Twin Cities commercial real estate market dips into a decline

Every sector of the Twin Cities commercial real estate market stumbled under the weight of the troubled economy and credit markets last year, according to a report released today by Bloomington-based NorthMarq.

The real estate services firm's 2008 Compass Report outlines a year in which vacancy rates for retail space jumped to a 10-year high and some land values fell by as much as 70 percent from their recent peak prices. Cutbacks by employers left building owners scrambling for ways to fill office and industrial space.

The dismal conditions could get even worse in 2009, said Mike Ohmes, NorthMarq executive vice president, brokerage services.

"The next year is going to be one where people are hopeful that we find the bottom of the market," he said. "If that happens, I believe it won't be until the end of the year."

The overall vacancy rate for office, retail and industrial buildings in the Twin Cities reached 12.2 percent in 2008, the highest level since 2004, NorthMarq said. More subleased space went on the market, an indicator of tenants cutting back or shutting down.

The larger amount of vacant space wasn't caused by a big increase in new buildings. Construction of office, retail and industrial space fell to about 2.4 million square feet in 2008, about 2 million square feet less than the previous year. Ohmes said construction should fall again this year to less than 1.9 million square feet.

Much of the decrease will result in reduced construction of retail centers, where year-end vacancies stood at 8 percent, NorthMarq said. The industry already has seen dozens of retailers close stores or trim expansion plans, and more are expected in 2009. Ohmes said community retail centers planned for several suburbs could be scaled back, postponed or canceled. One in Inver Grove Heights that was to be anchored by a Target store was recently shelved.

Ohmes said both retail and office property owners will continue to offer concessions, including reduced rents, to retain and attract tenants. "Free rent [for a limited period] is a discussion that most, if not all, building owners are willing to have," he said.

The overall office vacancy rate increased from 15.2 percent to 15.9 percent in 2008, NorthMarq said. That's expected to increase again to about 16.8 percent this year. Ohmes said. The possible exception are office markets in downtown Minneapolis and western suburbs.

"Office properties need job growth, and no one's expecting any in 2009. The issue for building owners is how they are going to bridge the gap" until the economy rebounds, he said. Meanwhile, some communities are modifying their land-use rules to attract a wider range of office and industrial development.

Industrial vacancies stood at 12.5 percent at the end of last year, the highest level since 2006, the reports said. The amount of subleased space, an indicator of employers cutting back, has more than doubled since 2007. Ohmes said the number of user-owned industrial buildings put up for sale jumped last year from 267 to 422.

More land slated for development also went on the market, sometimes at sharply lower prices, NorthMarq said. In most cases, the land was to be used for residential or retail projects. Ohmes said foreclosures on land parcels are up and should continue to increase this year.