Midwest Real Estate News January February 2010 : Page 1

midwest WWW.REJOURNALS.COM St. Paul’s Boulder Lakes III in Eagan, Minn., provides one sign that the industrial market in Minneapolis/St. Paul is still a stable one. (Photo courtesy of Interstate Partners.) by Dan Rafter, Editor Whitney Peyton is a realist. He knows that the days of the commercial real estate boom are long gone. But Peyton, senior managing director at the Minne- apolis office of CB Richard Ellis, isn’t a defeatist, either. He’d consider himself more of an optimist when it comes to the commercial real estate business in the Twin Cities of Minneapolis/St. Paul. That’s why Peyton was predicting that there will be commercial real estate transactions in the Twin Cities in 2010. He also predicted that this new year will be a stronger one than was 2009. “I think we’ll bounce around at the bottom for the next two quarters, but that we’ll see improvement in the third and fourth quarter of this year,” Peyton said. “It’s not going to be business as it was in 2006, 2007 or 2008. But there will be business. Business will occur here this year.”See? That’s being realistic. But it’s also being optimistic. Peyton isn’t alone, though. The Twin Cities commer- cial market has been resilient even during the worst of the commercial real estate slump. While the com- mercial markets on both the East and West costs has been tumbling badly, the market in the Minneapolis/ St. Paul region has been down but not dramatically so. It’s a bit of a cliché these days, but it also happens to be true: The major cities in the Midwest, with a few exceptions, are a bit on the boring side. They don’t experience the major highs or the stomach-churning lows that cities in California, Nevada or Arizona do. During the boom times, that means that cities like St. Paul andMinneapolis don’t see explosive growth in the number of commercial transactions. But on the flip side, they don’t see terrible plummets in business when things are going bad. And that’s whereMinneapolis/St. Paul is today: Busi- ness is certainly down from the busiest days of the commercial real estate boom. But it’s not down nearly as much as it is in other markets. “I do believe that the Midwest by its nature tends to be less cyclical than the two coasts,” Peyton said. “That’s really the result of our diversified economy. It’s probably the result of some Scandinavian influences in our society, too. By our nature, we tend not to get overly enthusiastic during the upturns or overly pes- simistic during the downturns.” Milwaukee Looking toward a bright 2010 Page 12 R E A L E S T A T E N E W S® THE DAKOTAS | ILLINOIS | INDIANA | IOWA | KANSAS | KENTUCKY | MICHIGAN | MINNESOTA | MISSOURI | NEBRASKA | OHIO | TENNESSEE | WISCONSIN JANUARY/FEBRUARY 2010 VOLUME 26, ISSUE 1 Twin Cities 2010: Better times ahead? Mixed numbers A look at market research from Marcus & Millichap Real Estate Investment Services shows that Peyton’s basic assertions are valid: Commercial business is down in the Twin Cities. But the Minneapolis/St. Paul region has not seen it slow nearly as much as have other similarly sized cities. Marcus & Millichap said that the Twin Cities’ office market realized a negative net absorption in 2009 that was expected to rise past 1.2million square feet. This is the first time this figure has been this high since 2002. At the same time, the vacancy rate in the office sector was expected to hit 19.4 percent in 2009, up 270 basis points from 2008. Rents had dropped in the year, according toMarcus &Millichap, 0.8 percent to $21.71 a square foot. There was some fairly positive news from the office market, though: Office deliveries were expected to reach 852,000 square feet by the end of 2009. That’s not nearly a record pace, but it is better than the 663,000 square feet of office space that came online in 2008. continued on page 21

A Bright Future In Minneapolis/St. Paul? .

