Active Real Estate Market Warms Up Minnesota
Minnesota’s economic growth recently has faced a labor shortage and high property taxes. “We will continue to be among the strongest performing states in the Midwest,” says Keith Collins, CCIM, of CB Richard Ellis in Minneapolis. “However, because of the labor shortage and the high cost of doing business, growth will likely be below the national average.” Commercial real estate professionals weigh in on how various property segments have performed under these conditions.
In Minneapolis and St. Paul, the demand for housing is outpacing supply. “Despite low vacancy rates and strong rental growth, relatively little new construction has come on line,” Collins says. Barriers to new construction include a lack of available land zoned for high-density developments, high construction costs, property taxes that are two times higher than the national average, and communities that are resistant to high-density developments, he says.
About 3,500 units will come on line this year, and Collins says more will be added over the next few years. “New construction of apartments will continue to increase as developers try to find land,” he says. “We can also expect developers to seek out redevelopment opportunities, especially in-fill sites in downtown Minneapolis and downtown St. Paul.” Financing is readily available for these projects, he says.
The multifamily occupancy rate in the Twin Cities has held steady between 98 percent and 99 percent, says Martin Waibel, CCIM, of Michel Commercial in suburban Arden Hills. Studio apartments there average monthly lease rates of $452.37, one-bedroom units average $612.91, and two-bedroom units average $802.05.
“Average sales prices are up substantially in recent years,” Waibel says. Class A units sell for an average of $70,000, class B units average $50,000, and class C units average prices in the mid-$30,000s.
However, Collins says multifamily sales activity is slow in the Twin Cities, especially for class A buildings. “Our market has historically been dominated by local ownership who would rather hold their properties than sell and pay the significant capital gain taxes,” he says.
Both Waibel and Collins say a critical need for low-income housing exists throughout the state. “The affordable-housing crisis will continue as legislators try to find ways to spur new development for low-income families,” Collins says.
The retail segment in Mankato, located in southern Minnesota, has experienced a recent growth spurt. “General Growth [Properties] has added a 1 million-sf mall,” says Tim Lidstrom, CCIM, of Lidstrom Commercial Realtors in Mankato. “Wal-Mart, Target, Sam’s [Club], Best Buy, ShopKo, Kmart, [and] Menards all have new or expanded stores.”
Vacancy rates in the area vary from near zero percent to 15 percent depending on the location. “Around the General Growth mall there is hardly space available,” Lidstrom says. “Downtown areas are more challenged.”
Retail lease rates also vary, averaging between $6 psf and $16 psf for stand-alone and strip-mall space. Enclosed mall space leases for more than $16 psf, which is stable to up from recent years, Lidstrom says.
Steady construction of small strip malls, single-tenant buildings, and restaurants continues, Lidstrom says, which could develop into a problem if consumers become conservative. “Mankato has benefited from a trend that has been going on for years: spend all you have, save very little,” he says. “If this changes in the future, the retailers are going to be challenged.”
The Twin Cities retail segment has performed equally well. “The market in the metro area of Minneapolis and outlying areas is quite active,” says Gary Ascher, CCIM, of Park Commercial Properties in Edina, a Minneapolis suburb. “[But] deals are taking a little bit longer now that there’s more negotiation becoming a part of every deal on behalf of both tenant and landlord.”
All this activity has prompted an increase in lease rates, Ascher says. “The rates have been moving up where owners have controlled their operating expenses,” he says. “We’re seeing rates in the mid- to high teens as being more common today than in the past five years.”
Ascher acknowledges that real estate taxes are high in the state but knows that not much can be done about them. “Of course high taxes [are] a fact of life in Minnesota,” he says. “We just have to live with the tax base the way it is.”
Overall, Ascher says retail is in good shape. “Everyone’s busy, everyone’s doing deals,” he says. “It’s a good, strong market.”
The southwestern Minneapolis office market has been marked by low vacancy rates, high lease rates, and continued development, says Jill Rasmussen, CCIM, SIOR, of Northco Real Estate Services in Edina. “The overall office vacancy rate [was] 5.9 percent in 1999, down from 7.3 percent a year ago,” she says.
“Net rental rates [are] at an all-time high, but remained flat in 1999,” Rasmussen says. Class A properties averaged between $15 psf and $19 psf annually, class B properties averaged between $10 psf and $14.50 psf annually, and class C properties averaged between $9 psf and $12.50 psf annually, she says.
