Twin Cities property outlook

A flurry of year-end reports recaps Twin Cities real estate in 2015 while highlighting shifts that will shape the market in 2016.

Last year was the strongest since the recession for Twin Cities retail centers, with only 6.6 percent vacancy, said Cushman & Wakefield/NorthMarq's (CWNM) biannual Compass Report. Grocery-anchored and regional malls drove demand. Average rents at top-performing locations rose to around $40 a square foot.

There is some indication that retail rents are peaking, according to the 2015 fourth-quarter retail report by the Minneapolis-St. Paul office of Welsh & Colliers International. Many tenants are being priced out of new shopping centers and are looking at secondary locations.

More than 5,700 rooms are in development now, pushed by high occupancy levels in existing hotels and stable room rates. Cushman & Wakefield/NorthMarq's report predicts a slowdown this year in transactions due to high prices. The report said to watch for industry consolidation in 2016 — a nod to rumors that Minnetonka-based Carlson Cos. is looking at options for its Radisson hotel brands.

Office space has its lowest vacancy levels since before the recession. The metro-wide rate, including subleases, is 17.3 percent, the same as in 2007.

Last year was also the best since the recession for office absorption. Users took on nearly 982,000 square feet in 2015, which far exceeded 2014's 272,000 square feet, according to CWNM.

Office rental rates reached a historic high in 2015 in real dollars and just below pre-recession rates when adjusted for inflation. Average rent per square foot was $16.76 for Class A, $12.12 for Class B and $9.92 for Class C, according to CWNM.

Last year was one of the Twin Cities' strongest for new or leased industrial space, but don't expect to see that same level this year, cautions Cushman & Wakefield. The market absorbed about 3.6 million square feet of warehouse space in 2015 while approximately 1.68 million square feet were added across the metro area. Good development sites are decreasing and lower supply means less absorption this year.

It could be another record-breaking year for luxury apartment construction in the Twin Cities, but with some areas reaching a saturation point, most of that development will happen in the suburbs. That is according to a market outlook from the Minneapolis office of NAI Everest, one of several firms that are keeping tabs on the rental market in the Twin Cities.

Last year, 3,642 new apartments came to market. Already this year, nearly 700 units have opened and at least another 4,700 are under construction for opening this year.

Here is a sampling of what's happening in the region:

• In downtown Minneapolis, 457 units are under construction and about 1,900 units have been planned or proposed.

• In the east suburbs, no new units are under construction, but 495 have been planned or proposed.

• In the west suburbs, nearly 1,000 units are under construction and 2,141 have been planned or proposed.

Despite thousands of new units, the vacancy rate throughout the Twin Cities metro at the end of 2015 was just 3.1 percent. A vacancy rate of 5 percent is considered evenly balanced.

The tightest market was the northern suburbs, where the average vacancy rate at the end of the year was 2.3 percent.

The average vacancy rate in downtown Minneapolis was 6.3 percent and the vacancy rate in downtown St. Paul was 4.1 percent.

Rents in downtown Minneapolis increased 6.4 percent by the end of the year, with an average rent of $1,373, compared with $1,077 outside of downtown. New buildings are fetching an average $2.25 to $2.75 per square foot and have exceeded lease-up projections, according to NAI President Gina Dingman.

Institutional investors continued a buying spree in the Twin Cities last year, setting several records for price per unit. For transactions of $2.5 million or more, total volume last year was about $970 million, not including deals that may have closed but not yet been reported. That exceeded 2014.

The Walkway, a 92-unit luxury apartment building in Uptown that's best known for its cantilevered hot tub, was a record-setter last year with a per-unit price of $437,000. The entire project, which includes nearly 20,000 square feet of retail space, was bought by JPMorgan Chase & Co. last summer for $53.8 million.

Some of the most aggressive buyers were national firms like Weidner Apartment Homes.

Jim Buchta • 612-673-7376