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Changing Commercial Real Estate Market | Twin Cities

by Chris Garcia, 3:37 PM on October 28th, 2013, No Comments

The commercial real estate market much like the stock market continues to improve.  Tenants are expanding their operation through lease expansions and building purchases.  The amount of absorption this year will be substantial.

As a result of all the positive news, the market is now aggressively changing.  We are seeing less free rent, higher rates, longer lease terms, and higher construction costs.  Below we have looked at some of the effects of the changing real estate market:

Trends of a Changing Market

Less Free Rent

It was common for the last few years to get 1 month free per term of the lease.  That has changed to ½ month per year of the term and rounded up; i.e. 5 year lease would be 3 months free.  However there are Landlords not offering any.  The amount will depend on the product type, amount of improvements, and credit of the Tenant.

Term Being Pushed

Landlords are pushing lease term.  3 and 5 year leases used to be the norm. Now it is 5 and 7 year leases.  10 and 15 year leases are not uncommon.  This trend will continue.

Rental Rates Rising

A fairly obvious trend of an improving market, Landlords are pushing the rates when they can.  Many are trying to make up for the last few years and looking for 10% increases.

Annual Bumps Increase

Annual increases are being asked up to 3-5% which is a far cry from the 2-3% which were seen from 2008-12.  Some Landlords were doing little to no annual increases, not the case any longer.

Tenant Improvements Increase

The cost to build out space is once again on the rise.  Any General Contractor will tell you that their margins were squeezed from 2008-12.  For a retro fit of an existing office, a minimum of $15 per square foot will be needed and $30 per square foot for a higher quality space (carpet tile, moving/building new offices, higher end finishes).

The real estate market, like any other continues to change.  At this point in time it is moving in the direction of the Landlord with less quality space available.  There still are subleases available and motivated Landlords as well as buildings available for sale.

Survey Says… Rental Rates on the Rise!

by Chris Garcia, 12:39 PM on June 26th, 2013, No Comments

With vacancy rates decreasing and an economy that continues to improve, Landlords are feeling bullish on the Twin Cities commercial real estate market.   Recently we conducted a survey with six prominent Landlords to get an understanding as to what their perspective is in the next 6-12 months.  The questions asked were:

  • Have you raised you rates?
  • Do you plan to in the next 12 months?
  • Any plans to build a new building on a speculative basis?
  • How much free rent will be offered in 2014?

The results of the survey were along the lines of what was expected with one surprise.  Two of the Landlords surveyed were predicting that free rent would go away in 2014.  That would be the first time since 2000 that free rent was not standard in new leases.

Notes from Survey:

  • Every Landlord expects free rent to decrease in 2014
  • As mentioned above, two Landlords predict free rent will go away completely in some sub markets
  • One Landlord expects to build spec in 2014
  • Most will only build if the perfect site presents itself
  • Four Landlords have raised their quoted rates, only 1 has no plans to, and the last has plans to start increasing them in 2014
  • All six would only build 24’ clear and higher for industrial, none have plans for office or flex (single level office with low clear)

Most Landlords are raising their rates on office and industrial between 5-10%.  The market for high clear industrial space is tight and there are more situations where Tenants are competing for space.  Office still has plenty of space available however there are certain areas where it is tight.  For example, Downtown Class A for large blocks of space is extremely tight.  The Bone Marrow Group is looking for 200,000 SF with little to no options.  They are now getting close to a build to suit near Target Field, which should break ground in 2014.

Rental rates have not increased in years and while Tenants never want their cost of doing business to go up, it really has been a long time since Landlords have seen an increase.  It is hard to imagine that free rent will go away in 2014 however if the market continues to improve at the same rate, it very well could.  The Landlord could have the upper hand in 2014 or 2015.

The one item that the Tenant almost always has in their favor is the high cost to replace them.  When a Tenant moves from one location to another, the cost to re-Tenant is almost unavoidable.  Down time, tenant improvements, and real estate fees are associated with finding a new Tenant and are expensive.  That is not likely to change any time soon.

