Investors appear to be increasingly bullish on the Twin Cities commercial real estate market, whether they're buying or building apartments, power retail centers or modern industrial properties, according to a report released Wednesday by Cushman & Wakefield/NorthMarq.
The Bloomington-based real estate firm found that "investment capital remains abundant" locally and nationally from many sources, including lenders, institutional and private investors, and real estate investment trusts. The rosy outlook (for the most part) will continue in the second half of the year, as well.
Part of the uptick can be attributed to an improving economy, said Scott Pollock, executive director of the firm's Capital Markets Group. Many investors are frustrated with investment options in first-tier cities — such as New York, Los Angeles and Chicago — so they're turning to second-tier cities such as Minneapolis and St. Paul for potential deals, he said.
"In many cases, the returns are a lot more attractive here," Pollock noted.
Generally, the most-desirable investments include up-to-date industrial buildings with more-efficient 32-foot ceilings, multifamily developments, Class A office space (particularly in downtown Minneapolis) and retail power centers.
Among all the options, multifamily projects are "the absolute sweet spot," the report states.
Downtown Minneapolis and the North Loop, in particular, have experienced a building boom of late, as thousands of apartments either have opened or are being constructed or planned. About 2,600 rental units in the Twin Cities are scheduled to open this year, with another 4,300 expected in 2014.
In some cases, investors partner with a developer to help finance a project, and in other instances, investors are on the prowl for existing properties.
Spurred by urban-loving millennials, empty-nesters and still-skittish homeowner-wannabes, the Twin Cities apartment market's average vacancy rate is 2.8 percent, with a rental rate growth of 2 percent to 3 percent — figures that have "sparked even more interest" from investors, the report said.
Retail power centers — shopping centers anchored by at least one big-box store — that survived the Great Recession are seen as attractive deals for investors, Pollock said.
For example, several firms reportedly bid on urban mall Gaviidae I in downtown Minneapolis (anchored by Saks Fifth Avenue Off 5th), with New York-based David Werner Real Estate ultimately writing a $26.5 million check for the shopping center.
One area of retail that investors are taking a harder look at is grocery-anchored shopping centers.
This is due to the changing dynamics of the grocery industry, where mass merchandisers such as Target and Wal-Mart have eroded the market share of traditional stores such as Cub and Rainbow Foods.
"It used to be if you could get one of the top two grocers in the market to anchor a center, it would be a stable investment," Pollock said.
That's not necessarily the case now, he said, noting that niche players such as Trader Joe's and Whole Foods have also nipped at the heels of the traditional development model.
The report said that many noncore assets are considered to be broken by investors, although none is named. These are properties with soft fundamentals, including significant vacancies, above-market rental rates, near-term rollovers or tenants with weak credit.
Pollock also noted that suburban office complexes nationally and to some extent locally are not attracting as much interest from investors, mostly because young professionals prefer urban settings, not just for their homes, but for work, too.
"In that regard, the investment appetite" has followed the urban trend, Pollock said.
The report found that the multitenant office market in the Twin Cities actually slowed in the first half of the year.
"The recovery is still underway, albeit at a slower-than-expected pace," the report noted.