Minnesota commercial real estate outlook favorable

The May 2017 University of St. Thomas/Minnesota Commercial Real Estate Survey indicates a continuation of favorable market conditions for commercial real estate that have been observed in its last three surveys over the last two years.

The biannual survey projects a two-year-ahead outlook for Minnesota’s commercial real estate industry and forecasts potential opportunities and challenges affecting all commercial real estate sectors.

Observations from 2017 have recorded few changes in expectations since December 2016.

“The natural cycle in commercial real estate appears to be running its course. There is some concern that we are near the top of the cycle and that overbuilding may occur in some product types and submarkets,” said Herb Tousley, director of the real estate programs at the University of St Thomas. “While the forecast for 2019 still looks good, the increase in online shopping, higher interest rates, and the continued redefinition of the office environment will remain major factors in the performance of commercial real estate in the coming two years.”

The panel is expecting to see a continuation of the favorable market conditions for commercial real estate that the state has been experiencing for the last several years. As it has for the past three surveys the panel has remained essentially neutral on occupancy rates.

With all of the new product coming on line it is expected that given a little time the market will be able to absorb all of the new space.

Additionally, the panel continues to expect to see rent growth as the economy improves. Development efforts will be helped by an expected moderation in the rate of increase in land prices; however, the price of building materials is expected to increase significantly. The panel is also expecting to see lenders become more risk adverse and tighten their lending standards somewhat.

That results in lower loan amounts and higher equity requirements on development projects. Higher equity requirements make development more difficult since equity dollars are more expensive and using less debt financing tends to reduce the rate of return on a project. Overall, the panelists see continuing activity at or near present levels in most categories of commercial real estate during the next two years.

As was done with all 12 previous surveys, the same group of 50 commercial real estate industry leaders involved in development, finance, and investment were polled regarding their expectations of near-term, future commercial real estate activity. Index values greater than 50 represent a more optimistic view of the market over the next two years, with values of less than 50 indicating a more pessimistic view.

Although the composite index level is similar to previous surveys the pattern of the individual indexes in the current survey is very different.

For more information, visit the Shenehon Center’s complete report for May 2017 at http://www.stthomas.edu/business/centers/shenehon/research/default.html.

The report is also available for free via email from Tousley at [email protected]