Commercial real estate perks up

The commercial real estate market in the Twin Cities is showing small, but meaningful, signs of recovery as vacancy rates in most types of properties declined in 2011, according to a report released Monday by Cushman & Wakefield/NorthMarq Real Estate Services.

The survey of office, industrial and retail projects found a market-wide direct vacancy rate of 15.2 percent -- not optimal, but still reversing a three-year slide from 11.5 percent in 2007 to 15.9 percent in 2010. Across all property types, the rate last year was 17.6 percent.

"Clearly we're seeing a reversal of some negative trends," said Mike Ohmes, executive vice president for transaction and advisory services at the Bloomington-based real estate firm. He cautioned that it will take several years of robust growth before the commercial real estate market become healthy and stable again.

A few bright spots -- and challenges -- are highlighted in the twice-yearly survey.

Demand for some types of warehouses, office space in the southwestern suburbs and multi-family rental housing was strong last year. But demand for older market space across the Twin Cities remains "muted," and any recovery in the overall market for industrial space will likely be slow.

The southwest market for large office space users posted 456,000 square feet of positive absorption -- a key indicator in commercial real estate that describes the difference in occupied space over time. This was the highest yearly total in more than a decade, in an area that had seen negative absorption of 378,000 square feet in the past three years.

Beyond the downtowns of Minneapolis and St. Paul, the southwestern suburbs are home to many Fortune 500 companies that were "hard hit in recent years, but now most of those companies are doing the expansions," said Bill Rothstein, senior vice president for office leasing at Cushman & Wakefield/NorthMarq. "Corporate profits are up, and the bigger companies are expanding, while smaller firms tend to hold back."

"We're still in a challenging market, but a lot of people are upgrading their office space," Rothstein said.

In addition, overall vacancy rates of medical office space remained stable at 11.4 percent. As baby boomers age and medical providers prepare for more patients in the wake of federal health care reform, long-term demand for this type of space is strong, the report states. In many cases, this involves medical clinics taking over former retail space, or building new facilities in shopping centers.

Another glimmer highlighted in the report involved strong demand for newer "bulk warehouse space" -- industrial buildings with limited office space. Medical products firm Medline Industries, for example, is building a 300,000-square-foot distribution center in Rogers.

The report also documents the multi-family apartment construction boom that is currently underway in the Twin Cities. Developers added about 900 new market-rate units in 2011, and are expected to add another 1,300 this year.

Rents are increasing as vacancy rates decline, "giving developers reason to invest in new construction," the report states. Much of this development is occurring in downtown Minneapolis and in Uptown.