Commercial real estate deals show July improvement, but recovery seen more than a year away

Commercial real estate fundamentals improved in July, but the pandemic continues to affect development projects and is likely to remain a significant challenge for more than a year, according to a COVID-19 impact report released Tuesday by the NAIOP Commercial Real Estate Development Association.

Surveys of 347 development firms and brokers nationwide found positive growth of industrial, office and multifamily building acquisitions in July, "with more respondents reporting having witnessed these deals than in previous months," said association president and CEO Thomas Bisacquino.

Some 92.6% of respondents reported an increase in overall building acquisitions activity in July. That compares with just 70.7% in June.

Since the industry's COVID-19 impact survey began in April, acquisitions and new development activity for both industrial and office buildings proved relatively strong last month. In fact, office deals improved in July for the first time since April. Some industrial building buyers noted their businesses were helped by the pandemic's acceleration of e-commerce.

Still the association suggested caution and noted that such upticks were not distributed evenly across the commercial real estate sector.

For example, office building deals remained "uncommon" in certain markets, he said. In fact, 52% of those surveyed reported no office deals in the last three weeks.

Retail property deals also remained particularly elusive, with 79.6% of those surveyed reporting no new retail acquisitions or development last month, Bisacquino said.

Economists noted that those findings were far from surprising given the rise in retail bankruptcies such as last months' filings by Lord & Taylor, Brooks Brothers and Sur La Table.

Activity for new multifamily housing projects proved mixed with half of survey respondents reporting an uptick in building acquisitions while 40% reported a surge in new construction.

With the coronavirus surging across most of the country, real estate developers and brokers said the impacts of COVID-19 were expected to affect their industry for more than a year.

In the Twin Cities, projects such as the opening of the highly anticipated Daytons project remain on hold.

The renovation into office space of the former Macy's on Nicollet Mall in Minneapolis was to open its lower level retail and food market by June.

Instead, that grand opening was postponed and there has yet to be an announcement about tenants in the upper floors, which are being converted into offices.

Jim Durda, a longtime property manager and the general manager of City Center in downtown Minneapolis, said downtown has seen a flurry of big development projects in recent years.

Those already in development, like the 34-story RBC Gateway project, which includes Four Seasons Hotel and the new headquarters for RBC Wealth Management project and the nearly finished Thrivent headquarters downtown, are proceeding as scheduled.

But as for new deals?

"None downtown," he said. "Right now I think demand is in check while people reset."

Durda added he doesn't expect deals for new commercial buildings downtown until tenants' workers return downtown and already-vacant office space is leased.

Statewide, broker and research firm JLL said in its second quarter report last week that "spec building" activity halted in the Twin Cities with the arrival of COVID-19.

But manufacturing and distribution demand is now rebounding and should benefit building or construction deals, particularly for medical device, pharmaceutical and other life-sciences firms.

Dee DePass • 612-673-7725