St. Thomas Study Finds Pessimism in Twin Cities Commercial Real Estate Market

Twin Cities industry leaders are somewhat more pessimistic about future commercial real estate market conditions two years from now, according to the University of St. Thomas Opus College of Business’ fifth semiannual Commercial Real Estate Survey.

The survey polls 50 commercial real estate industry leaders representing development, finance and investment. It measures their expectations for the future of the market in seven different categories including vacancy rates, rental rate growth, land prices, building material prices, new project financing criteria, and rates of return. These are the people who are making decisions today that will affect future commercial real estate conditions.

The spring 2012 survey recorded its first composite score below 50, based on a 0-100 index, since the inception of the survey in 2010, indicating a more pessimistic view of the future commercial real estate market.

Compared to the fall 2011 survey, the panel anticipates land values will continue to increase. There is also a strong expectation that the price of building materials will continue to rise over the next two years, shifting from a strongly negative 27.9 to a more negative reading of 26. Both of these factors make it more difficult to obtain financing and provide adequate returns for investors.

“Those surveyed remain confident that rent and occupancy will continue to improve over the next two years,” said Herb Tousley, director of real estate programs at the University of St. Thomas, who conducted the survey along with his colleague Dr. Thomas Hamilton, associate professor of real estate. “However, expected increases in land prices and building materials may have a dampening effect on commercial development activity.”

Investor’s return expectations remain unchanged at 49, which is essentially neutral. “This serves as an indication that investors are still trying to figure out the ‘new normal’ in the commercial real estate space,” noted Tousley.

The entire report can be seen here.