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4.b. CBRE Market Study
ROSJ'VIOLINT EXECUTIVE SUMMARY PORT AUTHORITY Port Authority Meeting Date: February 18, 2014 AGENDA ITEM: CBRE Market Study AGENDA SECTION: New Business PREPARED BY: Kim Lindquist, Deputy Directo AGENDA NO. 4.b. ATTACHMENTS: CBRE Market Outlook APPROVED BY: RECOMMENDED ACTION: Information and Discussion. 0 ISSUE CBRE has sent out their 2014 Market Forecast which is attached for the Port members'information. There are a few items to glean from the report which may be more applicable to Rosemount as a third tier suburb: Industrial: Demand continues to increase in the metropolitan area which could benefit the buildings with some vacancies or current owners looking to sell. Rates also appear to be increasing. Retail: Demand in neighborhood centers in second and third tier suburbs has not increased as much as other areas of the metropolitan area and activity is not projected to increase in 2014. Office: The eastern metropolitan area is recovering slowly. Lease rates are increasing because there is little new construction and demand has risen somewhat. Multi-family: There is an increase in multifamily rental housing. However,based upon recent Maxfield Research information,rents rates in Rosemount are not high enough to cover the cost of new construction without some type of financial subsidy. Healthcare: Demand will continue to increase and there will be more emphasis on services and accessibility which means healthcare in more traditional retail locations. As part of the South Gateway land use study, the City commissioned Maxfield Research to review demand in that immediate area. Also,Dakota County hired Maxfield Research to update their Housing Needs Assessment. Staff will be working with the County and Maxfield to schedule a presentation for the Council and Port Authority in the near future. 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PAUL MARKET OUTLOOK 2014 ,• iiiik,'''' ''' ' .. _,.... • , •t" • • , ,,..,..„, , . . „ .... .. , ,..,, ''4 ' A .0111 . ,• , .V •, ,. •i• 11111L'Oli .. , . ... • ., . 4i11111' 441''' ' :, Ill A ••• . . . • .• . . .. i ,.,. 6, ,, . „1 .4•, ... ,.•. •. . . ... , . , Ii • 1 •.. , .6: •... .•. .6 .:• • . . , ••1• •:- •■• • .,.. • • • • . .* . .. • ., .•. , • •. ••.. ,.. . , • .. . ,.• 6 ' ' 1 . ' . L ; . ' .“...--- . • .. '—..' .— , to*,*, . ';'' . , 7.1/ ' • • • ; •,• ,. „",,, 4 . • : •.„ * . i „0144• • •• I 4. ••4 , ,0 lik: : -''.-...I • I- s II IP II 41. a. S 4 • ; '1•;•-1.''''' • '' 4() - ?‘ ' ' i •? " 1 • • • PIP 4 .• „•„, 144.: ' 4 4 1 0,441 . 4 1 • 4 , ,4 4 .11 1 i 111161 40 , ,. li 1 1 PI i , 1 N.„0" His left I fl 4 1 . , . . , li .. . • • 1410*10., , A • .. ,,„..„,.., 4 , -,,0, ..„ • . • 1!„ V „ , - • I / I . I' 4 1 4 •-- ' , 4 , • • -,, 4 i I / „. . 4' 4 .„.. ,.. . .. . .,,, , . .. . s , TABLE OF CONTENTS Welcome 3 CBRE Minneapolis/St. Paul 4 Minneapolis Office - Downtown 5 Minneapolis Office - Suburban 6 St. Paul Office - Downtown 7 St. Paul Office - Suburban 8 Global Corporate Services 9 Capital Markets 10 • Office & Industrial 10 • Retail 11 • Multi-Housing 12 Debt & Structured Finance 14 Industrial 15 Retail 16 Land 17 Tertiary Markets 18 Data Center Solutions Group 19 Healthcare 20 Valuation & Advisory Services 21 CBRE Service Lines 24 Contributors 25 CBRE cs 2014,CBRE,Inc. MESSAGE FROM MANAGEMENT As we look back on 2013,we see a year of growth—growth in our local economy,growth in our CBRE team and growth in our platform of services to you, our business clients and partners.We value our relationships and know that our success is directly related to yours.We are excited to share with you our 2014 Outlook,a high-level compilation from our leaders providing the past, present and future of the real estate market. Recovery continued in 2013 with the addition of 39,000 new jobs and a reduction in the unemployment rate from 5.40% to 4.60%. The office market continued to languish. Workplace strategies and space optimization were key drivers. Solid indus- trial absorption decreased vacancy rates to 5.05% spurring a number of speculative developments and increased spec land purchases. We anticipate the recovery to continue in 2014. Net absorption in the office, industrial and retail sectors is projected to out- pace supply leading to multiple new development opportunities. Our Minneapolis/St. Paul office welcomed the acquisition of two new retail brokers in 2013 strengthening our local platform. Additionally,we added talent to our Project Management, Industrial Brokerage and Property Management teams, all bringing impressive qualifications and experience. Whether the scope is local or global, we are confident that our CBRE team provides the relevant experience, market knowledge and proven track record to help our clients make the most informed business decisions. Thank you for your support and trust in 2013. Cheers to all for continued growth and success in 2014. -:" 1 . Blake Hastings Matt Nicoll Managing Director, Managing Director, Brokerage Asset Services • — - sr. �A p 3K 7,7 ar 1111111111L MUM • _ 31 MINNEAPOLIS MARKET OUTLOOK 2014 C B R E :1 2014,CBRE,Inc. LOCAL MARKET 1.. MINNEAPOEIS/St PAUL Offices 2 Employees 965 Real Estate Professionals 153 Property Sales (# transactions) 206 Property Leasing (# transactions) 799 Commercial Properties Under Management 21M SF Loan Originations $562.2M Project Management Assignments 118 totaling $72.3M Valuation and Advisory Assignments 1,458 �, i, II �it i + 1 0 it 1:11�� M �.. 