Local Real Estate Pros Convey “Eroding Confidence”

A twice-yearly survey by the University of St. Thomas Opus College of Business indicates that local real estate professionals are less confident about the near future of the commercial real estate industry than they were just six months ago.

Local real estate professionals involved in development, finance, and investment have become less optimistic about the prospects of the commercial real estate market for the next two years-reversing a positive trend observed during the last year and a half.

That's according to survey findings released Monday by the University of St. Thomas Shenehon Center for Real Estate. The Minnesota Commercial Real Estate Survey-which earlier this month polled 50 real estate leaders about their expectations of local market conditions for the next two years-marked “the first step back from positive outlook in its two-year history,” the school said.

The survey, which is conducted twice annually, asks industry leaders 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 most recent composite index totaled 51.2, compared to 55.6 from the previous survey, which was conducted in June. (The index was 54.1 for the survey conducted last fall.)

St. Thomas said that the decline from June marked the largest movement of the composite index since the survey's inception in 2010, and it represents “a sign of eroding confidence.”

“Economic uncertainty over the past six months seems to have taken its toll on commercial real estate outlook in the Twin Cities,” Herb Tousley, the University of St. Thomas Opus College of Business' real estate programs director, said in a statement.

Tousley, who conducts the survey with Thomas Hamilton, an associate professor of real estate, said that the study “showed a lot of agreement amongst panel members that their mood has been tempered.”

While those surveyed were more optimistic than pessimistic, expectations diminished in several key areas. Respondents were less confident about an increase in rental rates and occupancy, as forecasts for the price and supply of space both dropped significantly: The index for rental rates dropped from 70.8 to 66.5, while the occupancy index fell from 71.4 to 67.

The survey panel continued to display concerns about an increase in land and building material prices, which could deter new development. The building material index is now at 27.9, up slightly from 25 after the index fell sharply in the spring. The land-price index, meanwhile, was 38.1, compared to 37.5 in the spring.

Financing is also a concern, as respondents indicated that lenders will continue to be very selective in their evaluation of deals, “drawing back on the optimism that credit markets will bring about attainable loan-to-value requirements and lead to greater financing.”

Full results from the survey conducted this fall can be found here. All past Minnesota Commercial Real Estate Surveys are available here.