Report: Local Real Estate Market Hit Bottom in 2010

The growth of overall market vacancy has slowed, and there are many indicators that the local real estate market bottomed out in 2010-but "fundamentals are still very weak across the office, industrial, and retail leasing markets."

The Twin Cities commercial real estate market likely bottomed out in 2010, and recent economic indicators suggest that 2011 will mark the start of a slow rebound, according to NorthMarq Real Estate Services' annual Compass report.

Overall market vacancy in the 13-county metro area rose modestly to total 15.8 percent at the end of 2010. That represents a 0.5 percent change-far smaller than the 3 percent growth experienced between 2008 and 2009.

The local market saw roughly 365,000 square feet of negative absorption in 2010, compared to 4.3 million square feet the previous year. Absorption refers to the difference in occupied space between one point in time and another.

In the second half of 2010, the Twin Cities office market picked up a bit, resulting in 202,000 square feet of positive absorption. Vacancy, however, remained steady at nearly 20 percent.

According to the report, the downtown Minneapolis office market is “coming back to life,” and it's particularly evident in the Class A market, which includes higher-quality buildings that are generally 200,000 square feet or larger and offer better amenities. Outside of the metro area, the Shops at West End development in St. Louis Park is described as “one of the most desirable new business districts in the Twin Cities.” The submarket ended the year with the lowest vacancy rate in the metro area.

The medical office market remained relatively stable, outperforming the general office market. Two significant developments that are underway include the Ridgeview Medical Center's Two Twelve Medical Center in Chaska and the Savage Medical Building.

The retail market also experienced a better second half of the year, resulting in 374,000 square feet of positive absorption. And an increase in demand at retail centers allowed some landlords to raise rental rates.

The industrial market fared the worst, with vacancy rising to 17.2 percent-the highest number reached in more than 10 years.

The report indicates that the local market has likely bottomed out. “However, fundamentals are still very weak across the office, industrial, and retail leasing markets,” the report states. “Recent economic indicators such as the unemployment rate have not been overly encouraging, setting the stage for a slow rebound in 2011.”

Looking forward, the report says that landlords are “well-advised to remain on the offensive in terms of attracting and retaining tenants” in 2011. It also projects an uptick in investment activity this year, as well as an increase in construction costs as a result of steeper materials and energy costs coupled with increased construction activity.

Bloomington-based NorthMarq provides a variety of commercial real estate services, including brokerage, property and facility management, real estate advisory services, and project management.