Minneapolis Market Update April 2012

by Chris Garcia, 6:32 PM on April 10th, 2012, No Comments

The Minnesota Commercial Association of Realtors recently published their annual market report.  The market continues to experience positive absorption in both office (1.1M positive) and industrial (1.3M positive).  Vacancy rates are declining and rents are starting to increase.  Below is a summary:

Office- 1.1M positive absorption

Market Vacancy Rate- 16.2%

Minneapolis CBD- 14.3% (Class A 9.2%)

West Metro- 15.3% (Class A 10.3%)

St Paul CBD- 22.4% (Class A 15.9%)

Industrial 1.3M positive absorption

Market Vacancy Rate- 11.8%

Northwest Metro- 10.6%

Southwest Metro- 13.2%

East/NorthEast Metro- 9.5%

Office vacancy remains high while industrial is moving toward a healthy market.  Office is a direct correlation to the jobs market while industrial shows production and consumption is increasing.

February 2012 Market Update

by Chris Garcia, 5:16 PM on February 1st, 2012, No Comments

The overall market is improving steadily, and will continue to do so.  Absorption is expected to be over 800,000 SF for 2012.  United Health Group continues to acquire property while St Jude and Target are gearing up for large expansions with Target building 700,000 SF in Brooklyn Park.

Here is a brief overview of the Twin Cities office and
industrial market:


  • 484,000 square feet of positive absorption for 2011
  • Vacancy rate fell to 19.2%
  • Vacancy rate fell for the first time since 2006
  • Vacancy among class A properties is at 14.9%
  • 656,000 sf of positive absorption recorded for class A
  • Minneapolis CBD showed 116,000 sf of positive absorption showing
    positive absorption for the second consecutive year
  • Minneapolis CBD fell to 18%

Market rates were flat in 2011 and 2012 should see an increase.  Market-wide rates are $23 per square foot gross, versus $22.50 psf at year-end 2010.  There have been no new office buildings since 2009.


The industrial market is showing a 17% vacancy rate at this point.  Leasing activity was decent for
2011 with 600,000 square feet of positive absorption. Rental rates are also flat and average net rates are currently at $4.25 and $8.00.

There are no new multi-tenant projects under way in the Twin Cities however there are some build to suits. The BTS include a 300,000 SF building for Medline, 580,000 SF building
for Sanmar, and a 100,000 SF building for Tri-Star.

Northmarq Compass Market Report July 2011- Summary

by Chris Garcia, 7:33 PM on July 27th, 2011, No Comments

On July 26, 2011 Northmarq’s Minneapolis office released their market report.   The report discusses office, industrial, retail, investment, multi family, and now hotels.  We focused only on Office, Industrial, and Investment Properties.  Here is the summary:


The viewpoint from the report is bullish, especially when you consider that the vacancy rate is high by any standard at 19.2%.  That is 7 percentage points off the 2001 level of 12%.  The absorption for the first half of 2011 was 324K SF.  All of that absorption can be attributed to Class A leasing.  Class A leased over 500K SF alone.

They predict an additional 950,000 SF of absorption for the 2nd half of 2011 which would equate to over 1.25M SF of positive absorption for all of 2011.  That would be a great year.  Here is the summary:

  • No new office buildings under construction at this point
  • Mpls CBD is healthy for Class A office at 10-5% vacant
  • 500,000 SF of leases are signed and not included in their numbers
  • Class B and C are extremely competitive for Tenants.  Both posted negative absorption thus far in 2011
  • Class A posted 500,000 SF of positive absorption alone in 1st half


The outlook for industrial is generally positive.  With 500K SF of positive absorption and a prediction of another 500K SF for the 2nd half, the feeling is that the market is turning the corner.  The northwest lead the way in activity as it did in the last recession with some large deals including Great Northern (100K SF), General Mills (65SF), Medline (300K SF),  and ATK (300K SF).  885,000 SF total was completed in the northwest alone.

  • 540,000 SF positive absorption for 1st half
  • 16.9% vacancy rate
  • Large Users in the market including RR Donnely (300K SF), Sanmar (500K SF), FedEx (100K SF)
  • Bulk Warehouse is at 14% vacancy, close to being a healthy rate
  • Rates predicted to tighten in 2012
  • New construction is not mentioned


More investors are looking at the Twin Cities as a good place to own real estate.  Cap rates are moving downward as the market becomes healthier and liquidity is starting to return.

  • More institutions have focused on the TC Metro area
  • The properties of choice are Class A office, Bulk Warehouse, Grocery Anchored Retail
  • Mpls CBD gets a 100 basis point premium over suburbs 7-8 Cap
  • CMBS market is on the rebound which is helping liquidity
  • Cap Rates are 6.6 for Multi-Family, 8.2 for Retail, 8.6 Industrial, and 8.3 Office

Check out the full report at http://bit.ly/pv7wJR.

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