasing demand.
Click here to download the full 2007 Twin Cities Market Report
Featured Team
Larry Chevalier, SIOR and Brian Woolsey specialize in downtown Minneapolis tenant representation and office building sales. Together, the downtown Minneapolis team has 35 years of real estate experience. They have represented a wide range of clients, including the Federal Reserve Bank, Prudential, U.S. West, U.S. Bank, General Electric, and Opus NW. As a team, Larry and Brian have leased 6 million square feet and sold 4 million square feet of office property.
Larry Chevalier,
SIOR
Larry Chevalier has been a Licensed Real Estate Broker since 1976. He has worked with Colliers for over 25 years where he holds the title of Senior Vice President. He has been awarded Cooliers' Top Achievement Award for 13 years. In his career, he has leased over 5 million square feet and sold over 3 million square feet of office property. In 2003, Larry was awarded the Minnesota Commercial Realtor of the Year by MNCAR. In 2006, he served on MNCAR’s Board of Directors. He is also a two-time recipient of Colliers' Darrell Holt Award. Larry holds the SIOR designation, and he has also worked as an ethics arbitration panelist for 10 years. He is a reporter for SIOR’s National Office Research Committee, and is a market update panelist for BOMA, SIOR, and NAIOP.
Brian Woolsey
Brian Woolsey has been a Colliers Associate since 2003. Prior to joining Colliers, Brian interned in sales and leasing at United Properties. He holds a Finance B.B.A. from the University of Minnesota’s Carlson School of Management. Brian has played a role on several landmark projects, including Normandale Lake Office Park, the BGK Portfolio, Northstar Center, and One Southwest Crossing. Brian is an active member of real estate organizations MNCAR, MAR, and NAR. He is also a member of the Public Relations Committee for the International Facilities Management Association (IFMA). He serves as the Downtown Network’s sponsorship chair and is the chairman of the 2007 Skyway Open Committee. He is a current candidate for the CCIM designation.
Updates
Brokerage – Recent Transactions
The Gallery Professional Building
(St. Paul, MN) – James McCaffrey, SIOR, CCIM; Gina Dingman, CCIM; and Julie Lux, CCIM of Colliers’ Investment Services division represented the Saint Paul Port Authority in the sale of the Gallery Professional Building to Triple Net Properties, LLC.
The Gallery Professional Building is an eight-story medical office building totaling more than 100,000 rentable square feet in the city’s Central Business District. The Gallery is approximately 68 percent leased to 14 tenants, including Summit Orthopedics, Medical Associates of Minnesota, and Health East Medical Research Institute.
Maple Ridge Center
(Maple Grove, MN) – Colliers announced that a team from its Investment Services division, including Mark Kolsrud, CPM, Matthew Klein and Shawn Moore, represented Sarasota, Fla.-based Village West, LLC in the purchase of Maple Ridge Center, a 26,983-square foot retail and office facility located at near the intersection of Highway 169 and 63rd Avenue North in Maple Grove. Village West purchased the building from Maple Ridge Retail Center, LLC for $6,055,000.
Maple Ridge opened in December of 2005. Current tenants include Subway, Jackson Hewitt, Hempel Properties, and Mountain Mudd Espresso.
The Colonnade
(Golden Valley, MN) – Mark Reiling, CRE, SIOR and Kai Thomsen represented Minneapolis-based Buffalo Wild Wings Grill & Bar in leasing new corporate headquarters on the top two floors of The Colonnade, located at 5500 Wayzata Boulevard in Golden Valley. Buffalo Wild Wings, which has 19 restaurant locations in Minnesota and 435 locations throughout the United States is one of the 10 fastest-growing restaurant chains in the country. The company had outgrown its space in the 1600 Tower, located in St. Louis Park, and will be moving into their new space in September.
“Buffalo Wild Wings is a growing business, serving great food, and we are pleased to partner with them on both the corporate and retail sides of their business,” said Reiling. Andrea Christenson, SCLS and Molly Townsend of Colliers’ Retail Sales and Leasing division, represent Buffalo Wild Wings as it expands its restaurant locations in Minnesota.
Hudson Square Business Center
(Woodbury, MN) – Peter Dufour, CCIM, a vice president at the firm, represented Hudson Square Business Center, Inc., in the sale of Hudson Square Business Center, located at 7876 Hudson Road in Woodbury to Hudson Square Business Center, LLC for $1,085,000.
Hudson Square Business Center is a 10,143-square foot single-story office building located just southeast of the intersection of Highways 94 and 494. Built in 1993, the building, which sits on a 1.1 acre site, offers freeway visibility, easy highway access, and close proximity to nearby retail and office developments. The building is nearly 100 percent leased with just 300-square feet available. Current tenants include Allstate Insurance, Beacon Computer Services, Chez Cheveau Salon, Farmers Insurance, Storm Guard, and Zehm Brothers Construction.