Strong Mix of Fortune 500 Companies Helps Fuel Growth of Twin Cities
Even in the context of a sustained stretch of national economic growth and a Midwest region where there are plenty of high-performing markets, Minneapolis-St. Paul stands out. The commercial real estate market in and around the Twin Cities is thriving, in large part due to some impressive structural fundamentals.
Metrics and measurables
The state of Minnesota — especially the Minneapolis-St. Paul metro area — has a very diverse base of employment, with a long list of significant Fortune 500 companies, including familiar and even iconic names like Target, Best Buy, 3M, U.S. Bancorp, General Mills, Medtronic, C.H. Robinson and United Health Care. United Health Care alone generated $226 billion in revenue in 2018.
The economic and market diversity of the Twin Cities stands in contrast to some other Midwest markets, even some that are experiencing significant growth. The market has also experienced an exciting and ongoing uptick in workforce numbers and population growth, elevating Minneapolis-St. Paul far ahead of U.S. averages for both numbers — surpassing cities like Seattle, Atlanta and Washington, D.C. Forbes lists the state of Minnesota as among the nation’s top 10 “Best States for Business.” With 65 percent of the state’s population living in the Minneapolis-St. Paul metro area, it’s easy to see why brands and businesses are paying attention.
That population is generally well-educated. Minnesota has the highest percentage of adults with a high school degree at 93 percent. It also ranks in the top 10 for college attainment. Residents enjoy a high quality of life — the state consistently ranks among the nation’s best in quality-of-life metrics and factors like access to health services and civic amenities.
Even Minnesota’s famously frigid winters are less of an issue than you might expect. The city’s strong public transportation system and elaborate network of skywalks and protected pedestrian walkways make it easy to navigate downtown during even the coldest months of the year. Add in a household income that is higher than the national average, a metro area that is comparatively clean and safe for a city of its size, and a surprisingly diverse and fast-growing culinary scene, and it’s not hard to see why Minneapolis-St. Paul isn’t just one of the best commercial real estate markets in the Midwest, but in the nation.
Amenities and opportunities
In terms of specific market segments, analysts are particularly bullish on the Minneapolis office market. With properties in most national primary markets at the height of pricing, investors will likely continue to push into secondary markets for better yields. Minneapolis is already reaping some of the benefits from that dynamic.
One current note of caution is that a lot of money remains sitting on the sidelines waiting for a broader market correction or the numbers simply to make sense. Across the commercial real estate landscape in general, but especially in major markets, the cost to buy a building has gotten so high — and cap rates have slimmed down to the single digits — that more than a few owners and investors have concluded that now is not the best time to buy. Minneapolis-St. Paul is faring far better in this regard than places like New York City, but it is still an issue that needs to be monitored.
Since the Great Recession of the late 2000s, Minnesota has seen landlords investing heavily in amenities and repositioned common areas. That investment has paid dividends and has helped to drive up rental rates. Today, Minnesota has one of the strongest office rent increases of any U.S. market, with a 2019 first-quarter boost of 3.6 percent compared to 2018 figures. Overall office vacancy in Minneapolis-St. Paul is currently around 8 percent.
With unemployment at an all-time low, we continue to see companies pushing forward with improved workspaces that they can subsequently leverage as recruiting tools — especially for millennial workers — and to create a competitive advantage. Many companies in the market continue to push flexible and collaborative open-space layouts and shared desk/office concepts, and to mirror the larger national trend by investing in premium amenities and chic office extras.
While this is by no means unique to Minneapolis-St. Paul, area owners, investors and companies have done an especially great job in that regard. The prevalence of appealing new rooftop amenities is particularly noteworthy — if perhaps somewhat surprising given the climate. Engaging and experiential common spaces between buildings are another increasingly familiar sight across the Minneapolis-St. Paul market. Companies like tech startup Zipnosis and Minneapolis-based Phillips Distilling have successfully created great spaces both inside and outside their offices.
In terms of neighborhood and micro-market specifics, Minneapolis’ central business district (CBD) growth has been especially strong lately. Overall growth and market rent numbers have spiked, and there has been a surge of leasing activity in the last few quarters. The CBD’s North Loop District has been particularly active. The I-494 corridor has also experienced some of the metro area’s strongest growth in the last 12 months, and we have seen significant rental increases throughout the I-394 corridor as well.
With the caveat that larger national trends could always kick up an economic headwind, there is no reason to believe that the active commercial real estate market in the Twin Cities will slow down anytime soon. With its strong fundamentals, welcoming corporate climate and strong mix of high-credit and Fortune 500 companies, it’s reasonable to expect continued growth in Minneapolis-St. Paul through the rest of 2019 and into 2020.
— By Andy Gutman, President, Farbman Group. This article originally appeared in the November 2019 issue of Heartland Real Estate Business magazine.