Commercial Real Estate Experts More Pessimistic

Minnesota’s commercial real estate experts are displaying “lingering concerns” about where the industry in the Twin Cities is headed, according to a study released Tuesday by the University of St. Thomas Opus College of Business.
 
The semiannual Minnesota Commercial Real Estate Survey is based on responses from 50 industry leaders. They are asked questions about their expectations for future vacancy and rental rates, development costs, and new project financing in the next two years. The results are based on an index of zero to 100—with values greater than 50 indicating “optimistic”; at 50 meaning “neutral”; and below 50 representing “pessimistic.”
 
Overall the survey revealed a composite score of 47. This is only the second time a score has been measured below 50 since the survey originated in 2010; the first was last November when it was 48.
 
Experts predicted higher land prices and rising costs for building materials. The land price index dropped to 33, its lowest level since the survey’s inception, leaving the experts worrisome about how this will affect new development. The high cost of building materials, which scored a 22 on the index this year, down from a 26 in the fall, may also negatively affect new development, according to the study.
 
“We’re continuing to see the same trend that emerged last year,” Herb Tousley, University of St. Thomas director of real estate programs and co-conductor of the survey, said in a statement. “However, there are some key differences in the survey this year, including a higher level of confidence among leaders that rental rates and occupancy will continue to grow into 2015.”
 
The index for rental rates increased from 67 to 69, reflecting growing confidence. The index for the amount of equity required by lenders also increased from 58 in fall 2012 to 64 now, which indicates the experts’ continued belief that the credit markets are returning to more normal loan-to-value requirements.
 
The survey concludes that industry experts have not significantly changed their expectations of what market conditions will look like two years from now. Overall they remain slightly pessimistic about the prospects for the commercial real estate market in 2015, but remain confident that rents and occupancy will continue to grow in the next two years.
 
The complete survey results can be viewed here.