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CITY HIGHLIGHT, JUNE 2008
MINNEAPOLIS/ST. PAUL CITY HIGHLIGHTS
Greg Moltumyr, Nancy L. Frykman, Lee Tuchfarber, Eric Dueholm, Robin Zellmer and Ted Leines.
Minneapolis/St. Paul Office Market
Despite growing concern over the state of the local and national economy, the Twin Cities office market delivered 169,640 square feet of positive net absorption during the first quarter. Compared to recent years, the market has slowed considerably, but current market conditions are stable and relatively healthy. Direct vacancy across the metro area currently sits at 12.88 percent, with Class A space consistently outperforming the market, though it is followed closely by solid activity in the Class C market.
Rising unemployment, continued turmoil in the residential housing and financial markets, and the looming political uncertainty caused by the upcoming presidential election suggest that the current economic stagnation is likely to linger throughout the year. As a result, developers are scaling back on plans for new construction. In Eden Prairie, Minnesota, Liberty Property Trust has gone so far as to halt construction mid-build on a 120,000-square-foot speculative office building. Landlords are bracing themselves for the possibility that the slowdown could escalate into a downturn, and are aggressively pursuing those tenants that are still shopping the market.
In markets such as the southwest metro area, where developers have already launched a concentration of new office projects, the slowdown could cause dramatic increases in the vacancy rate if demand stays light as the new towers come online. Though all the major speculative projects under construction have committed anchor tenants, collectively, they are still approximately 60 percent vacant. In other submarkets in which talk of development has yet to be put into action, the slowdown is less likely to have as significant an impact.
So far, the economic uncertainty is fueling inactivity — but not panic — within the commercial real estate market. Tenants are displaying a reluctance to expand or commit to long-term leases, but landlords are holding fast to quoted rental rates, and are willing to wait and see where the market goes before introducing too many new incentives. This standoff will likely continue until the future of the local and national economy becomes clearer.
— Greg Moltumyr is vice president with Minneapolis-based NAI Welsh.
Minneapolis/St. Paul Retail Market
Last year’s credit crisis continues to ripple through the economy. First, it created a housing slump. Then, following the old adage that retail follows rooftops, the decline in single-family home starts resulted in decreased retail activity.
The housing slump, coupled with higher gas prices, has consumers feeling the squeeze and, consequently, retail sales are weak. Additionally, with home prices taking a hit, many would-be franchise owners aren’t willing or able to use their equity to fund such ventures.
In short, these are trying times in most retail markets and Minneapolis/St. Paul is no exception. However, developers and retailers are already adapting to the changing market conditions.
For starters, developers have delayed plans to push retail farther out into third and fourth-ring suburbs. Instead, they are refocusing expansion efforts on new or redevelopment opportunities within established markets.
Examples of this include proposed Target and Kohl’s stores in Lino Lakes, Minnesota. The developer pulled the plug after projected housing developments didn’t materialize in this suburban area. By the same token, infill developments in Blaine, Minnesota, in Anoka County continue as Ryan Companies and Oppidan have each decided to move forward with construction of retail centers.
In the Northeast submarket, Rosedale Mall has been revitalized thanks to Lend Lease’s investment in the regional mall. This investment has attracted several new tenants, including Caché and an expanded Victoria’s Secret inside the mall, and California Pizza Kitchen, Potbelly Sandwich Works, Lucy, Ann Taylor LOFT, Chipotle, Panera Bread and DSW Shoes outside on the plaza. Six new stores have recently been added, including J. Crew, C.J. Banks, White House | Black Market and Sephora.
Ryan Companies recently added a Super Target and The Home Depot to The Grove, the company’s expansive retail development in Maple Grove, a town in the Twin Cities’ northwest submarket. Both stores are faring well, but the center’s remaining vacant space largely sits empty as this submarket nears its retail saturation point.
Retail in downtown Minneapolis remains a concern. While Brooks Brothers returned after a 15-year absence and Fogo De Chão opened its first restaurant in the Twin Cities, Crate & Barrel has exited downtown, and Borders Books & Music and Williams-Sonoma will soon follow. On the plus side, Whole Foods Market will open soon, with apartments above the trendy grocer. The city’s long-awaited transit line will provide more transportation options to downtown, starting next year with the Northstar Line and followed by the Central Corridor in 2014 and Southwest Line in 2017. The completion of those light and heavy rail corridors should open retail opportunities for future development throughout Minneapolis/St. Paul. Service and quick-service retail should flourish around the stations that link these transportation corridors. The completion of the new stadium for the Minnesota Twins in the North Loop should also provide more incentives for retailers.
The retail sector in Minneapolis/St. Paul remains in neutral, leaving developers and retailers to sift through today’s tougher economic climate. During the first quarter, absorption was nearly flat with a positive 58,142 square feet. This slightly decreased the vacancy rate to 5.3 percent, from its year-end 2007 mark of 5.4 percent.
Many retailers, such as Wal-Mart and Starbucks Coffee, are retrenching by scaling back expansion plans; other retailers, including Macy’s and Talbots, are closing stores that don’t perform. Additionally, retailers are sharpening their pencils to optimize returns by improving existing locations, customizing inventories, fine-tuning their space and going green to save some greenbacks in the bottom line.
