Second half of 2020 tough for much of Twin Cities commercial real estate

Vacancy rates in Twin Cities retail stores, hotels, and offices rose in the second half of last year, suggesting ongoing difficulties for parts of the commercial property sector this year, according to a recent research report by Cushman & Wakefield.

While industrial and residential real estate fared better, the January 2021 Compass Report shows that “the economic headwinds caused by the pandemic had different effects on leasing and sales volumes across the various asset classes in the twin cities,” said Mike Ohmes, general manager of Cushman & Wakefields Minneapolis-St. Paul’s office.

He anticipates debt and equity investments will slowly recover this year and hopes “the increasing commercial real estate activity for all real estate sectors will gain strength over the course of 2021.”

Currently, Cushman & Wakefield, which manages more than 4 billion square feet of real estate worldwide, predicts that commercial developers will add 1.3 million square feet of new construction to the Twin Cities later this year.

While residential and e-commerce-oriented properties performed well, the occupancy and vacancy rates for Twin Cities hotels, retail stores and offices were hit hard in the second half of 2020 due to the pandemic.

Only 33% of all hotel rooms were occupied last year, and more than 45 Minnesota hotels have temporarily closed their doors. This, along with increasing debt levels, resulted in a “slowdown” in sales transactions, according to the Compass report.

The local vacancy rates in the office sector rose from 17% in the second half of 2020 to 18.5%. New leasing activities declined by 42% compared to the previous year, as “the continuing uncertainty about future space requirements largely slowed users’ real estate decisions,” the Kompass report said.

Most of the companies in the partner cities are maintaining remote working arrangements due to the pandemic, so that office towers in the city center and suburban office parks are largely empty. Some companies have applied for rent relief from the landlords.

The story goes on

Interviews with property managers and builders also showed that many office tenants are considering renting less space in the future.

“The amount of available sublet space in the twin cities has increased by 30% since the first quarter of 2020 and reached 1.4% of the total market stock by the fourth quarter,” reported Cushman & Wakefield. That is better than the national vacancy rate for subleases of 2.1% of the inventoried properties.

A subset of the office space – medical offices – was particularly hard hit by the pandemic when Minnesota patients postponed routine wellness checkups and non-urgent medical procedures, the Compass report said.

“Since the inception of COVID-19, lost revenue from voting has accelerated business model changes … and real estate [down]Size decisions began to affect the market in the second half of the year, “the report said.

By the end of last year, more than 50,000 square feet of medical office space was available for sublet, the report said.

But even with difficulties, Cushman & Wakefield found isolated rays of light. Several developers are planning to open new medical practices in the region.

This includes a new 78,000 square meter Xchange Medical project in the direction of St. Louis Park. There are also three new projects under way for Brooklyn Park, including a new Twin Cities Orthopedics Clinic, an expansion for Cirtec Medical and a future surgery center through a joint venture between Allina Health and a division of the UnitedHealth Group.

The compass report found other bright spots in commercial real estate despite the pandemic.

The Twin Cities had residential sales of $ 1.3 billion late last year. The vacancy rate for multi-tenant buildings remained low in the suburbs at just 3.2%. Vacancy rates in the core cities were higher, reaching 7.1% in downtown St. Paul and 8% in downtown Minneapolis.

Factories, warehouses and other industrial properties also performed well late last year. Leasing activity increased 24% to 7.5 million square feet. The increase was due to the increase in e-commerce shopping.

The surge in online shopping has boosted Amazon.com’s business and changed the way Target, Best Buy, Walmart, and other top retailers do business, increasing the demand for fulfillment and distribution centers. As a result, the region’s builders added 2 million square feet of new industrial construction, the Compass report said.

Dee DePass • 612-673-7725