- Investor demand is outpacing supply
- Both local and national capital remains plentiful
- Investors are pursuing higher yields in secondary markets like the Twin Cities
- Urban properties are in highest demand although select, stabilized suburban properties are gaining favor
- Multi-family properties remain a “sweet spot” for investors
- Unable to find enough high-clear industrial space to satisfy appetites, investors are starting to pursue flex space
Commercial real estate investors continue to flock to the Twin Cities in pursuit of higher yields. The investment market for multi-family properties remains robust, and there is a strong appetite for stabilized, class A office buildings; grocery-anchored retail centers and select power centers; and well-located, modern industrial properties. In many cases, investor demand is outpacing supply, although investors remain more selective in certain product types.
Discouraged by the lack of investment properties and/or high prices in top-tier markets, investors are looking to second-tier markets like Minneapolis for potentially higher returns. Both local and national capital remains plentiful from lenders, institutional and private investors and REITs.
Apartments Remain Hot
Robust demand continues for multi-family properties—especially in urban markets—and all types of investors want in. Traditionally, the market was dominated by local investors, but there are now new entrants, including pension fund advisors, private equity investors and REITS. Record-low vacancy rates, increasing rental rates and steady job growth are driving demand for apartment development. Developers and lenders are chasing new projects in an effort to satisfy pent-up demand and what they view as a “generational shift” toward more people renting.
The market delivered more new apartment units in 2013 than it has for the past three years combined. Most of the new product was well-received, and some properties reported higher-than-expected rents. Approximately 4,600 units were delivered in 2013 and another 5,600 units are expected in 2014. Key to the development boom is upward rental rate growth; average rental rates jumped 3.5% in 2013 and are expected to increase 4-5% in 2014. Sales transaction volume is up slightly over 2012 at $450 million. Big sales included Stoneleigh at the Reserve and Lake Calhoun City Apartments.
Flex Space ‘Flexes Muscles’
The industrial market is on fire, and there is simply not enough industrial product to satisfy investor demand. There is more aggressive pricing, a deeper buyer pool and new investment groups pursuing the product across an expanding geography. While investors clearly favor well-located, low-finish properties, the emerging story is that higher-finish office “flex” properties are also seeing demand. This trend is an indication of how difficult it is to find yield in some of the more traditional core industrial deals. Of the 11 industrial sales reported, half were higher-finish properties.
Grocery Competition Heats Up
Once the “sweet spot” for investors, grocery-anchored retail centers remain attractive. However, investors are paying more attention to each center’s fundamentals as competition continues heating up from non-traditional grocery retailers. The addition of more groceries to Walmart, Target, dollar stores and drugstores, together with new Aldi, Trader Joe’s, Whole Foods, Costco and Sam’s Club stores, means the shopping basket is being split between more players. Many traditional grocers are seeing downward pressure on sales. That being said, many grocery-anchored centers continue performing well. During the second half, four grocery-anchored centers, one power center and one regional mall were sold to new owners.
Office Market Deepening
More buyers are looking at the local office market than in previous years, particularly Class A properties in downtown Minneapolis. Several noteworthy CBD and suburban office properties traded. However, there is also emerging interest in the suburban office market, including several new investors focused on suburban opportunities. Many are private capital, entrepreneurial investors but there is also a growing pool of well-heeled investors; some are opportunity groups and some are value-add buyers looking for inefficiencies in the market. Most of these investors seek those pockets in the suburbs where they see potential rent growth. The 505 Waterford building in Plymouth is a good example. All of the competitive bidders were new to the market and all believed in the property’s rent growth opportunity.
The first half of 2014 appears poised for new investment activity across all product types. Interest rates in 2014 should remain low. Yields should remain stable. Several new downtown Minneapolis class A apartment developments are anticipated to trade as well as several existing apartment portfolios.
Retail could see another half-dozen transactions of grocery-anchored centers. Calhoun Square in Minneapolis should close. Investors are also opening up their criteria to include larger centers, including power and lifestyle centers.
Several large national industrial portfolios are being marketed that include core as well as flex Twin Cities properties. Institutional investors will continue pursuing industrial properties with high clear heights and minimal office finish, but due to the low supply, higher-finish office/flex product is also in play. Both lenders and investors are likely to continue favoring CBD office deals. However, they will also continue looking for “pockets of opportunity” in suburban office markets.
To read more, visit the January 2014 edition of Cushman & Wakefield/NorthMarq’s Compass report, now available online. Visit the web site: www.northmarqcompass.com