The two core measurements for success in commercial real estate arguably are vacancy rates and the rents landlords are able to charge. And by those two key markers, the next two years are going to be improved ones, respondents to a local survey indicated this month.
A panel of 50 Twin Cities commercial real estate professionals involved in development, finance and investment were asked by academics at University of St. Thomas' Opus College of Business how they felt on a series of industry measures, and to predict how they were going to go in 2012 and 2013. The results were released June 15 in the University of St. Thomas Minnesota Commercial Real Estate Survey.
Because there is typically a two-year lag time between the genesis and the completion of commercial real estate development projects, what the professionals predict now about 12 or 24 months in the future can be very indicative of what they're going to do next week.
The survey revealed the professionals are feeling much more strongly that rents and occupancy rates are going to be higher over the next two years, which is likely to translate into decisions made this year that assume a strengthening local market over the mid-term.
The St. Thomas researchers put the responses into an index that uses "50" as a neutral point between optimism and pessimism on a scale of 1 to 100, with scores above 50 indicating optimistic views and those below 50 a pessimistic view. Respondents were asked how they felt about rents, occupancy, land prices, the cost of building materials, rates of return on investment and the amount of equity demanded by lenders.
The composite score of all the categories was 55.6, up from 54.1 in the previous UST survey conducted last fall, indicating more but still guarded optimism.
However, big increases in optimism were seen in rents, where the index soared from 56.4 previously to 70.8, and in occupancy, which jumped from 64.9 to 71.4. The numbers showed commercial real estate pros are significantly more optimistic those two market fundamentals will be higher in the future, said Herb Tousley, director of real estate programs at the University of St. Thomas and one of the survey's authors.
"Those two categories are the operating fundamentals of most properties, which speak to the demand for space," he said. "If there is more demand for space, that means there is an improving economy, and what the survey is saying is that the respondents expect to see a somewhat improved economy with new jobs being added."
The first indication of an improved economy is an uptick in the demand for space, which is reflected when existing empty office space starts to fill up. And first-quarter numbers reported by the Twin Cities office of Cassidy Turley sheds some light on why the real estate community might be feeling a bit more bullish about the future.
The report indicated the Twin Cities metro's office vacancy rate fell in the first three months of the year, from 19.3 percent in 2010's fourth quarter to 18.8 percent. Downtown Minneapolis saw its vacancy rate drop from 17.9 to 17.2 percent over the same period.
The report, however, also showed why there's still a long way to go. Vacancies in the key southwest and west office sectors remained unchanged at 19.9 and 17.5 percent, respectively.
Also on the positive side, the Twin Cities added thousands of jobs over the past year. Its unemployment rate shrank from 8.2 percent in the first quarter of 2010 to 6.8 percent this year -- an addition of 30,000 jobs. That makes Minnesota one of the nation's bright spots in terms of economic stability.
The optimism on improving rents, meanwhile, is again tied to the feeling that demand for office space is picking up. Northmarq Commercial Real Estate Services predicted at the start of the year that rental rates would likely remain "volatile and depressed" until the excess space is taken off the market -- something the survey respondents seem to feel will happen, perhaps sooner rather than later.
"They all seem to think we're going to see some improvements on rents in the next couple of years," Tousley said, adding that the prospect of new development, only a year ago considered highly unlikely, could be brightening.
"Higher rents generally help justify the costs of new construction. It's not 100 percent positive, but this is still a pretty strong sign that the people who make the decisions about spending are feeling pretty positive. There's a perception of job growth in the Twin Cities."
The survey did include some notes of pessimism. Respondents were very pessimistic about the prices of building materials, seemingly convinced they will go up and thus act as a drag on plans for new development.
Also, they expressed a strong conviction that land prices will rise. On one hand, that can be seen as a negative because, like the cost of building materials, higher land prices can act as a deterrent to development.
But in a larger context, more expensive land reflects higher demand, which, in turn, is a sign of an improving economy.
"The participants think we've hit bottom on land prices and that they will go up," Tousley said. "I think what this reflects is that there's more demand for prime infill sites close to transit."
Don Jacobson is a St. Paul-based freelance writer.