Political storm clouds may be gathering over Washington, D.C. and trade wars may be roiling financial markets in the U.S. and overseas, but in Minneapolis-St. Paul, the real estate market continues to move steadily along with an uptick in speculative office projects and continued low vacancy rates in multifamily projects.  That was the assessment of a panel of real estate experts who presented as part of the State of the Market hosted by Bisnow recently in downtown Minneapolis, where over 200 people gathered for an update on commercial real estate projects.

Anne Behrendt, who recently took the helm as the President of Doran Companies, kicked off the panel by saying, “As developers we tend to be an optimistic bunch, and I don’t see anything in the real estate fundamentals that gives me concern.  In the Great Recession, real estate was highly over-leveraged but that is not the case this time around.”  She noted that falling interest rates have offset cost increases in labor and construction materials.

Lance Wright was the only lender on the panel.  As Managing Director for ACORE Capital, he manages the Central Region, including Chicago and Minneapolis, from offices based in Dallas.  His group closed $1 billion in real estate deals last year and is on pace to beat last year.  Wright said, “Compared to other cities,  the Twin Cities is not overbuilt and construction costs remain relatively reasonable.  And you don’t suffer from the traffic gridlock that is happening in faster growing markets.”

Jeremy Jacobs recently jumped from Mortenson Development to head up Colliers Minneapolis office as Managing Director.  He said that outside investors are looking at Minneapolis as an alternative to tech cities that have experienced problems that come with rapid growth, like high housing costs, congestion and construction interference.  Jacobs also noted the trend to create walkable communities with services and amenities nearby is here to stay, “this is what buyers, renters and office workers are looking for, along with a sense of community.”

One recent development that has the potential to disrupt the pipeline for new multifamily projects is inclusionary zoning.  Cities have attempted to solve the shortage in affordable housing with housing ordinances that require developers to set aside affordable units or buy their way out of the requirement.  So far, Minneapolis, Edina, Bloomington and St. Louis Park have enacted ordinances that mandate affordable housing.

“We didn’t really have a seat at the table,” said Behrendt.  “It can work but it makes projects much more difficult when putting together a proforma and each City has a different approach.  It would be better if there was a regional or statewide solution to the problem.”  Jacobs also acknowledged, “the need for housing is real but it won’t be solved on the backs of developers. Housing is a societal problem and we are going to need a societal solution.”

Several panelists commented on the recent spate of new office projects. Wright is partnering with Ryan Companies to finance 10 West End, a new office project in St. Louis Park. “I looked at this market and noted that it’s been 18 years since a major new office project has been delivered to the market.  Besides, your rents aren’t sky high and demand is improving.”

Earlier in the program, Bill Katter of United Properties gave an update on the Gateway project on the north end of the Nicollet Mall, which broke ground in June.  The 37-story mixed use project is anchored by a Four Seasons hotel and the offices of RBC, and topped off with high-end condos.  In addition, The Nordic and 419 Washington are two new downtown office projects delivered to the market in 2019.

Erin Fitzgerald, a principal with Transwestern, is bullish about leasing almost 200,000 square feet in the Wells Fargo Center.  “It’s almost its own market – this landmark building has never had this much space for lease since it first opened.  People love the location and amenities in the core of downtown.”  She’s also looking forward to the renovation of the former Dayton’s department store with new offices, retail and a food hall.  “We need retail in downtown with so many people living and working here and the food hall is going to be one of those places we tell visitors, ‘you just have to see it’.”

A bright spot in the office market across the country is “co-working” office space.  It’s both an opportunity and a risk for landlords, according to Wright. “It’s been a great way for landlords to fill space and help startups, but we haven’t seen what happens to this space in a downturn, that’s why we recommend limiting co-working to no more than 20 percent of a building.”

As the panel closed out the morning, no one sounded the alarm on the market and all four panelists remain optimistic about the future of commercial real estate in the Twin Cities.  “When things do slow down, you want to have capital and ask yourself ‘where do we want to be, where are the opportunities?’” according to Behrendt.

Bill Griffith is a shareholder at Larkin Hoffman and practices land use, real estate and municipal law.  He represents Mall of America and the City of Columbus, as well as a number of local and national real estate owners, managers and investors. Bill served as moderator of the State of the Market panel hosted by Bisnow.