1 1 1 I , } y 1 Illb _.w ' RN I I 1 _ice+H-- r I 1111 ,111 1 0 1 . so �( r. ,- i r s � j a *it f• Bloomington, MN Office /linneapolis, MN Office 4 , .,c ,{,ET ) 1 -D. 2TI , CBRE "P 2014,CBRE,Inc. MINNEAPOLIS OFFICE Written By: DOWNTOWNMork McCary, Senior Vice President Reed Christianson, First Vice President Er n Wendorf, Senior Associate 2013 REVIEW Significant Total Building SF Type Building • As predicted, 2013 was another year of modest improve- Transactions ment in the Downtown Minneapolis office market. Wells Fargo 350,000 SF Renewal Northstar East • Total positive absorption among all building classes was over 76,330 square feet, or less than 1.00%of the office Oracle 137,000 SF Renewal Oracle Centre base. Gray Plant,Mooty 109,000 SF Renewal IDS Center • Class B and C buildings continued their comeback. Schwegman, • The Class A submarket, which has been the vanguard Lundberg& 42,434 SF Renewal TCF Tower of downtown's office recovery, was the biggest loser as Joessner PA companies continued to downsize and relocate to more OiifCe1 CBRE,Inc. economical, well-positioned Class B options. • Vacancies below the 20th floor in the Class A submar- ket increased 4.30%, leading to continued competition among landlords for new tenants. Downtown Minneapolis Net Absorption • Most tenant relocations continued to reflect some degree 120'000 of upgrading. 90,000 60,000 • In terms of property sales,nine downtown office buildings were sold in 2013,which represented an unprecedented 30'000 18.00% of the entire office universe in the submarket: o Plaza VII, IDS, RBC Plaza, Gaviidae II, Gaviidae I,Oracle (30,000) , <: and International Centre, Neiman Marcus Building, Ca Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 Q2'13 03'13 Q4'13 nadian Pacific Plaza, 510 Marquette and TriTech. source:CBRE, 2014 OUTLOOK • Despite the low unemployment rate in Minneapolis/St. Paul of 4.60%, a sputtering economy along with cautious Downtown Minneapolis Average Asking Lease Rates employers will set the stage for another year of modest 9= recovery in the Downtown Minneapolis office market. Class Class B 15.00 • As net rent spreads continue to widen between Class A 1460 renewals and Class B alternatives, reverse migration will continue. 14.00 13 2013 Trend 2014 Forecast Abrption Ii:I Vancy Qed Rate Concessions ► ♦ 10. Q1'12 Q2'12 03'12 Q4'12 Q1'13 02'13 Q3'13 Q4'13 The arrows are trend indicators from a year over year time period and do not urce:CBRE, represent a positive or negative value. 5 1 MINNEAPOLIS MARKET OUTLOOK 2014 C B R E 0 2014,CBRE,Inc. MINNEAPOLIS OFFICE SUBURBAN Written By: Brian Helmken, First Vice President Brian Wasserman, First Vice President 2013 REVIEW 2014 OUTLOOK • The Minneapolis suburban office market located in the In 2014, we expect to see continued downward pres- 1-394 and 1-494 corridors includes the west and south- sure on employee per rentable square foot ratios. For- west suburbs of St. Louis Park, Minnetonka, Plymouth, tune 500 firms continue to employ alternative workplace Eden Prairie, Bloomington, Edina, Richfield, Golden strategies with space reduction goals as high as 30.00%. Valley and Uptown. Overall vacancy to decline modestly. Rates will rise as • In 2013,the market experienced four consecutive quar- premier properties push the $20.00 net per square foot ters of positive net absorption, totaling nearly 156,000 level in certain markets. square feet. The bifurcation trend of Class A properties will con- • Overall,vacancy rates increased two percentage points tinue in 2014. Premier Class A properties have almost rising from 15.00% in 2012 to 17.00% in 2013. This no meaningful vacancy, often nearby Class A properties jump is mainly due to the addition of a 300,000-square- have above market vacancy rates. The struggling Class foot vacant, single-tenant building that is being mar- A properties will slowly heal in 2014, provided they offer keted as a multi-tenant property. a better value proposition than upgraded Class B assets. • Vacancy increased in Class A and Class B properties r Deal costs remain stable with reduced concessions in to 16.00% and 18.00% respectively, while vacancy re- premier properties due to their high occupancy levels. mained much higher for Class C buildings at 21.00%. Multi-tenant office absorption will fare better than 2013. • Class A tenants exhibited economic strength by provid- Absorption relative to the size of base continues to be ing most of the suburban growth with significant lease anemic. extensions and expansions similar to 2012. The current glut of large Class B and single-story office • New leasing activity was spread fairly evenly between properties with high vacancy continues. It is likely there the 1-394 and 1-494 submarkets. will be more large properties coming to market. • Net asking rates for Class A remained stable for all of Despite the underlying solid fundamentals in the premier the western markets with 1-394 leading at $16.16, 1-494 Class A market, no new speculative construction will at $15.48 and the Northwest at $1 1.10. Class B saw a commence in 2014. There is currently a $3.00 to $4.00 slight increase to $1 1.87 on 1-494, $12.49 on 1-394 and spread in current rents versus the rents necessary for new $10.08 in the Northwest market. construction pro-forma. Developers will continue focus- ing efforts on single-tenant opportunities and selected redevelopment of troubled assets. Quality multi-tenant office development sites continue conversion to multifamily or single-tenant build-to-suit. 2013 Trend 2014 Forecast Absorption ► • Vacancy Quoted Rate ► • Concessions ► ► "The arrows are trend indicators from a year over year time period and do not represent a positive or negative value. 