Report says Twin Cities commercial real estate outpaced expectations in first half

Office, industrial and retail space continues to be filled in the Twin Cities even as companies consolidate their space and some retailers close stores.

According to real estate firm Cushman & Wakefield's biannual Compass report released Wednesday, absorption of multitenant properties in the first half of the year outpaced projections, bringing the area's vacancy rate to 10.6 percent at the end of June, slightly better than the 10.8 percent vacancy rate reported for the same time last year.

"The market outperformed what we thought it would do in the first half of this year, and it looks like there is momentum to have a very strong second half of 2018," said Mike Ohmes, managing principal for the Twin Cities office of Cushman & Wakefield. He added, "As you get to this point in a cycle, incremental improvement becomes more challenging."

Industrial continued to drive results, accounting for 1.6 million of the 1.8 million square feet of space absorbed during the period. About 184,000 square feet of office space was absorbed with only about 500 square feet of retail being filled overall.

The industrial market has been a strong performer in the commercial real estate industry for years. The pace of new construction of warehouses and other industrial space accelerated as 2018 progressed with more than 1 million square feet of new space expected by the end of year, including a 161,000-square-foot industrial building for North Star Sheets in Cottage Grove.

The other submarkets are on slightly shakier ground.

The reshaping of the retail landscape continues. Bon-Ton Stores, the parent company of Herberger's, declared bankruptcy earlier this year — which will result in store closings in the Twin Cities. Toys "R" Us and Babies "R" Us, which also filed bankruptcy, closed their remaining stores. The closings mean chances for new retailers and new redevelopments to backfill the space, Ohmes said.

"There is still expansion that's occurring, but it's a different kind of expansion. It's convenience. It's discount. … Retail is one of those things where it's always reinventing itself," he said.

The office market is stable and steady though users continue to consolidate space to be more efficient, Ohmes said.

"Even though there's activity and companies are out looking for new office digs, for the most part, they are trying to be smart about it and be as efficient as they possibly can," Ohmes said.

The report questions if it's possible that the Twin Cities will experience a "creative office overload" as buildings continue to be renovated such as the former Dayton's store that is being converted into an office and retail complex.

"It remains to be seen how deep the market is for creative office space and how much rent tenants will be willing to pay for these expensive redevelopments," the report said.

For the second half of the year, office absorption is projected to remain flat or possibly be negative.

One area in Twin Cities real estate that remains red hot is apartment development. Renter demand is still outpacing supply with apartment vacancies around 2.8 percent. More than 5,500 apartment units are expected to be completed this year.

More foreign investment groups and more relatively new private equity firms are recognizing the Twin Cities as a good investment opportunity as they look to purchase commercial real estate assets as well, Ohmes said.

Nicole Norfleet • 612-673-4495

Twitter: @nicolenorfleet