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July 2019 
Executive Summary 

Twin Cities Commercial Real Estate Market Starts 2019 Strong, Even Stronger Second Half to Come

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The Twin Cities multitenant commercial real estate industry got off to a strong start in 2019, with absorption meeting projections across the board, vacancies continuing to tighten, and rent growth remaining strong. At the end of the second quarter, the vacancy rate across office, industrial and retail properties sat at 10.8%, down slightly from 10.9% at the beginning of the year.

A total of 2 million square feet (msf) was absorbed by occupiers throughout the office, industrial and retail property types in the second half of 2018, in line with what Cushman & Wakefield had projected for the six-month period. At its current pace, the market would handily outpace its 2018 absorption total of 2.78 msf, with industrial continuing to drive much of the activity.

In the first half of the year, the submarket saw 1.42 msf of absorption, putting it on pace to match its strong 2018. Office posted 557,600 sf of absorption, nearly matching its pace from the second half of 2018, while retail rebounded from negative 600,000 sf in the second half of 2018, posting a relatively flat absorption number.

New construction continued forward at a healthy pace, with 1.52 msf being built across all property types in the first half of the year. With 1.5 msf projected for the remainder of the year, the 2019 total for new deliveries would hit 3.0 msf, up from 2.1 msf delivered in 2018.     

Retail Market Moves Past Big Box Bust
With the momentum of new big-box closings slowed almost to a halt, the Twin Cities retail market got a chance to show its strength. Well-located big boxes are being demised or leased entirely to single tenants. Some new closings may occur throughout the rest of the year, but the market overall is expected to absorb positive space.

Office Sector Continues its Arms Race
With the labor market tight and exciting spaces leasing quickly, office tenants know it’s important that their space appeals to potential recruits. Companies want highly amenitized space to attract and retain talent, and the buildings that appeal to that dynamic are doing the best in the market.

Investor Pool For Commercial Real Estate Assets Remains Deep
New and abundant sources of capital continue to target the Twin Cities in search of higher yields. Both domestic and foreign capital is drawn to the metro’s strong fundamentals and demand drivers. However, there continues to be more investors than buying opportunities.

Industrial Continues to Power the Leasing Market
With about 1.4 msf of absorption, the industrial sector continued to lead the way in leasing. An even stronger second half is being projected, and the construction pipeline remains robust as vacancies stay low.

Land Market Sticks With Its Bread and Butter
Industrial and residential users kept the land market busy during the first half, targeting strategic land positions for new developments all over the Twin Cities. The market’s upward momentum did take a bit of a break in the first half, however, with prices stabilizing.

Multifamily Achieves Rent Growth Amid Building Boom
The Twin Cities continues to rank among the country’s most dynamic, in-demand apartment markets. Despite a flood of new development, the metro boasts healthy absorption, a low 2.6% vacancy rate, and solid rent growth. Business expansion, job growth, and in-migration are bolstering renter demand, while the shortage of available, affordable starter homes is keeping more millennials in the rental pool. 

Prognosis for Medical Office Remains Positive
Undeviating demand for space, stable occupancy rates, steadily increasing rental rates, and an uptick in construction all bode well for the Twin Cities medical office market. However, unrest continues as the sector faces uncertainty around healthcare policy, new medical technologies, the aging population’s mounting medical needs, changes in reimbursement, and new healthcare delivery models. Medical office real estate continues to evolve to keep up with these changes.

Supply For Hotels Catches Up to Demand
Following a record-setting run -- thanks to robust business and leisure travel -- the Twin Cities burgeoning supply of hotel rooms is finally starting to catch up to demand. After several peak-performance years, a downturn is inevitable, but when and how deep is unclear. As long as the economy remains healthy and there is no “black swan” event, the hotel industry could merely experience a “hiccup” in activity.

Outlook
Absorption is expected to pick up even more in the second half of the year, with approximately 2,450,000 sf projected across all property types. That number would bring the year's absorption total to 4.5 msf, the most since 2015.

Construction continues at a strong pace, and an additional 1.5 msf of properties expected to be complete by the end of the year. The investment sales market is also expected to be even more active in the second half of 2019, with several top-tier properties already on the market.

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DISCLAIMER 
The Compass report, published since 1997, is created by Cushman & Wakefield experts using Twin Cities commercial property data from the first six months of 2018. The data used for this report has been obtained from sources which we deem reliable. While every effort has been made to report accurate data, Cushman & Wakefield cannot guarantee the accuracy of this market report. Furthermore, we cannot assume responsibility for any omission of data which may occur. It is our intent to provide the best possible information regarding the office, industrial, land, retail, multi-family and investment markets while leaving the reader the responsibility of further verification before using this report for business and/or financial decisions.

This report includes information for multi-tenant office, industrial and retail projects greater than 20,000 square feet and multifamily for-rent properties. Not included are owner-occupied, government or single-tenant buildings. Not all information and insights we've collected can be published in any given volume.

 
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