6 I MINNEAPOLIS MARKET OUTLOOK 2014 C B R E ©2014,CBRE,Inc. ST. PAUL OFFICE DOWNTOWN Written By: Jerry Driessen,Vice President Joe Hughes, Senior Associate 2013 REVIEW 2014 OUTLOOK • The 2013 Downtown St. Paul CBD office market re- • We predict a continual gradual improvement in market bounded nicely from that of previous years, albeit at c1 conditions. Vacancy will decline by approximately 2.00% slow pace. to 3.00% by year-end 2014. • Overall vacancy decreased from 23.00% year-end of Many trending issues affecting the office market include 2012 to 18.80% year-end of 2013 —a very positive star technology, hoteling,workplace strategies, employee re- tistic. tention and attraction, creative open plan design popu- larity, mass transit, core city rebound, low interest rates, • The net absorption in 2013 was half that of 2012 but low cap rates, low unemployment, competition from oth- still positive. The year ended at 10,854 square feet of net er states, connectivity, increasing construction costs and absorption. We now have two consecutive years of posi- lead time, increasing demand for plug and play space, five absorption after four negative years. and most importantly, efficiency in space. • Renewals were the focus of the market, some of which . Shopping the market early in 2014, is a 45,000-square- included rightsizing. Infor, USBank,Springsted and TKDA foot new requirement, a 35,000-square-foot relocation all renewed their leases which aided the recovery. from the suburbs, a 125,000-square-foot renewal, and a 25,000-square-foot renewal, all of which helps the • Also assisting in the recovery, new leases were added perception of activity. to the market including MNSure, Arch Insurance, Regus and West Academic. The relocation and expansion of St. Major sales and lender involvement will continue into Paul Foundation and Bush Foundation helped the market 2014. Currently seven properties are for sale on the as well. market ranging from 100,000 to 350,000 square feet. Redevelopment sites are still available including Macy's • Sales were the buzz of the market which included US and Woolworths. Bank Center, 180 Kellogg, Gilbert, 350 St. Peter and The Minnesota Club. . Owner-users have recently discovered or are following the herd mentality, that long-term real estate ownership • Lease rates continued their slow increases, as in previous far outweighs leasing. This is true for the long-term play- years. Year-end net office rates were at$12.42 for Class ers that are not quarterly results driven. Short-term result A and $10.28 for Class B. Gross rates ended the year at entities are still required by Wall Street to lease, provid- $22.28 for Class A and $19.58 for Class B. ing ultimate flexibility and anticipating business returns higher than typical commercial real estate returns. Significant Total SF Type Building Transactions Downtown St. Paul Net Absorption US Bank 127,000 SF Lease 101 E 5th 180 Kellogg 725,000 SF Sale Post Office 100.000 US Bank Center 360,000 SF Sale 101 E 5th au o 0 Info(Lawson) 140,000 SF Lease Commons (100,000) 'Source:CBRE,Inc. O tf _ O - (200,000) 2013 Trend 2014 Forecast (300.000)—' (400,000) Absorption (500,000) Vacancy 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 cRFT _ Quoted Rate • Construction The arrows are trend indicators from a year over year Ewe period and do not represent a positive or negative value. 71 MINNEAPOLIS MARKET OUT, C B R E :C:2014,CBRE,Inc. ST. PAUL OFFICE SUBURBAN Written By: Jerry Driessen, Vice President Joe Hughes, Senior Associate 2013 REVIEW 2014 OUTLOOK • The suburban St. Paul/East metro office market in 2013 Suburban St. Paul is projected to continue its slow im- also continued a slow and gradual improvement. provement in 2014. No new multi-tenant development larger than 30,000 square feet is currently planned to be • Absortion was up from 23,000 in 2012 to 136,500 in built. Build-to-suits continue to be built along with small- 2013. This again is the lead story, proving to be more er multi-tenant office, medical and tech/flex buildings. than four times larger than 2012. We predict a 2.00%to 3.00% decrease in overall vacan- • Vacancy improved in both Class A and B buildings, de- cy. That could change if siginificant vacant owner user creasing from 24.00%to 21.00%in Class A,and 28.50% buildings get renovated into the mutli-tenant competitive to 25.00% in Class B. Overall vacancy for the suburban set. St. Paul/East metro submarket was down one percentage point from 2012 to 28.70%. Lease rates will continue to improve due to no new con- struction and increasing replacement costs. • Significant large blocks of space are on the market including those that are not included in the multi-ten- Office tenants over 50,000 square feet who are shop- ant numbers. These include the 450,000-square-foot ping in the East metro (not CBD) in early 2014 will have State Farm Regional Office; 200,000-square-foot nine options to choose from in addition to the tech heavy 'motion; 250,000-square-foot Delta Airlines; and finish spaces. 350,000-square-foot Hartford Insurance. 2013 Trend 2014 Forecast • Lease rates on the net basis slowly increased in 2013. Class A saw a 1.00% increase to $12.66, while Class B Absorption saw an 11.00% increase to $1 1.43. Vacancy • • • Midway vacancy inched up a bit from 9.50% in 2012 to 10.30% in 2013. Class A net lease rates are up sig- Quoted Rate • nificantly to $14.07. Absorption in 2013 was half of the 2012 mark. Construction • Overall vacancy in the Burnsville, Eagan, Apple Valley 'The arrows are trend indicators from a year over year time period and do not area increased from 17.00%in 2012 to 20.00%in 2013. represent a positive or negative value. Absorption was significantly off from the 2012 mark. Significant Suburban St. Paul Net Absorption Transactions Total SF Type Building Roseville 150,000 Corporate 250,000 SF Sale MT Office 100,000 Lockheed 75,000 SF Lease Eagan Tech 50,000 1275 Red Fox 75,000 SF Sale MT Office 0 S e g. O N of (50,000) a Radiant Financial 55,000 SF Sale Ardenwoods zt. (1 00,000) "Source.CBRE,Inc. (150,000) 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 crce.CBRE,I- 8 MINNEAPOLIS MARKET OUTLOOK 201-) C B R E ©2014,CBRE,Inc. GLOBAL CORPORATE SERVICES Written By: Charles Caturia, Senior Vice President 2013 REVIEW °'014 OUTLOOK • Corporate real estate decisions continued to follow in The arrival of new corporate entities like Shutterfly, the the direction of the overall economy, which were seen organic growth of companies like Prime Therapeutics, locally in cautious but positive absorption rates. and the new construction of the Vikings Stadium and the Stadium Village anchored by Wells Fargo should all • Companies became increasingly cost-focused in continue to add momentum. the past year, with an emphasis on efficient space utilization and a downward