CITY HIGHLIGHT, JUNE 2005

MINNEAPOLIS/ST. PAUL CITY HIGHLIGHTS
Jeffrey LaFavre, Eric Dueholm, Keith Collins, Chad Sturm, Erin Houge

Minneapolis/St. Paul Office Market

Slow but steady progress characterizes the Minneapolis/St. Paul office sector. Encouraging signs of employment growth continue to push the market forward. The Twin Cities bucked a statewide trend and added 1,300 jobs during the first 2 months of 2005. The area’s unemployment rate now stands below 4 percent.

Activity increased in nearly all sectors of the office market during the first quarter, with positive absorption of 350,000 square feet. This led to further improvements in the vacancy rate, which ended the quarter at 18.1 percent, with higher vacancies in the Minneapolis and St. Paul central business districts (CBD) — 20.7 percent and 23.1 percent, respectively — than in most of the suburban office markets. Even at that, both CBDs are showing signs of life as vacancy rates declined by a half percentage point in Minneapolis and  1.5 percent in St. Paul, which is the first improvement in St. Paul’s CBD in more than a year.

The improving economy and this absorption bode well for the office market this year. All indications point to a dynamic year as transaction activity quickens, a point underscored by the optimism of brokers in the trenches.

While landlords aren’t out of the woods, asking rates are showing a slight up tick and property owners, especially those with strong tenant bases and occupancies, are reining in concessions. These improving fundamentals signal that rental increases will be easier as competitive pressures lessen.

Restrained development will further fuel the office sector’s recovery. Some projects are coming out of the ground, primarily in the stronger yet smaller suburban markets. Examples include Kalice Development’s Inver Grove Professional Building (44,000 square feet) and Manley Land Development’s Manley Plaza (46,000 square feet) in the Anoka County submarket. Despite high vacancies (nearly 25 percent) in the northwest sector, Opus Northwest is building nearly 300,000 square feet of space in two office centers, and LandCor Inc. is developing the 54,000 square-foot Bell Tower West. It’s important to note, though, that much of this submarket’s space is Class B and these new buildings have significant pre-leasing commitments.

Ryan Companies continues to press ahead with the redevelopment of the former Sears’ retail and catalog center on the outskirts of the CBD. At the intersection of Lake Street and Chicago Avenue, the 1.5 million square-foot Midtown Exchange redevelopment landed Allina Health System as its anchor tenant. Allina will use the space for its headquarters, housing some 1,000 employees in 250,000 square feet. Further fueling the redevelopment is the area’s importance as a booming medical corridor, with three hospitals and a multi-million refurbishment to its streets and infrastructure.

Developers have been sitting on the sidelines, waiting for improving conditions.  A number of projects are on the drawing boards from a broad base of local and national development companies. Chief among these developers are Duke Realty, McGough, United Properties, Ryan Companies and CSM.

Many developers are placing their bets on the western suburbs, which offer solid demographics from affluent residents and easy accessibility from the area’s major interstates and roads.

Bloomington Central Station bucks this trend, though, as a key proposed development. Locally based McGough has plans for more than 1 million square feet of office space and another 50,000 square feet of retail located across from the Mall of America. The long-range plan calls for developing this during the next 10 years, creating a new urban core for the tri-city area.

— Jeffrey L. LaFavre is managing principal of Colliers Turley Martin Tucker’s Minneapolis/St. Paul operations.

Minneapolis/St. Paul Industrial Market

The Minneapolis/St. Paul industrial market is in recovery mode thanks in part to improved economic conditions. Manufacturing rose on broad strength in durable goods where employment is up 4.3 percent for the year. Employers are finally willing to expand their labor force for the first time in several years based on optimistic manufacturing forecasts and stabilized market conditions. Historically, industrial properties recover before office properties, which generally lag by 6 months to 8 months.

New development is ramping up in 2005. Several new projects are already under construction and more are in the planning stage. The Interstate 94 corridor is drawing the most attention by developers, especially in the Rogers and Woodbury areas. The 260,000-square-foot Diamond Lake Industrial Center II in Rogers is the largest speculative project currently under construction. Room and Board recently leased 194,000 square feet of distribution space in the phase II building, which has allowed the developer to kick off plans for the third and final phase of the project. The Rogers City Council has approved MBY Companies to proceed with the final phase. They are expected to break ground on the next 260,000-square-foot facility once the current phase is completed.

The next largest project currently under construction is the 122,912-square-foot Eagle Creek Commerce Center III in Savage. Even though the Southwest market has the highest vacancy rate at 9.4 percent, this market recorded significant net absorption in 2004. Most new projects are relying heavily on pre-leasing prior to breaking ground.

Blaine is also experiencing some interest from developers. Speculative construction should grow through the year as vacancy levels are reduced, and demand for high quality and specialized space increases. Look for investors to take advantage of low interest rates while they last.

Rental rates have remained stable with landlord concessions beginning to diminish. The current average rental rate is $5.24 net per square foot for all types of space in the metropolitan area. Warehouse space is averaging $4.42 net per square foot, while R&D/Flex space is at $6.21 net per square foot. Although favorable deals still exist for tenants in the market, look for the current rates to slowly begin rising as the year continues and competition for space picks up.

— Eric Dueholm is vice president–brokerage services for Minneapolis-based Grubb & Ellis|Northco  Real Estate Services.

