POTENTIAL REAL ESTATE INVESTMENT OPPORTUNITIES – GREATER TWIN CITIES METROPOLITAN AREA – SEPTEMBER 2013
Based on our observations and recent activity, current market conditions appear favorable for several property types in the Twin Cities metro area and outlying counties including, but not limited to, the following:
Immediate 13-county Metro Area
-Small Office and Commercial Properties
Following the recession, several smaller freestanding office buildings, office condominium units and small industrial properties falling below 5,000 square feet in size were vacated, foreclosed upon and available for purchase at prices falling significantly below replacement cost. Prices and available inventory have firmed up. As the economy continues to recover, such properties should allow for value appreciation if located within or near areas of population density.
-Large Industrial (generally 100,000 square feet or larger with clear heights above 24 feet)
Users continue to seek functional distribution space with high-clear ceilings to increase efficiencies. Large blocks of modern, well-located space are quickly being absorbed as tenants take advantage of the few remaining options market-wide. Users looking for space in large industrial buildings offering high clear heights are facing a lack of inventory. The shortage of large, prime space options will limit the number of leases signed unless more product is added. Rates in the best properties will likely continue to increase, while landlords of older, less-functional space will have to continue offering aggressive rates and incentives to fill their buildings. Upward pressure on pricing is expected for user-buildings because of the lack of available space for lease and lack of user-building inventory. This shortage of functional space should also continue to drive build-to-suits and speculative projects. Developers are expected to continue taking land positions which should also increase demand for prime sites that can accommodate large floor plates of approximately 100,000 square feet.
-In-fill Residential Land and Lots
As the housing market continues to recover, inventory of newer homes in prime locations has decreased. In-fill lots ready to go will pick up momentum from builders and private parties looking for state-of-the-art amenities and new construction. Acreage available for smaller subdivisions in first and second-ring suburbs, especially where entitlements have been secured to allow for groundbreaking to occur sooner will have an advantage from both the demand and pricing sides.
-Apartment Properties of Good Quality in Need of Upgrades and/or Repositioning
Most submarkets in the metro report a vacancy rate of less than 5%, and the core cities perform better than the suburbs overall. Rents are beginning to increase in some instances as most concessions have gone away. A lack of new product being developed, creation of new households, an increasing number of baby boomer households choosing urban apartment living and a slowly increasing economy are contributing to the market’s improvement. Modest growth is projected as demand continues and rents are able to move upward. Older properties of good quality may face spotted redevelopment with new projects. Therefore, attention should be given to maintain curb appeal of such properties by maintaining and refreshing the exterior, patching and seal coating of parking lots and meticulous grounds upkeep as rents are increased. Common areas and unit interiors should continue to be refreshed over time to maintain a strong market position. The outlook for such properties is positive.
Outlying Counties West and South of Metro Area
Prime tillable farmland has experienced double-digit appreciation rates over the last few years with price increases expected within the foreseeable future as the trend of large farms become larger continues. Since debt ratios are often low to non-existent for large agricultural acreage, the risk of a “bubble” resulting in a large volume of such properties going back to lenders is low if prices level off or even decrease. With little product available on the market at any given time, prices are oftentimes bid up at auctions. Risk factors to watch are whether commodity prices level off and if the ethanol subsidies will be reduced which would both impact the ability to sustain current land prices and strong appreciation rates. Less than prime farmland may provide for opportunities in price appreciation over time since start-up farmers are being priced out of prime farmland and there could be an ability to increase production with minor upgrades.
-Acreage With Building Entitlements Exceeding 1 per 40 Acres
Although most rural residential development has been stagnant over the past several years, large tracts providing for future splits/subdivision will gain momentum as market fundamentals improve. Contributory value of building entitlements (right to build a home) should increase over time.