migration to lower quality Many U.S. manufacturers — driven by technological spaces. advances, cheaper energy and quality concerns—are reshoring operations, which will add to further local • Layoffs among some of Minnesota's largest and national advances. corporations have been a constant source of discus- sion in 2013. Target, Best Buy and Supervalu have As the overall office and industrial product supply re- shown their desire to stay lean in the face of decreasing mains relatively unchanged and vacancies gradually margins. decline, rates will increase putting more pressure on managers to use space more effectively. • The U.S. unemployment rate has dipped below 7.00% for the first time in five years,though some of the reduc- Movement toward flexible work space will continue with tion has been a result of people simply dropping out of fewer private offices, smaller cubicle configurations to the work force. allow for additional desk spaces and a significant in- crease in the amount of non-dedicated work area. • The Fed has finally signaled a tapering of its quanti- tative easing program which has kept interest rates at 2014 will see a renewed examination of mobile and historical lows. remote workforce as companies reengineer their meth- ods of operation. • Asking rates continued their upward climb in 2013, driven in large part by the lack of new construction and Continued efforts to centralize corporate real estate the decreasing availability rate. functions will be a focus as a means of better cost con- trolling and uniform implementation as well as enforce- ment of best practices portfolio wide. Greater emphasis will be put on labor analytics, in- cluding availability, quality and cost of the workforce, when selecting new locations for operations. Business will also develop new efforts to create functional and flexible space to attract and retain the new millennial Significant workforce. Total SF Type Building Transactions Dorsey&Whitney 250,000 SF Renewal 50 South Sixth 2013 Trend 2014 Forecast Absorption • A Be the Match 240,000 SF Relocation 524 North 5th Vacancy • • Kroll Ontrack 195,000 SF Renewal Multiple Plymouth Quoted Rate • • AIMIA 143,122 SF Renewal Corporate Center Construction • Infor,Inc. 142,761 SF Renewal Lawson Commons The arrows are trend indicators from a year over year time period and do not •Source:CBRE,Inc. represent a positive or negative value. 9 MINNEAPOLIS MARKET OUTLOOK 2014 C B R E :?2014,CBRE,Inc. CAPITAL MARKETS Written By: OFFICE & INDUSTRIAL Steven Buss, Executive Vice President Ryan Watts, First Vice President 2013 REVIEW 014 OUTLOOK OFFICE OFFICE • 2013 brought 11 new investors to the Minneapolis of- Capital interest in Class B CBD assets and suburban fice market. Buyers migrated from both Gateway office Class A properties will increase, placing downward markets with much lower yields and from regional mar- pressure on cap rates. kets with less attractive space market fundamentals. Investors will increasingly recognize the attractiveness • Minneapolis CBD sales totaled $574 million and repre- of risk adjusted returns in Minneapolis where there is sented 65.00%of the $890 million in total 2013 multi- strong GDP growth,above inflation market rent growth tenant sales volume. Notable sales in the Minneapolis and virtually no new supply. CBD included the $255 million sale of the IDS Center, the $126.5 million sale of the RBC Plaza and Gaviidae i Cross border capital flows will increase as additional Common, and the $73 million sale of the Oracle and foreign investors arrive after observing the success of International Centre. Canadian and middle eastern investors in acquiring and successfully operating assets in Minneapolis. • The largest suburban sales were high quality proper- ties leased to investment grade tenants. Notable sales INDUSTRIAL included the $123 million sale of Cargill at Excelsior Investment demand will increase for Class B light indus- Crossings and United Health Care's sale/leaseback of trial properties with clear heights ranging from 18' to two buildings for $146 million. 24' with infill locations. INDUSTRIAL Real estate investors including public REITs will consider • Pension Fund Advisors, Life Companies and Private speculative development as an alternative to buying ex- Investors are the most active buyers for high quality, isting stabilized product. low finish properties with 24' and greater clear heights. Cap rates for the best 32' properties are now 6.00% i Investor mindset will shift from cap rate compression to to 6.20% and the best quality 24' clear properties are property operations. CBRE expects NOI increases re- trading at 6.25%to 6.50%cap rates. suiting from vacant lease up and higher renewal rates to more than offset increases in long term interest rates. • High quality Minneapolis only portfolios are achieving pricing premiums compared to multi-market portfolios including Minneapolis with other assets in less desir- Minneapolis/St. Paul Industrial and Office Sale Activity able secondary industrial markets. Transactions over$5M • 2013 sales and current on market high finish sales, in- Industrial SuburbonOffce CBD Office cluding the Liberty and Hines portfolios, will result in $800 over $240 million of high finish sales; this is the high- $700 est level since 2005. High finish portfolios are being targeted by local operators with institutional capital o 6600 partners as well as national equity funds attracted to ss00- the higher yields and the space market and economic Savo recovery in the Minneapolis market. o p 6300 ' -. 0 $200 I I 6100 s ko m ti$; -a"IF.:ro .rn tn:.