Commercial Real Estate Remained Strong in 2019

Commercial Real Estate Remained Strong in 2019

Overbuilding in some sectors of apartment and hotel markets an emerging concern

The year 2019 is now in the rearview mirror, but a new market report from Cushman & Wakefield Minneapolis-St. Paul shows that it was a very solid year for commercial real estate in the Twin Cities. C&W Minneapolis-St. Paul released its latest “Compass” report last week, tracking stats through the end of the fourth quarter.

The market for industrial space was particularly strong. The vacancy rate fell to 6.8 percent, which Cushman & Wakefield says is the “lowest ever recorded for this market.” Industrial users absorbed more than 2.9 million square feet of industrial space in 2019. (“Absorption” measures the change in occupied space from one reporting period to another. Positive absorption generally means tenants are leasing more space; negative absorption signals that they are trimming or giving up space.)

The office market posted a solid 760,000 square feet of absorption for the year. Downtown Minneapolis accounted for 60 percent of that uptick, with about 454,000 square feet of absorption. But the office vacancy rate in downtown Minneapolis is historically high at 19.1 percent; that vacancy number climbs to 19.9 percent if available sublease space is also counted. C&W reported the overall office vacancy rate across the metro at 17 percent. The western suburban market, which includes the West End area, remains one of the tightest office markets with an overall vacancy rate of 12.5 percent and a Class A vacancy rate of 10.3 percent.

Downtown St. Paul saw negative absorption of roughly 58,000 square feet. While the overall year was solid, C&W’s stats show that the market overall lost ground in the fourth quarter of 2019, with negative absorption of 24,000 square feet of space.

Per the report, retail and medical office properties are both stable.

Development of new apartments and hotels remains strong, but a few cracks are starting to show in the market.

With respect to hotels, C&W reports: “It was inevitable that the Twin Cities hotel sector would cool. While demand is still growing, supply has outpaced demand.”

As for the overheated apartment market, C&W notes: “Absorption is generally keeping pace with new supply; however, downtown Minneapolis is experiencing some softening due to the concentration of new product, and tenant concessions are being offered.”

Tenant concessions are deals such as a month or two of free rent to lure renters.