Real estate notebook: How CoStar sees the Twin Cities commercial market

The Star Tribune doesn't have an account with the CoStar Group, the lead provider of commercial real estate data, so I jumped at the chance recently to pick the brain of CoStar's Minneapolis market analyst Michael Roessle and chat all things commercial real estate.

Compared to the other markets that CoStar keeps tabs on across the country, the Twin Cities commercial real estate market typically falls in the middle, Roessle said.

"In general, in terms of rental rates, vacancy rates, fundamentals like that, this market historically and still for the most part tends to be pretty square in the middle of the pack," Roessle said. "It's not the dynamic growth that you may see in coastal markets and it's certainly not the near the bottom."

He added, "This market has really been characterized by its stability and I think that really helps this market weather downturns better than a lot of other markets."

Roessle's assessment of the Twin Cities office scene reflects the flat outlook predicted in other recent local analyses.

"The office market isn't as robust as perhaps the multifamily or even the industrial sector," he said.

A number of office tenants have recently relocated to other buildings, but while that churn creates a lot of leasing activity, there hasn't been much market growth.

While rental rates for newly renovated buildings are rising, the growth isn't marketwide. Competition for tenants is leading property owners to give more concessions for tenant improvements, he said.

Speculative office buildings, which are built without pre-lease agreements with major tenants, are becoming less common, though there have been a few projects in popular areas like the North Loop and Uptown that are under construction.

"At the end of the day, that's probably ultimately a good thing for this market because if there is an economic downturn over the next couple of years it will be better positioned," Roessle said. "There won't be a flood of speculative space."

In terms of retail space, Roessle said what is happening in the Twin Cities is not much different from what's happening in other parts of the country.

In order for a retailer to remain in business, the company needs to "offer something that the internet can't provide," Roessle said.

"It pushes brands to become innovative and to refresh their brand and stay modern," he said.

The changing retail scene is spilling into industrial real estate. Growth in e-commerce has driven the need for last-mile distribution facilities including in the Twin Cities area, Roessle said.