°D'„-:;o n SO 2007 2008 2009 2010 2011 2012 2013 Rai Cap tai A lay ics and CBRE Minne cobs Inst;ro oral Or" 1 2.3 1.13 10 I ,NE; POLIS ? APKET OUTLOOK 2u 1-I CBRE 2014,CBRE,Inc. CAPITAL MARKETS RETAIL Written By: Jim Leary, Senior Vice President Jeff Budish,Associate 2013 REVIEW 2014 OUTLOOK • Grocery anchored and investment rated, single-tenant • Investors will continue to focus on credit and operational retail were the most sought after asset classes; cap viability of individual retailers with a strong preference for rates for these product types compressed throughout centers where NOI is provided by daily needs retailers. the year. In spite of rising interest rates, cap rates on core retail • All retail asset classes experienced NOI growth due investments will remain flat to slightly lower. This is due to improved occupancy levels as well as rental rate to current wide spreads between treasury rates and cap growth. This, combined with the lack of new construc- rates as well as the continued economic recovery. tion, has forced investors to consider non-core product classes. Overall sale activity and pricing has reached pre-reces- sion levels, however, due to a lack of new construction • Institutional owners have spent much of the past year and general shortage of supply,we anticipate sale activ- shaping portfolios by selling non-core assets and re- ity to remain flat to slightly declining in 2014. Pricing placing them with higher quality assets. could increase due to continued demand from the REIT sector, increasing demand from private coastal investors • Private equity companies and individuals from coastal shopping for higher yield and constrained supply. states have shifted their focus toward midwestern states with the hope of acquiring properties at comparatively Estate planning, portfolio shaping and maturing debt higher returns. The trend started a few years ago, but will continue to drive selling decisions; however, higher increased measurably in 2013. capital gains tax rates will cause investors to carefully weigh all options. Consumer Confidence Index ' Regional malls and community centers will continue to 140 reinvent themselves or slowly die off; this can be seen in projects such as Southdale, Northtown Mall and Mall of 1 loo America, where excess surface parking is converted to o both retail strip centers, structured parking, hospitality, i 11 dining and housing. ? 6° ' Investors will be focused on an increasingly narrow crite- ria for acquiring new product. Wall Street has obligated 20 I I I I I I I I I I I I public REITs to better define themselves within a specific 00~ dss oP co cP" 01 0P o0Q o`o o`, 0`1' 0`0 product type and private equity companies are creating 1 1. % % .1 % 1 '1 1. 1. "1 P tYP P q �' P 9 Sr, r,,( e':-BO, funds which target specific retailers. Minneapolis/St.Paul Retail Sale Activity ngle Tenant Cop Rate Compression by Quarter Transactions over$2M �::B-to AA+Rated Retailers) Grocery Molt/Other Strip 6.9% $250 6.8% $200 - 6.7% ,; w 0 6.6% - - G 5150 - a _ V 6.5% ..S $100 _ b.4% v ;` ',: _ 6.3% I O 411 _ 2% SO - � •, 6., Q3'12 Q4'12 Q1'13 Q2'13 Q3'13 04'13 2007 2008 2009 2010 2011 2012 2013 'Source:Real Capital Analytics CBRE 11 I MINNEAPOLIS MARKET OUTLOOK 201 '. 'c 2014,CBRE,Inc. CAPITAL MARKETS Written By: MULTI-HOUSING Keith Collins, Senior Vice President Abe Appert, Senior Vice President Ted Abramson, Senior Associate Laura Hanneman, Client Services Specialist 2013 REVIEW Significant Units Buyer Transactions PROPERTIES OVER $5 MILLION • 2013 was a notable year with the first urban sale since Stoneleigh at the Reserve Weidner Apartment 2008, which also happened to be at the highest price Plymouth,MN 361 Homes per unit the market has seen. Promenade Oaks 281 Nighthawk Properties/ Eagan,MN Osprey Properties • For property sales of $30 million and greater, 33.00% were built in the 2000s, 17.00% in the 1990s, 22.00% Lake Calhoun City 158 L&B Realty Advisors Minneapolis,MN in the 1980s, with the balance built prior to 1980. The Barrington 282 CAPREIT Woodbury,MN • Cap rates trended down, resulting in the first sub- 5.00% cap rate at 4.51% for a newer urban property. Southwind Village 320 Virtu Most suburban value-add properties vZere in the mid- Burnsville,MN to high-5% range, while Class C product was in the Source:CBRE,Inc. 6.75%to 7.25% range. • New construction was robust with the greatest activity in the past 20 years. In 2013, 4,300 units were delivered, Minneapolis/St. Paul Market Statistics as were six student housing projects totaling 490 units Average Rent Cap Rates vacancy at the University of Minnesota. $1,000 1.00% • Effective rent growth year over year as of the third quay- 700% ter of 2013 was 3.80%, and occupancy remained at $950 6 ;, A , 97.00%or greater for ten consecutive quarters. e iMab/. AW! , 600% $900 PROPERTIES UNDER $5 MILLION 5 5.00%I ' • These properties continued to perform operationally. It ° $850 ( 4.00% was by no means a banner year in transactions, but o 300% activity picked up significantly in the fourth quarter of S800_ fir; 2013. Total transaction volume for $1 to $5 million i 2.00% properties was $66 million. $750- l.00% c M1°o, M1°°M1 M1°°3 M1°0' M1°off M1°ob M1°°1 M1�'o ti°� M1°moo M1°-.` M1°- M1°<* • Cap rates continued to compress to 6.00% and some 2:CBRE.Inc.and Marquette Advisors sub-6.00% based on in-place numbers for prime locat- ed Class B and C assets,to 7.50%for more challenging Class C locations. Minneapolis/St. Pout Sates Volume $5+million transactions • Investors have in-place cash yield expectations of $eoo 6.00% to 8.00%. Buyers continue to be willing to pay up for value-add opportunities as they have seen posi- Y700 tive results in doing so. „ s000 0 S500 -5- $400 0 S $300 32°43 I` I I I $100 $0 9&o. o° o°� o°� o`° 0' M1 M1 M1 M1 M1 M1 M1 M1 M1 h M1 M1 1 M1 ;.:rce:CBRE I^c. 12 I MINNEAPOLIS MARKE` _OO J': C B R E .0.2014,CBRE,Inc. CAPITAL MARKETS Written By: MULTI-HOUSING Keith Collins, Senior Vice President Abe Appert, Senior Vice President Ted Abramson, Senior Associate Laura Hanneman, Client Services Specialist 2014 OUTLOOK PROPERTIES OVER $5 MILLION PROPERTIES UNDER $5 MILLION • Expect to see an increase in sales activity in 2014, par- The small to midsize apartments will see an increase titularly for urban core properties constructed in the in transaction volume. Many owners look to capitalize past ten years and value-add opportunities. on current (last