Julie Kimble and other CRE experts were part of Minnesota REjournal’s State of the Market panel discussions on the industrial, retail and office sectors earlier this month.
Coming out of 15 months of pandemic hibernation, there was almost no way to predict exactly what industry experts would have to say about the state of the Minneapolis-St. Paul commercial real estate market! As would be expected, the Minnesota REjournal’s State of the Market panel experts generally found a fair amount of hope amidst some ashes mirroring the resilience of our world as it coped with and overcame this most significant challenge. KimbleCo CEO Julie Kimble was honored to be one of the panelists for the office market update. A summary of key points from each of the market panels, retail, industrial and office, are below.
Retail
There were both winners and losers during the pandemic. Retailers including Target, Walmart and essential categories of grocery, sporting goods, home improvement and those offering drive-throughs and deliveries, came out well. Food, fitness and fun categories struggled as did regional malls (both before and after the shutdown). Big rebounds post-COVID are being seen in furniture, gyms and anything “experiential”.
While some restaurants suffered greatly and had to close, the vast majority weathered the storm with the help of incentives and relief funding. Many landlords allowed them to “pay what they could”. As always, strong relationships between tenant and owner made the biggest and most positive impact for both parties. Some learned that the lease term of “force majeure” or an “act of God” may be applicable to their right not to operate but it was not necessarily an opportunity to not pay rent.
According to Jen Helm, managing director, Newmark, “Amazon has not killed retail.” She referenced that the success of Amazon has created opportunity overall for retailers, a “rising tide lifts all boats” theory.
As it relates to Minneapolis CBD retail – the panel told us there is surprising activity underway – so good news for all.
A revelation for retail owners and developers is the new requirement for retailers to have dedicated parking stalls for online pick-up orders. Something likely to carry forward in future developments.
All agreed that suburban developments with junior box tenants may suffer with release presenting challenges. Communities that will consider medical and housing on those retail assemblages will be successful.
All panelists predict continued success for retailers that achieve click-to-brick. The ability to drive sales online with the right blend of experiential brick and mortar retail.
Industrial
As the primary real estate for essential business, industrial was and is thriving through the pandemic and beyond. With 4% vacancy and more demand than supply, rents are rising. But so are land and building costs, so developers must maintain a close eye on economics. Current rents of $6/$12 psf could be rising to $7/$14psf, in part due to the “Link effect”, a reference to the significant investment and portfolio of Link, a logistics real estate company purpose-built and specifically designed for today’s evolving supply chain. It seems 4% annual rent increases may also be on the horizon. Of course, relating back to our retail summary, the continuing growth of retail giant Amazon drives much industrial growth.
When will the party end? Most referenced the stability of the Midwest market over time not anticipating a total end to the cocktails anytime soon with the big party extending for at least another 24 months.
Office
With rising vacancies and an increase in sublease space, there was much to discuss about the current state of the office market. The pandemic showed us that companies could function productively with its workforce at home. What does this mean for the future of office? While there was some variation in the panel, all agreed that some form of a hybrid work model was here to stay. With the war for talent still raging, attraction and retention are key to any company’s success. And many employees will demand flexibility, whatever that means for them. We know for certain that the workplace experience will need to be stellar and this will continue to evolve how companies plan their space and how they establish their policies. This could not be more evident than seeing many with the new corporate role of “head of remote”.
Relative to the fundamentals of the Twin Cities market, it feels a bit like we need to reestablish our baseline as many companies let their leases roll or did short-term extensions. Many of the larger companies shed square footage with a resulting overall 15% vacancy as per last calculations. Yet significant product has come on the market with 10 West End and The Dayton’s Project. United Properties RBC Gateway project will come online in 2022.
There was much discussion around the impacts of 2020 to the Minneapolis CBD. With efforts by the city, proactive investment such as Deluxe’s move from the suburbs to the CBD and the gradual opening back up of restaurants and retail there is optimism that Minneapolis will return to its prior vibrancy. Whether that’s in one, two or three years is anyone’s guess at this point.
All agreed that with the wide variety of company needs, types and business models (think hub and spoke), there is demand for both CBD and suburban space.
Conclusion
Everyone, regardless of asset type, is keeping their eyes on the significance of potential legislative changes that could make real estate investment less attractive, namely – elimination of 1031 exchanges, increases in the capital gains rate, the elimination of the stepped-up basis on inherited property at certain levels and the recharacterization of promotes from long-term capital gains to ordinary income.
All in all, there was reason for hope and optimism as we move out of the pandemic fog and into the new world.