Sales have dropped off in the area due to the increase in new construction. “Investors question the ability to continue to grow rental rates with the amount of new product being delivered to the market,” Rasmussen says. “Seven new office projects [multitenant] totaling 616,500 sf have been completed in southwest Minneapolis. Nine totaling 1.2 million sf are under construction and five are planned totaling 515,000 sf.”
The office market in southern Minnesota also is in a growth period, says Mac Hamilton, CCIM, CPM, of Hamilton Real Estate in Rochester. “We are experiencing unprecedented business expansion,” he says. A new 26,000-sf building that is 65 percent preleased just sold for $3 million and a 60,000-sf building that is half-leased is coming on line this June. “Demand has elevated sales value,” he says.
Lease rates for new suburban office space range from $12 psf to $13 psf, while new downtown office space averages $20 psf.
The area’s occupancy rate is up significantly from recent years, reaching 95 percent, Hamilton says. He expects the rate to stay high over the next few years. “Continued business expansion regionally should keep demand strong,” he says.
Shifting IndustrialThe Twin Cities industrial market is strong and stable but undergoing some changes, says Kay Harris, CCIM, of Kay Harris Real Estate Consultants in Minneapolis. “There is a fair amount of activity still going on, but not the frantic rush there was by tenants earlier,” Harris says. “It is less of a landlord’s market than it has been.”
Instead, the area has become a seller’s market. “There is more demand for buildings to purchase than for lease, and these are in short supply,” Harris says. “The [real estate investment trusts] bought up most of the larger product in the last four to five years and paid high numbers -- in the $40s psf for a lot of product.”
Recently, REITs have targeted older buildings with structural deficiencies that can be fixed. Harris says the prices for these buildings range between the mid-$30s psf and mid-$40s psf. New construction is occurring to meet the demand for buildings.
As a result of the new development, the vacancy rate recently has increased from between 5 percent and 7 percent to between 10 percent and 15 percent. Lease rates also are up a little from recent years, Harris says.
Indianapolis Real Estate Races On
Despite a change from a manufacturing to a service base, the Indianapolis economy remains strong. All commercial property segments have responded positively to the shifting economy.
Active subleasing, new construction, and interested investors define the office market in Indianapolis, says Drew Augustin, CCIM, SIOR, of Olympia Partners in Indianapolis. The downtown class A vacancy rate is 7.8 percent, while the suburban class A rate is 6 percent.
“New construction is requiring higher rental rates,” Augustin says. “Older buildings are moving rates just under new construction pricing.” Class A properties downtown lease for $21 psf to $23 psf and class A suburban properties lease for $21 psf to $24 psf.
“The greater Indianapolis industrial real estate market continues to boom,” says Janet G. Crump, CCIM, of Colliers Turley Martin Tucker in Indianapolis. More than 4 million sf of new construction is underway or was completed through the first three quarters of 1999, she says. Despite the new product, the occupancy rate increased from 92.6 percent at year-end 1998 to 93.2 percent at second-quarter 1999.
Numerous sales also are occurring as the demand for good-quality, free-standing buildings remains high, Crump says. “Prices have approached -- and sometimes exceeded -- reproduction costs,” she says. “Sales prices in the $25 psf to $35 psf [range] are the norm with some sales exceeding $50 psf.”
As the population ages, renting has become an attractive long-term alternative to owning, says Stephen R. LaMotte Jr., CCIM, of CB Richard Ellis in Indianapolis. “The renter-by-choice segment of the market is becoming deeper as evidenced by the increasing number of high-end, highly amenitized communities,” LaMotte says. New apartment construction in the city has steadily increased since 1994 and 3,700 more units are expected to come on line this year.
Lease rates also have risen. “The overall average rental rate in 1999 was $563 -- 66 cents psf -- and gross rent growth was 2.6 percent,” LaMotte says. At year-end 1999, the occupancy rate was 92 percent.
The expansion of existing stores and the introduction of new ones have fueled construction in the Indianapolis retail market. “Several new power centers have been completed, and smaller (10,000-sf to 20,000-sf) convenience centers have been built on good corners to serve the neighborhoods,” says Ted Kleinmaier, CCIM, of Retail Realty in Indianapolis.
Despite the new developments, the occupancy rate has risen to almost 95 percent in recent years. Lease rates also have crept up in the last few years. “New construction for small (1,200-sf to 2,400-sf) users is leasing from $14.50 psf to $17.50 psf with prime locations getting $20 psf,” Kleinmaier says.