one to two years) NOI growth and the continued low interest rate environment. • Investors remain bullish on value-added potential for well-located 1980s suburban properties and will con- With improving operations and the growing comfort tinue to take advantage of attractive financing options. level among consumers to remain renters or transi Life companies and commercial mortgage-backed se- tion away from home ownership (e.g. millennials, curity companies will compete with agency lenders. echo boomers, baby boomers), operations should stay strong. • Physical vacancy (one of the lowest in the nation) will likely increase somewhat in 2014 as new supply enters 2013 Trend 2014 Forecast the market. • Cap rates for new urban core properties will likely re- New Development • • main sub-5.00%, and value-add 1980s vintage prop- erties should continue to trade in the high 5.00%to low Vacancy • • 6.00%cap rate range. Quoted Rate • A • Core plus deals are likely to remain stable in the 5.00% to 5.50%cap range. Cap Rates • • • Thirty-six projects are under construction totaling 6,300 •The arrows are trend indicators from a year over year time period and do not • units, and an additional 100 projects are planned or represent a positive or negative value. proposed totaling 15,600 units; many of which will not be built. Almost half of the new properties being built are located in the urban core areas of Minneapolis in- cluding Uptown,the North Loop and downtown (1.90% Wir of the metro area's inventory). -. — • All located near the University of Minnesota, five stu- 1 dent housing projects totaling 959 units are under con- : Y..�-••-■ struction, and an additional six projects totaling 690 - units are planned. - ar G fa s • Class C asset activity will increase as yield seekers move to secondary locations and assets. air -- ` �+ , 13 I MINNEAPOLIS MARKET OUTLOOK 2014 C B R E '0 2014,CBRE,Inc. DEBT AND STRUCTURED FINANCE Written By: Joel Torborg,Vice President Ben Bastian, Production Analyst 2013 REVIEW 2014 OUTLOOK • U.S.Treasury rates rose from their historic lows in 2012. Leverage alternatives will be readily available through- The 10-year U.S.Treasury rate increased 1.26%closing out the capital stack, plenty of liquidity. the year out at 3.04% compared to 2012's year-end at 1.78%. Global economic indicators will continue to improve. As the Treasury and Federal Reserve continue their ta- • Fannie Mae and Freddie Mac followed up their record per,this will remove artificial demand, increasing yields year in 2012 of approximately $62 billion in loans with on U.S. Treasuries and putting upward pressure on in- a combined total of approximately$57 billion.This was terest rates. in line with their 2013 projections. Investors continue their move to floating rates for short- • CMBS was the biggest change among the commercial er term loans in order to take advantage of lower inter- real estate lenders, providing additional liquidity to the est rates at the shorter end of the yield curve. capital markets. CMBS volume in 2013 was $86.1 bil- lion, a 78.00% increase over the previous year and al- Underwriting standards will remain relatively firm. most three times that of 2011's volume. CMBS was also competitive at higher leverage deals. With agencies having now repaid the Federal Govern- ment and returning to profitability, they will focus on • Life companies continued to win longer term,fully am- traditional fundamental underwriting, verses loan vol- ortizing deals from agencies and continued providing ume origination targets or reductions. forward commitments on multifamily construction loans prior to stabilization. Life companies were primarily fo- Select life companies will return to more traditional LTV cured on 65.00%to 70.00% LTV business. rates of 75.00%, while still chasing risk adjusted yield. • Banks won a larger share of business with low leverage The CMBS volume will continue to increase as the (>60.00% LTV), non-recourse floaters on shorter term demand for AAA and B piece bonds continues to be loans, providing borrowers with overall lower interest strong and the rating agencies are consistent with their rates. underwriting of portfolios. CMBS volume in 2013 was $85 billion, up from $35 billion in 2012 and likely to • While lenders were more amendable to higher LTV surpass $100 billion in 2014. loans in 2013, average LTV ratios hovered around 65.00%, significantly below the 70.00%-plus levels seen in 2005 and 2007. Looking forward, however, le- 2013 2014 verage is anticipated to go up in 2014. Trend Forecast Annual CMBS Issuance in the United States Market Volatility 250 Lender Regulation 225 200 Distressed Properties 175 I 11 LTV Ratios ,• 150 • 125 — — CMBS Lending 100 — — o Construction Loans 'p 75 — a 50 — Mortgage Rates 25—a ' c i4 h h M a n .a a- .o w a r ni N Tz The arrows are trend indicators from a year over year time period and do not 0 e . M1 !• h b 9 0 4 O M1 g represent a positive or negative value. *. M100, M10 `1.00 'y00 '1.00 '19 `10„CI Source:Commercial Mortgage Alert CBRE 14 I MINNEAPOLIS MARKET OUTLOOK 201-i �>2014,CBRE,Inc. INDUSTRIAL Written By: Bryan Van Hoof, Senior Vice President Katy Mulcahy, Associate 2013 REVIEW 2014 OUTLOOK • The Minneapolis/St. Paul industrial market continued . The Minneapolis/St. Paul industrial market continues to it's strong performance in 2013. In virtually all catego- be one of the strongest commercial real estate sectors ries we saw positive improvements with net absorption in the region. The local market surpassed the one mil- ending the year at 2,600,129 square feet. This marks lion square feet mark of positive net absorption in the the 14th consecutive quarter with positive net absorp- fourth quarter of 2013. tion. • The year started out with a flurry of build-to-suit activity • Vacancy rates continued to decrease in the local mar- and will continue through the first half of year. Ruan Lo- ket. This was primarily due to occupier demand for gistics agreed to terms on over 299,000 square feet of quality