Moving forward, Eden Prairie, Minnesota, in the southwest submarket remains a hot area but is almost fully developed. Kraus-Anderson Companies has secured a coveted development site along the Highway 212 extension, which is slated for completion this fall. Once completed, this road will provide traffic flow, easy access and high visibility in an area that’s growing. There are already rumors that a national developer is working on a lifestyle center in Chanhassen, Minnesota, on the southern end of the new highway.
The West submarket is considered a retail market in high demand, as it has only a 2.7 percent vacancy rate. Duke Realty Corporation is moving ahead with its plans to build The West End, an 18-acre mixed-use development in St. Louis Park, Minnesota. That center is expected to fill the demand centered around the intersection of Interstate 394 and Highway 100.
Looking toward the next 6 to 12 months, Colliers Turley Martin Tucker projects that retailers and developers will remain cautious until they have a better sense of how the economy is faring.
— Nancy L. Frykman, second vice president, and Lee Tuchfarber, associate, work in the retail sales and leasing division in Colliers Turley Martin Tucker’s Minneapolis/St. Paul office.
Minneapolis/St. Paul Industrial Market
The Minneapolis/St. Paul industrial market is beginning to show the effects of a slowing local and national economy. During the first quarter, the market experienced 774,221 square feet of negative absorption, with all but one regional submarket posting negative growth for the quarter. Vacancy across the metro rose to 9.52 percent [how significant an increase was this?].
Rising fuel costs and troubles in the retail industry have impacted the distribution and trucking industries; losses in the bulk warehouse category accounted for close to 60 percent of the negative first quarter absorption. Other industrial sectors, such as high-tech manufacturing, medical and machine shops, have fared better and have added jobs to the local economy where other businesses have cut back. On the whole, unemployment for the state is on the rise, peaking at 4.9 percent in March.
Commercial construction, especially in the industrial sector, has been slow, which will help moderate the effects of the slowdown if the market remains sluggish. High construction costs have discouraged industrial developers from overbuilding, so the market is entering the current downturn in a healthy condition.
Compared to other sectors of the real estate market, the industrial market, though slow, is still fairly well-positioned. Throughout the metro, asking rates are holding steady. Deal velocity has slowed, as users are taking longer to commit to making a move — but, though it is conservative, the market is by no means stagnant. Tenants are favoring shorter-term leases to longer, cheaper deals, and owner/user sale activity has likewise cooled with users more likely to opt to lease than to buy or build. Economic indicators suggest that these current market conditions will likely linger through the remainder of the year.
— Eric Dueholm and Robin Zellmer are vice presidents with Minneapolis-based NAI Welsh.
Minneapolis Puts Out the Welcome Mat for Luxury Hoteliers
All anyone really wants is a good night’s sleep, right? That certainly shouldn’t be a problem for consumers in Minneapolis in 2008, as the city is experiencing the largest lodging expansion in its history. While consumer spending is generally down, it seems that people are willing to spend a little bit more for a good night’s sleep and great lodging amenities, as evidenced by Minneapolis’ transformation into a first-tier lodging market.
In the coming year, Minneapolis will boast no fewer than six new luxury hotels including the Chambers, the Westin, the aloft, the W, the Minneapolis Hotel, and Ivy. In addition to this new development, significant upgrades are underway on a number of existing hotels that recently changed ownership, including the Hilton and Embassy Suites.
Corporate and leisure travelers, it seems, have significantly changed their expectations of lodging locations and amenities to include secure environments, flat-panel television screens, triple-sheet bedding, pillow-top mattresses and, especially, service. As a result of these changing expectations, they are willing to pay a higher price for that elusive good night’s sleep. Successful hoteliers recognize this — and in Minneapolis, they not only recognize what consumers want and will pay for, but they are responding by building new and renovating existing hotel sites to meet, if not exceed, rising consumer demands.
So where are these big-spenders coming from? With higher-end hotels, the Northwest Airlines hub, the Mall of America, light-rail transit, an overall perception that Minnesota is a safe place to live and visit coupled with a devalued dollar, the Twin Cities will soon welcome additional international travelers and benefit from the Euros, Yen and other foreign currencies such travelers will bring to our local economy.
But even with the potential of foreign travelers, do we really need more hotel rooms in Minneapolis? Do the numbers add up to sweet dreams for hoteliers?
In 2007, total hotel revenue in the Twin Cities increased 7 percent. Occupancy, however, did not follow this trend and came in at 67.5 percent through November, representing a gain of only 0.5 percent. At the same time, the number of available room nights over the course of the year increased by roughly 260,000. Digging deeper, the average daily rate increased only $4.75, which is a 30 percent decrease in growth compared to the previous 2 years. But the revenue per available room increased almost $4, which is equal to the gain in 2006.
This tells us that hotels are still growing revenue, albeit more slowly than in previous years. It also tells us that new construction is at a pace roughly equal to the growth in room demand. Despite the turmoil in the credit markets, so far, the hospitality lending markets have continued to proceed, although with higher costs and much more risk analysis. Why? Because even through a recession, if that is where we are now in, the long-term changes in travelers’ expectations will not diminish. As the travel volume ebbs and flows, consumers will remain attached to the quality they have become accustomed to, and that is where they will spend their lodging dollars in the future.
— Ted Leines is a senior associate in the Hospitality Services division at Colliers Turly Martin Tucker. |
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