Minneapolis/St. Paul Multifamily Market

The Minneapolis/St. Paul apartment market is showing signs of a modest recovery. According to GVA Marquette Advisors, the overall apartment vacancy rate at the end of the first quarter this year was 6.9 percent, compared to 7.4 percent at the end of the first quarter last year. Average rents have remained steady at $850 per month. Furthermore, for newer rental communities (1999-present) the vacancy rate has dropped from 17.1 percent in first quarter last year to 11.6 percent in first quarter this year. An improving Twin Cities job market and economy are reasons for the recovery — however, the loss of renters to home buying continues to be the major factor for why the market is improving at a slow pace. The Twin Cities median home sale price is now more than $235,000.

Uptown City by Village Green.

The majority of new development has occurred in the urban areas of downtown Minneapolis and St. Paul, as well as select suburban locations. The lack of land zoned for high-density development continues to be a barrier to entry for the Twin Cities apartment market. Detroit-based Village Green Companies recently completed its second apartment development in Minneapolis called Uptown City Apartments — 163 units located in the trendy Uptown area just south of downtown. Also, Minneapolis-based Dominium recently completed The Bluffs of Nine Mile Creek, a 126-unit luxury apartment community located in Eden Prairie. Condominium quality finishes, theater rooms and rooftop putting greens are examples of unique amenities in recent projects.

National developers have been few to the Twin Cities market. North American Properties has been the most active national player, having built Stoneleigh in Plymouth and Watertower and Southwest Station in Eden Prairie. Dominium has been the most active local developer during the past few years having recently started their fifth new apartment project.

Demand continues to increase for land adjacent to transit terminals as local municipalities continue to see positive growth. On 22 areas surrounding its Southwest Station in Eden Prairie, Southwest Metro Transit has guided mixed-use development that annually will return more than $400,000 in residential property taxes and nearly $300,000 in retail property taxes.

The Twin Cities light rail system, which opened last June, operates from downtown Minneapolis to the airport and Mall of America. This is a corridor to keep an eye on. A number of housing projects are in the works along the Hiawatha Light Rail line including several condominium and apartment projects. Oak Properties is scheduled to open Oaks Hiawatha Station this summer, which is a mixed-use development project including 61 rental apartment homes and street-level retail shops.

Mixed-use developments in urban neighborhoods are prevalent right now, as many commercial developers have been forced to become residential developers as well. Housing values are now often higher than industrial and office properties and close to the value of retail properties. The focus of these developments is on live, work and play style housing

New construction of apartments will remain modest until apartment operations show strong signs of improvement.

— Keith Collins, CCIM, is vice president with the Minneapolis office of CB Richard Ellis.

Minneapolis/St. Paul Retail Market

As the national economy continues to fluctuate, the Minneapolis/St. Paul local retail market steadily grows stronger through expansion, development and redevelopment. New construction of big box retail properties and regeneration of existing shopping centers have created a positive impact on the current landscape of the retail market.

The most significant recent development trends point toward infill projects and third-tier suburb expansion. Many retailers are identifying locations metro wide with two existing competing stores, and developing the “third competitor” property. For example, a CVS/pharmacy entering a market harboring Walgreens and Synder Drugstores stimulates spending and creates healthy competition. The expansion of the retail market into third-tier suburbs can be traced to the availability of land and the increasing sprawl of the urban population. Some of the major projects taking place in these outer rings are the Park Place at Town Center (Brooklyn Park), Southbridge Crossing & Dean Lakes (Shakopee), and Plymouth Creek (Plymouth). Both of these trends are linked to retailers’ desire to capture market share and boost sales.

The Minneapolis/St. Paul retail market still has relatively low vacancy rates of 6.2 percent. This vacancy rate has increased from last year’s 5 percent, but is due primarily to Mervyn’s closings in regional centers, which reintroduced 1.1 million square feet of space into the metro market. This combined with more than 2.5 million square feet of new leasable space has added to the attraction of retailers to the metro area. Lowe’s Home Improvement Warehouse, The Vitamin Shoppe, Dick’s Sporting Goods, Starbucks Coffee, Potbelly Sandwich Works, CVS/pharmacy, Home Goods, Steve & Barry’s University Sportswear and Aldi Grocery Store are new and/or expanding retailers making headway on the metropolitan retail scene. Many of these projects are competing for Class A locations and creating more opportunity for smaller, national and local tenants to secure quality sites.

Another major impact on Minneapolis/St. Paul’s retail scene has been the redevelopment of obsolete shopping centers and the addition of mixed-use/lifestyle centers to the market. Silver Lake Village, Apache Plaza, Prime Outlet Mall with Wal-Mart, Calhoun Square and Midtown Exchange are several existing retail centers undergoing rejuvenation, which has boosted additional retail and housing development. The increasing expansion of mixed-use properties and lifestyle centers, like Woodbury Lakes, has also impacted the market by expanding the shopping experience beyond enclosed malls and neighborhood centers.

The most active developers in the metropolitan market are Ryan Companies, Opus Northwest LLC, Sherman Associates, Robert Muir Company, Velmeir Development, CSM Corporation, Told Development, Solomon Real Estate Group and Bear Creek Development. These companies continue to study the growing Minneapolis/St. Paul population, pinpoint the need for specific retailers, and close on new and/or existing sites to capitalize on retail development opportunities.

— Chad Sturm is a senior associate and Erin Houge is an investment sales associate with Minneapolis-based Upland Real Estate Group.

©2005 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.