space. Tenants looking for larger spaces, such new construction. Liberty Property Trust landed a 232,000 as 75,000 square feet and above, have very few Class square foot tenant in their latest speculative project. A options. Speculative developments will continue in early 2014 • Asking rates increased from a recent average of $4.50 due to the lack of Class A industrial product that tenants per square foot (for all product types) at the beginning in the marketplace currently demand. In the first guar- of the year to $4.73 at the end of the year. ter alone, there are two projects scheduled to break ground totaling 798,000 square foot. • The industrial investment sale market remained robust throughout 2013. The continued interest by institution- • Average asking rates are anticipated to rise as the market al investors for quality and stable product made pricing continues to favor the landlord,specifically new construction. very competitive as cap rates compressed to all-time lows. As cap rates on core assets decreased, industrial • Overall, the 2014 industrial market will continue to investors were motivated to consider alternative prop- build on the positive momentum created in 2013. erty types within the industrial sector. 2013 Trend 2014 Forecast • Occupier building values have continued to increase. • Absorption • • New construction was very active throughout the year. By year-end, there were 16 industrial properties under con- struction in the Twin Cities market totaling 2.24 million Vacancy • • square feet. Quoted Rate • • • Speculative development continued to be a hot topic. There were three speculative development projects com- pleted by year-end totaling 567,800 square feet. These Concessions • • projects are nearly 100% occupied. 'The arrows are trend indicators from a year over year time period and do not represent a positive or negative vale. • Activity from the development community was fierce in 2013. National players such as Scannell and McShane joined the local standbys of Ryan, Opus, CSM and United Minneapolis/St. Paul Market Statistics Properties. Absorption Vacancy 4 9.00 at Significant Location Type Size 3 8 00 Transactions 7.00 § 0 2 ����� 6.00 US Foods Eagan Sale 337,000 SF i 1 - ` 900 vv'i 0 S. ■ ■ rr�■■■ ■ ■ 400 Superior Logistics Minneapolis Sale 350,359 SF 3.00 111 2.00 ProtoLabs Plymouth Sale 175,000 SF (2) 1.00 13) 0.00 `Source.CBRE,Inc. 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Socrce:C&RE.Inc.and iV'n a Jette AcR s:D'5 15 j MINNEAPOLIS MARKET OUTLOOK 2014 CBRE 'h 2014,CBRE,Inc. Written By: RETAIL Matt Friday, Senior Vice President David Daly, Vice President Eric Sheaffer, Client Services Specialist 2013 REVIEW )14 OUTLOOK • Class A retail sites able to accommodate 10,000 to As realized in 2013, prime retail space in quality cen- 15,000 square feet by way of redevelopment were ters remains scarce, causing rates to continue to in- highly sought after by investors. These sites are gener- crease in 2014. ally fully leased at groundbreaking, well before they hit the market. We will see continued activity in the grocery sector as Aldi, Fresh Thyme, Lund's/Byerly's and Whole Foods • Small strip center and urban infill projects were the continue expansion efforts. most sought after spaces for retailers. Pizza will become active in QSR. • Additionally, quick service restaurants (QSR) have re- mained very active (burger, yogurt,Asian and chicken). Medical tenants, most significantly dental, will continue to absorb space. • Junior to mid-box vacancies (10,000 to 30,000 square feet) were leased quickly as stronger retailers took ad- Despite stagnant growth in outer suburban markets, vantage of others giving back space in strong trade ar- retailers well-positioned both financially and competi- eas. tively could start exploring third tier markets for sites to accomodate their future growth. • Well positioned retail within mixed-use projects saw suc- cess with grocery chains, restaurants and service retail. Retailers seeking expansion will keep a close eye on the Office Max/Office Depot consolidation. • A noteworthy mixed-use project completed in 2013 is Ryan Company's Whole Foods development in Minne- Rainbow Foods, Barnes & Noble and JCPenney space apolis at 222 Hennepin. could come available as they refine their business mod- els. • Minneapolis/St. Paul was one of the most active retail markets in terms of new construction. Most notably, Neighborhood centers in second and third tier suburbs Paragon Outlets in Eagan,The Promenade of Wayzata, should not expect to see an increase in activity. Shingle Creek Crossings and Cabelas—Woodbury. Regional malls that have not developed a strategy to • A combination of new multifamily and student housing rebrand or create a new customer experience, mainly mixed-use projects were catalysts for new retail space with entertainment options, could continue to struggle. delivered. Landlords will pay close attention to creating a sustain- • Large tenants who left their occupied space included able tenant-mix by adding service retail and medical in Macy's at 411 Cedar in St. Paul, Neiman Marcus at lieu of apparel which has been very competitive. 505 Nicollet Mall in Minneapolis and Rainbow Foods at Rockford Road Plaza. 