Strong 2005 Results Set Stage for Continued Growth in Twin Cities Commercial Real Estate Demand in 2006

• Industrial absorption of 3.8 million square feet highest since 1999
• Retail poised for delivery of three million square feet in 2006
• Office vacancy declines 2% to lowest level in five years
• Growth of physician ownership drives off-campus medical office market

The Twin Cities commercial real estate markets are poised for continued robust growth in 2006, following strong performances in virtually every segment of the market in 2005.

Demand for both office and industrial space exceeded expectations in 2005, pushing vacancy rates lower and setting the stage for the beginning of a rebound in new speculative development. Meanwhile the retail market remained vibrant and growing, reaching a record 3.2 million square feet of positive absorption during the year.

Investor demand for Twin Cities commercial real estate properties continued to grow, spurred by a seemingly endless supply of investor capital and improving fundamentals in the major market categories. National and international investors were increasingly attracted by the higher yields available on Twin Cities’ properties versus those in larger markets such as Chicago and the two coasts.

Highest Demand for Industrial Space Since 1999
Demand for industrial space soared, resulting in 1.2 million square feet of positive absorption during the second half of 2005—and positive 3.8 million square feet for the year. It was the highest positive absorption total since 1999. All that activity drove the overall industrial vacancy rate down to a five-year low of 13%, a 2.5% drop from year-end 2004.  Read more

Year of the Big Deal in Office Market
Demand from large space users fueled another strong year of positive absorption and declining vacancy in the multi-tenant office market. The market finished with positive 1.4 million square feet of absorption in 2005—more than double the 2004 total. Direct space vacancy declined to 16.1% market-wide, down 2.2% from year-end 2004. Vacancy declined in every submarket.  Read more

Record Setting Year for Twin Cities Retail Real Estate
It was a record-setting year for retail development in the Twin Cities, with 2.35 million square feet of newly constructed multi-tenant product coming on line in 2005. Even so, developers were scarcely able to keep up with rising demand for retail space. The market recorded more than 3 million square feet of positive absorption in 2005, also a new high for the region. The overall retail vacancy rate declined to 6.3% at year end, down from the 7.8% figure at year-end 2004.   Read more

Medical Office Makes Strides; Physician Off-Campus Activity Strong
Demand for medical office space remained strong throughout the year, with high activity levels across the Twin Cities. The off-campus market was particularly active, fueled by increased demand for high-profile real estate from a growing number of private physician groups. In the on-campus market, hospitals were active in the development of new specialty medical centers such as cardiology care centers.  Read more

Investors Confident in Twin Cities Market
Surging confidence in the Twin Cities commercial real estate markets drove investment demand to unprecedented levels in 2005. The multi-tenant office market in the Minneapolis CBD continued to attract widespread attention, with 12 different major properties changing hands in 2005—led by the sale of the 698,000-sq.-ft. 50 South Sixth Street building for a price well in excess of $250 per square foot.

Demand for commercial real estate properties of all types exceeded the available supply, resulting in fewer sales in some areas such as retail, but at higher prices. The trend is expected to continue into 2006, as commercial real estate continues to attract more and more attention as a favored asset class among a wide array of investors—including large national institutional investors such as pension funds and insurance companies, REITs, international investment funds, tenant-in-common funds and privately funded entrepreneurial investors. Rising interest rates will work to the advantage of large institutional investors in 2006 and to the disadvantage of leveraged buyers such as entrepreneurial investors. Improving fundamentals in the multi-family market may give that sector a boost in transaction activity in 2006 as well.