Is the future of the local commercial real estate market half full, or half empty?
According to the University of St. Thomas Opus College of Business’ fifth semi-annual Commercial Real Estate Survey, the future looks half empty. And that’s after real estate professionals said it was half full last fall.
An explanation: The survey released this week polls 50 commercial real estate industry leaders — from developers to financiers — to gauge their expectations in six categories, including vacancy and rental rates, land prices, building material prices, new project financing, and rates of return.
This spring survey’s composite index score was 49 from 51.2 last fall. (Each question has a value from zero to 100).
“We went from being slightly optimistic to slightly pessimistic,” said Herb Tousley, director of the Shenehon Center for Real Estate at St. Thomas.
This is significant, he said, because it’s the first time in five surveys that the score has dropped below the halfway mark.
One sentiment that stuck out was the view that the cost of building materials — including lumber, cement and steel — will continue to rise over the next two years. Tousley says the demand for these materials, especially as construction booms in places like India and China, is driving up prices up globally. In addition, the cost of land is expected to increase, too.
“The more you have to pay for land, the harder it is to make your deal work,” he said.
On the positive side, the survey indicated financing is available for the right projects. “Although investors and financiers are being selective about the deals that they do, that means they’re not financing the shaky deals they might have looked at five years ago,” Tousley said.
Janet Moore covers commercial real estate for the Star Tribune