The commercial real estate market in the Twin Cities is beginning to see light at the end of the tunnel, according to the University of St. Thomas Opus College of Business’ first “Minnesota Commercial Real Estate Survey” released today.
The inaugural survey is designed to be a forecasting tool for the outlook on commercial real estate in the Twin Cities. Top decision-makers provide information about choices being made today which will affect economic events in the future, including vacancy rates, rental rate growth, development costs and new project financing. The research is conducted by Herb Tousley, director of real estate programs at St. Thomas, and Dr. Thomas Hamilton, associate professor of real estate.
The composite index for the survey is 53.5, indicating some optimism by the survey participants that general conditions are going to improve slightly over the next two years. Each question on the survey has a value from 0 to 100, with values higher than 50 corresponding to answers consistent with favorable outlooks.
Showing the strongest signs of optimism by survey respondents were that rental rates and occupancy rates would improve over the next two years, indexing at 69.4 and 60.2 respectively. “Both of these numbers contribute to a higher net operating income, which suggests an increase in property values over the next two years,” said Tousley.
Respondents also felt optimistic that financing for commercial real estate should be easier to obtain, making it more likely projects will be undertaken. Respondents were of the opinion that investors’ return on investment requirements would fall and degree of financial leverage would increase, as the index for investors’ expected returns was 56.6 and for the amount of equity required was 59.2.
The survey did reveal some causes for concern, as well. Survey respondents were pessimistic that land values and building costs would increase from current low levels, indexing at 42.9 and 33.7 respectively. “These numbers indicate that new development will be tempered,” Tousley added.
“Though respondents were not predicting boom times ahead,” Tousley added, “there is an overall consensus that commercial real estate is starting to turn the corner toward better times in the Twin Cities.”