Writer: Eleana Teran
3 min read November 2022 — Across residential, commercial, retail and office, Minneapolis-St. Paul’s real estate landscape continues a show of strength despite economic headwinds. Colliers Executive Managing Director and Market Leader Jeremy Jacobs and Mike Ohmes, managing principal at Cushman & Wakefield, discussed with Invest: the trends they see in the marketplace and how the area is well positioned for further growth.
Where are you seeing the most activity in the market?
Jeremy Jacobs
Traffic is heavier and retail is picking up but transactions continue to slow, particularly as investment sales weaken because of the macroeconomic environment. Multiple deals have retraded, even within the hottest asset class from the past few years — industrial. The debt market, given the actions of the Federal Reserve, continues to slow down the market and create additional headwinds. Rates make it tough for buyers to achieve desired returns and sellers are having seller’s remorse as the prices they can achieve continue to get worse compared to the high water mark sales of the past few years.
Mike Ohmes
The industrial activity across the market has been the most robust in the first half of the year. Be it leasing, property sales, or investment, it has really been the strongest sector across all areas of our practice. We expect that is going to continue for the balance of this year and then into 2023. Vacancy rates on the industrial front for multi-tenant space is only about 3%. Although there are 5 million square feet under construction to be delivered, most of it is being built on a speculative basis, meaning they made the decision to kick off the construction process without requiring any preleasing. The space is mostly getting leased up by construction completion, if not earlier than that. Some of these buildings are actually being pursued by companies to purchase before they get delivered. And so that is a real clear sign that we have a constraint in our supply right now. Along with that, you have got rental rates that are rising faster than we have seen historically because of land prices and construction costs, which have increased significantly over the last five to six years. Companies are doing very well and need high-quality, modern industrial space.
What is your current assessment of the office landscape?
Jacobs: Nearly 60% of people are back downtown and you can tell that because the traffic around rush hour is as bad as it used to be. One of the themes of our Q3 report is that we are no longer seeing the urban-to-suburban flight, which is a great thing as businesses are no longer leaving downtown for reasons motivated by public safety perceptions. On the other hand, we are not yet seeing the suburban-to-urban flight. A lot of businesses will have to move downtown if we are going to see it continue to thrive.
Ohmes: We continue to see more space coming back to the market, either in the form of subleases or companies that are downsizing. They may stay in their present facility, but they also might relocate to a different one and lease a fraction of the space that they previously had leased. We expect that trend is going to go through 2023 and probably into 2024. What is interesting, though, is as companies are trying to decide how much space they need for their work at the office approach.
We also think that a subset of properties is going to get redeveloped or just go away altogether. Older office stock will have to reinvent itself in a meaningful way, offering a strong value proposition that people are attracted to or it will have to be turned into something different.
What is your outlook for the remainder of the year and your key priorities for the next couple of years?
Jacobs: There are still a lot of opportunities and we believe that offices will rebound in a meaningful way. We are already benefiting from some corporate occupiers who are making decisions on their real estate front and figuring out what their hybrid solutions will look like. Smaller occupiers rely on space to drive their culture and connection to employees. Collectively, we haven’t been able to rely on space over the last couple of years to reinforce culture. As the economy sours and layoffs mount, we believe more and more employers will expect their employees to spend an increasing amount of time in the office. We think the pendulum will swing back to the employer with culture being a highlight of importance.
There are some major players downtown that we are in conversations with and contemplating new investments. Downtown has not seen a new office building built since 2000. Some plans are in the mix for a new office tower downtown that would drive a lot of new interest in the downtown. It will likely absorb any tenants already downtown that are looking for best-in-class space as a way to recruit and retain the best talent.
Ohmes: The first half of 2022 was one of the best six months that we have ever had as an organization. Several things were firing on all cylinders in the first six months, and we are starting to see a bit of a pullback on that as we got into the month of August. We are watching our forecast very closely for the balance of the year. Companies and investors do not want to make any mistakes as uncertainty in the economy increases.
Our team of economists believes that if we do go into a recession, it will be shallow and short, and we hope they are right. Until we get into it and start to see the effects of these continued interest rate increases and the inflation number coming down, that could impact a lot of decisions that get made. Through the end of the year and through the first half of next year, there are certainly going to be a lot of questions that people want to have answered.
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