Commercial Real Estate Pros. More Optimistic

A recent survey of 50 local real estate professionals showed signs of optimism about the commercial real estate market during the next two years, despite an anticipated increase in land prices and building materials.

Minnesota's commercial real estate industry leaders are displaying “qualified optimism” about where the industry is headed between now and 2013, according to a study released Wednesday by the University of St. Thomas Opus College of Business.

The Minnesota Commercial Real Estate Survey, which is conducted twice annually, is based on responses from 50 industry leaders. They are asked questions about their expectations for future vacancy and rental rates, development costs, and new project financing. The results are based on an index of zero to 100-with values greater than 50 indicating “optimistic”; at 50 meaning “neutral”; and below 50 representing “pessimistic.”

The experts' expectations were “somewhat brighter” than they were during the survey conducted last fall, as the composite index climbed to 55.6, up from 54.1.

The index for rental rates jumped significantly from 56.4 to 70.8, while the occupancy level index rose from 64.9 to 71.4-meaning that real estate professionals are anticipating a greater demand for space during the next couple of years.

But the panelists did a complete 180 with respect to land prices. Last fall, they reported a slightly optimistic expectation that land prices would continue to moderate, resulting in an index of 50.5. That index plummeted to 37.5 this spring, and the survey described rising land prices as “a hindrance to new development, making it more difficult to obtain financing and adequate returns for investors.”

Experts also expect a jump in the price of building materials; that index dropped from an already low 37.2 to “a decidedly negative 25.”

The panel indicated that investors continue to seek out quality investments but they are being more diligent about how they evaluate risk and return when considering various alternatives. The survey also suggested that credit markets are expected to improve, making financing easier to obtain.

“The road to recovery is never easy or quick, but financing terms are getting better, equity is on the rise, and rent and occupancy has shown solid growth-making for encouraging times for the Twin Cities,” Herb Tousley, director of real estate programs at the University of St. Thomas, said in a statement.

The complete survey results can be downloaded here.