Investors Display Increased Confidence in Twin Cities Commercial Real Estate Markets

• Twin Cities market benefits from strong investor and capital markets activity
• Twelve office CBD sale transactions signal investor confidence
• Retail sale market shifts in favor of pension fund advisors

Perception of Premium Yields Draws Investors to Twin Cities
More and more investors put the Twin Cities on their radar screens in 2005. In particular, investors from outside the region were attracted by yield premiums available in the Twin Cities on office, industrial, retail and multi-family properties. The yield differential was as great as 50 to 100 basis points higher in the Twin Cities, especially for multi-tenant office and industrial properties, versus yields on comparable properties in larger markets such as Chicago, San Diego, Washington, D.C. and San Francisco.   Read more

Capital Markets
In the capital markets, the risk/reward differential between the various commercial real estate property types is shrinking. The trend is indicative of the increasingly competitive nature of the markets.   Read more

Industrial Market
Bulk warehouse properties were still in high demand by investors during the second half, although few such properties came up for sale in the supply-constrained Twin Cities market.  Read more

Office Market
Investors continued to display confidence in the Minneapolis Central Business District in 2005, as 12 significant multi-tenant office properties changed hands during the year. The total price tag for all 12 transactions was approximately $445 million, or an average sale price of $133.64 per square foot. This was on the heels of eight multi-tenant transactions in 2004 valued at $411 million, or an average of $112 per square foot.  Read more

Retail Market
More buyers than sellers continued to be the story for Twin Cities multi-tenant retail real estate in 2005. In all, 15 major retail real estate transactions closed in 2005, compared with 24 such sales in 2004.  Read more

Multi-Family
Multi-family properties remained the most competitive of all Twin Cities commercial real estate markets in 2005, with the thinnest spread on pricing. Investor interest was on the rise at year-end in reaction to the apparent cooling of the for-sale housing market, including a potential drop-off in demand for condominiums. REITs and pension funds were particularly active in the market at year end.  Read more

Outlook
All signs point to 2006 being similar to 2005 in terms of investor interest in commercial real estate. Higher short-term interest rates may be of concern to entrepreneurial investors, but not to the point that they are forced out of the market. Gradually rising interest rates will have less impact on large institutional investors, and might improve their competitiveness in the market.

Transaction activity levels will likely be steady or slightly lower for office, industrial and retail categories. Demand for multi-family product will be very intense and may lead to more transactions in that category.

So long as stock and bond market returns remain depressed, commercial real estate remains the favored asset class among large institutional investors and lenders. As competition increases, lenders will become more creative in their ability to place capital.