Dan Rafter

Of the commercial real estate boom are long gone.<br /> <br /> But Peyton, senior managing director at the Minneapolis office of CB Richard Ellis, isn’t a defeatist, either.<br /> <br /> He’d consider himself more of an optimist when it comes to the commercial real estate business in the Twin Cities of Minneapolis/St. Paul.<br /> <br /> That’s why Peyton was predicting that there will be commercial real estate transactions in the Twin Cities in<br /> <br /> 2010. He also predicted that this new year will be a stronger one than was 2009.<br /> <br /> “I think we’ll bounce around at the bottom for the next two quarters, but that we’ll see improvement in the third and fourth quarter of this year,” Peyton said. “It’s not going to be business as it was in 2006, 2007 or<br /> <br /> 2008. But there will be business. Business will occur here this year.”See? That’s being realistic. But it’s also being optimistic.<br /> <br /> Peyton isn’t alone, though. The Twin Cities commercial market has been resilient even during the worst of the commercial real estate slump. While the commercial markets on both the East and West costs has been tumbling badly, the market in the Minneapolis/ St. Paul region has been down but not dramatically so.<br /> <br /> It’s a bit of a cliché these days, but it also happens to be true: The major cities in the Midwest, with a few exceptions, are a bit on the boring side. They don’t experience the major highs or the stomach-churning lows that cities in California, Nevada or Arizona do.<br /> <br /> During the boom times, that means that cities like St. Paul and Minneapolis don’t see explosive growth in the number of commercial transactions.<br /> <br /> But on the flip side, they don’t see terrible plummets in business when things are going bad.<br /> <br /> And that’s where Minneapolis/St. Paul is today: Business is certainly down from the busiest days of the commercial real estate boom. But it’s not down nearly as much as it is in other markets.<br /> <br /> “I do believe that the Midwest by its nature tends to be less cyclical than the two coasts,” Peyton said.<br /> <br /> “That’s really the result of our diversified economy. It’s probably the result of some Scandinavian influences in our society, too. By our nature, we tend not to get overly enthusiastic during the upturns or overly pessimistic during the downturns.” Mixed numbers A look at market research from Marcus & Millichap Real Estate Investment Services shows that Peyton’s basic assertions are valid: Commercial business is down in the Twin Cities. But the Minneapolis/St. Paul region has not seen it slow nearly as much as have other similarly sized cities.<br /> <br /> Marcus & Millichap said that the Twin Cities’ office market realized a negative net absorption in 2009 that was expected to rise past 1.2 million square feet. This is the first time this figure has been this high since 2002.<br /> <br /> At the same time, the vacancy rate in the office sector was expected to hit 19.4 percent in 2009, up 270 basis points from 2008. Rents had dropped in the year, according to Marcus & Millichap, 0.8 percent to $21.71 a square foot.<br /> <br /> There was some fairly positive news from the office market, though: Office deliveries were expected to reach 852,000 square feet by the end of 2009. That’s not nearly a record pace, but it is better than the 663,000 square feet of office space that came online in<br /> <br /> 2008. In the retail sector, vacancy rates rose to 9.8 percent in 2009. But because of projects that were already in process, the Twin Cities did see 937,000 square feet of new retail space added to the market in 2009, compared to 800,000 added in 2008, according to Marcus & Millichap.<br /> <br /> On the industrial side, only 505,000 square feet of new industrial space hit the Twin Cities market in 2009, down from 1.2 million square feet one year earlier. The vacancy rate for the industrial sector stood at 10.1 percent in 2009, Marcus & Millichap said.<br /> <br /> In the multi-family sector, vacancy rates rose above 5 percent for the first time since 2006, the report said.<br /> <br /> Financing is key As it is in most markets, the key to a successful 2010, and beyond, in the Minneapolis/St. Paul region lies in the ability of commercial developers to acquire the financing they need to get their projects off the ground.<br /> <br /> Greg Miller, president of Interstate Partners in St. Paul, said that obtaining construction financing remains the biggest hurdle in the Twin Cities region. He had hope, though, that 2010 will be better in this regard than 2009 was.<br /> <br /> But he doesn’t see traditional banks as being the institutions providing this hope. Instead, he is looking toward alternative financing as being a more important source of funds for commercial developers in 2010.

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