A tough year is expected for suburban offices and most regional shopping malls, among others. But there are deals to be had.
Looking ahead, Mark Kolsrud of Cassidy Turley predicts that “we’re going to see continued investor interest in 'core assets,’ including newer industrial properties … and high-quality, well-leased office properties, preferably in downtown Minneapolis.” But after that, he said, “it falls off very quickly.”
Despite hopes that commercial real estate will break out of its protracted slump, local experts say 2012 will be much like last year.
The consensus is that we're in for a long, grind-it-out recovery with only a few bright spots. Recent signs of job growth are encouraging, but there likely won't be enough hiring to restore demand for office space to pre-recession levels.
Large employers have figured out how to get by with less office space. And cash-strapped consumers have continued to limit their spending, affecting the growth of retail centers, and thus the rents landlords can charge tenants.
The fortunes of the various types of commercial real estate -- office, industrial, retail and multifamily -- can best be measured by the amount of investor interest they're attracting. According to an analysis by PriceWaterhouseCoopers and the Urban Land Institute, the winners this year will be high-profile downtown office buildings and income-producing warehouses near transportation hubs, as well as full-service hotels and grocery-anchored neighborhood shopping centers.
A tough go is expected in 2012 for suburban offices, most regional shopping malls and "commodity" buildings in out-of-the-way office-campus settings.
"My prediction is that we're going to see continued investor interest in 'core assets,' including newer industrial properties with creditworthy tenants, and high-quality, well-leased office properties, preferably in downtown Minneapolis," said Mark Kolsrud, a real estate investment specialist with Cassidy Turley's Minneapolis-St. Paul office.
But after that, he added, "it falls off very quickly," with plenty of suburban office and retail properties that will likely continue to languish with high vacancies.
The upside is that for savvy local buyers with a long-range outlook, there are plenty of diamonds-in-the rough to be had, Kolsrud added.
Lawrence Yun, chief economist for the National Association of Realtors, said a slowly improving economy will mean modest improvements in commercial vacancy rates across the country in 2012.
His forecast predicts office vacancies will decline 0.6 percentage point in the coming year, while industrial vacancies will drop 0.4 point and retail vacancies will go down 0.8 point.
The real estate consulting firm Deloitte agreed in a recent report there will be modest gains in 2012, but warned strong headwinds are delaying the recovery, including subdued consumer spending, cutbacks in government spending, stagnating job growth, the European debt crisis, continuing home foreclosures and negative home equity.
Mike Ohmes, executive vice president in charge of brokerage services at Bloomington-based Cushman & Wakefield/NorthMarq, also said signs point to a continuing but tenuous recovery in the commercial space markets this year.
"Last year started out disappointingly, but as it progressed, we became more optimistic and we finished with optimism as well," he said. "Retail sales were up. People are starting to part with their money again. We're starting to see some modest improvements in jobs."
One of big winners for Ohmes' company, which also includes developer United Properties, are grocery-anchored retail centers. UP's Prairieview Shopping Center in Eden Prairie, for instance, leased up to 100 percent last year. Anchored by a Rainbow Foods store, it gained Hirshfield's as a key, 4,248-square-foot tenant at a time when the standard neighborhood retail vacancy was at 14 percent.
But major issues still persist, he warned, saying that for a real recovery in the commercial real estate markets, business tenants need more reassurance that government deficit spending is reduced and public sector finances are stabilized.
Don Jacobson is a St. Paul-based freelance writer. He can be reached at 651-501-4931.