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A Whole Foods grocery store will anchor this development in downtown Minneapolis, which will include almost 300 luxury apartments.

Renee Jones Schneider, Star Tribune

Twin Cities experts expect strong 2013 real estate market

  • Article by: DON JACOBSON
  • Special to the Star Tribune
  • December 28, 2012 - 2:51 PM

After a 2012 marked by some hopeful signs of recovery in the Twin Cities commercial real estate markets, 2013 will likely hold more of the same -- provided the fiscal cliff negotiations in Washington are resolved quickly, a group of local experts says.

Top players in the Minneapolis-St. Paul industry e-mailed their predictions to Bricks & Mortar for the coming year, and they indicate fairly strong feelings that the multifamily, industrial, investment and medical markets will continue their strong performances from 2012.

Even the long-struggling office and retail sectors could show modest improvements, the experts added, but those sectors are more dependent on a timely political deal being struck in Congress to avoid the federal tax hikes and steep budget cuts set to phase in Jan. 1. Some economists believe failure to reach agreement could trigger another recession. That uncertainty is holding back the commercial real estate markets, wrote Mike Salmen, a principal with Transwestern. 

"Overall, I am very optimistic about 2013 for the commercial real estate industry in the Twin Cities," Salmen said, but cautioned his outlook was "tempered by the short-term impact of the fiscal cliff or whatever modified tax legislation is ultimately agreed to. This uncertainty will put many commercial real estate players on the sidelines until the implications of the tax laws are more clearly understood."

Steve Chirhart of TaTonka Real Estate Advisors agreed: "Our No. 1 goal as a nation should be to restore confidence in both consumers and corporations by getting our spending and fiscal house back in order and creating an environment in which we have certainty. If this happens, I see strong growth in the economy which will also bode well for housing and the commercial real estate markets."

Said Richard Keller, a first vice president with CBRE, said "I anticipate the fiscal cliff issue will be resolved within the next few weeks, which will cause the economy to settle down. This, combined with the re-election of President Obama, will stimulate economic growth due to the fact that businesses will know where they stand -- one way or another.''

Most respondents were pretty sure the boom in the Twin Cities' multifamily and industrial scenes will continue, thanks to continuing strong demand.

"Both of these product types showed strength in 2012, evidenced by a significantly higher level of new construction than we have seen in many years. We expect more of the same in 2013," Transwestern's Salmen said. 

Rick Collins, Ryan Cos. vice president of development, predicted that while the fundamentals will remain good, the fast pace of apartment-building may moderate due to the sheer volume of this year's activity. 

"[The] apartment market may slow down a bit, as projects already under construction need to be absorbed before significant new inventory of projects is added," he wrote. His company is building the 286-unit 222 Hennepin Apartments in downtown Minneapolis.

Paul Hyde of Hyde Development, a real estate development firm, said there are significant signs of a return to a "landlord's market" in the industrial sector.

He cited the lack of medium to large blocks of space in modern buildings and increased leasing activity "reflecting pent-up demand from tenants who have been on sidelines for years." Combine those with rising rental rates and that points to new development in 2013.

The coming year will also see investors maintain their flow of dollars into commercial real estate, Ryan's Collins said.

"Continued low interest rates and low capitalization rates will keep sales of investment property strong," he predicted.

The medical market, meanwhile, will be marked by "continued steady, strategic growth by healthcare systems and clinics," predicted Davis Group principal Jill Rasmussen. "We are optimistic about new leasing and development projects in 2013,'' she said. "But we remain cautious as the deal process continues to be difficult and lengthy."

Given the fiscal cliff caveat, even the office market is likely to show modest improvement in some areas, according to Emily Nicoll, a senior associate with CBRE.

"Certain key markets (I-394 corridor, Minneapolis central business district) will continue to strengthen, but there remains an abundance of opportunity for large corporate users to leverage market conditions in their favor," she wrote.

Don Jacobson is a freelance writer in St. Paul who has long covered the Twin Cities commercial real estate markets.

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