2013 Trend 2014 Forecast Significant Transactions Tenant Size Absorption • • Ridgedale Center Nordstrom's 138,000 SF Vacancy Shingle Creek Crossings LA Fitness 45,000 SF Quoted Rate • • Rockford Road Plaza Kohl's 65,000 SF Construction • A 9895 Hudson Place Hobby Lobby 49,000 SF The arrows are trend indicators from a year over year time period and do not Southdale 494 Center Marshall's 26,100 SF represent a positive or negative valve. Southdale 494 Center Total Wine&More 17,300 SF *Source:CBRE,Inc. 16 I MINNEAPOLIS MARKET OUTLOOK 2014 C B R E C 2014,CBRE,Inc. LAND Written By: Richard Palmiter, Vice President Brian Pankratz,Vice President 2013 REVIEW ?014 OUTLOOK • Retail started its come back with the Paragon Outlets Retail construction will continue its comeback.The mar- in Eagan which began construction in May 2013 with ket will see the spillover effects from just being urban an expected completion and opening in August 2014. development into some second or third ring suburbs. This more than 400,000-square-foot shopping center was the largest to start construction, but Whole Foods, . The industrial market will continue to see additional Trader Joe's, Walmart and other service retailers also speculative development and build-to-suit projects. If opened new locations in 2013. the Minnesota Warehousing Tax does not get repealed, we could see a slow down new development in Min- • Apartments continued to be the leader in new con- nesota to more favorable tax states such as Wisconsin. struction focused mainly on the Minneapolis/St. Paul urban areas. The prime locations included University With the near completion of the large Target and Unit- of Minnesota campus, North Loop, downtown St. Paul, ed Health Group projects, there will be little new office Uptown and the Hwy 394/Hwy 100 Corridor. The 222 space built in the metro besides medical office projects. Hennepin opened, creating the first new mixed-use de- velopment anchored by Whole Foods and a 275-apart- ' The Twin Cities could see two new master planned proj- ment building. ects come to the market in Arden Hills and Rosemount- both former ammunition sites used during World War II. • Single-family for sale housing took off in the first nine months of 2013 while interest rates remained low. ' The housing market will remain strong in sales and National homebuilders continued to lead the charge rentals. New apartment projects will continue to pop in prime locations including Wayzata School District, up near transit centers. As land prices escalate, for sale Maple Grove, Blaine, Lakeville,Woodbury and Otsego. housing will continue to push into new suburbs and A few new townhome projects were started that were townhome projects will see increased demand. haulted during the slowdown. • Industrial development made an exciting comeback in 2013. New industrial spec developments started in lo- cations with good interstate access, pro-business cities ` ' `, -- X10, - and strong labor pools. Cities that saw development ," .,; I% a either build-to-suit or spec, included Rogers, Brookly n Park,Chanhassen, Roseville,Maple Grove and Dayton. r' 11 I /[\/ , w - . :�- I 4%fL - I • With the return of residential development, we so- f -.� /, r, , an increased interest in speculative land purchases by ;� . " c - investors. As the unknown Farming Bill still lingers in • i ` Congress, farm land prices seemed to have topped out -- for the moment but could change in 2014. µ.f` Jj ..401111 MIN 4 MIN.iiip 01: 4,.. ..: 44 . 17 I MINNEAPOLIS MARKET OUTLOOK 201 4 C B R E '`•2014,CBRE,Inc. TERTIARY MARKETS Written By: Sandy Barin, Senior Associate 2013 REVIEW 2014 OUTLOOK • Outstate pricing for vacant buildings trended upward • Corporations continue to right size and readdress their with the rise in new construction pricing. location, size and layout strategies devised prior to 2008. • Outstate cap rates compressed even further from dou- ble digits over the last five years. • The Bakken Oil Range continues to report an extremely high demand for industrial land and buildings. Pricing • Outstate leasing activity increased in 2013 with rents for land and construction is four times that of a typical holding steady. development in the area. • Rising construction costs kept rents higher than the pre- Currently, there are more buyers than sellers for indus- vious five year rental history. trial real estate, which will drive investors to non-core markets. • Labor savings helped to drive tertiary market consid- eration. The lack of metro land sites will continue driving land sales for build-to-suits in the outstate. • Minnesota Warehouse Tax caused warehousing com- panies to consider border towns in neighboring states. State tax programs can entice companies to look to border cities like Hudson, Lacrosse, Mason City and Sioux Falls. Significant TotaE Major Plant Total Transactions Building SF Transaction Location Closures(5 State) Building Transaction Location MPC(CBRE) 270,000 SF Expansion Janesville,WI MonDak Corner New Bakken Transload Facility 400 Acres Oil Range, Development (CBRE) ND Colony Brands 400,000 SF Lease Sun Prairie,WI (Binswanger) Caterpillar Closure 1 70,000 SF Vacant Owatonna, Stag (CBRE) 700,000 SF Sale Janesville,WI (CBRE) Building Sale MN Pactiv Closure 237,000 SF Vacant Chippewa Chart(CBRE) 1 10,000 SF Construction New Prague,MN (CBRE) Building Sale Falls,WI Vacant Pipestan, Chart(CBRE) 150,000 SF Extension Owatanna,MN Suzdon (CBRE) 215,000 SF Building Sale MN "Source:CBRE,Inc. US Foods(CBRE) 89,400 SF Vacant Fairmont, Building Sale MN 'Source:CBRE,Inc. 18 I MINNEAPOLIS MARKET OUTLOOK 2014 CBR E ©2014,CBRE,Inc. DATA CENTER SOLUTIONS GROUP Written By: Dan Curry,Associate 2013 REVIEW 2014 OUTLOOK MINNESOTA MARKET MINNESOTA MARKET • The Minneapolis/St. Paul market is experiencing a Colocation pricing will bottom out in 2014 as the new supply correction as operators and developers from providers work to land initial tenants in speculative around the country have committed to bring specula- projects. tive capacity to the market. Server ready concurrently maintainable cola capacity is set to grow from 1.4 MW Competition and lower pricing among network provid- to 6.5 MW in 2014. ers due to the new market structure will make Minne- sota a more competitive market nationally. • Demand growth from end-users is roughly inline with capacity growth as provider activity and headlines read ' Activity from end-users will increase as boards learn of by the C-Suite brought more attention to the quality of the growing trend to upgrade data centers. the end-users' environments. Providers looking to expand in town will have a wide • The Southwest and Southeast suburbs gained the most range of environments recently vacated and built by traction as the prime data center locations in town. enterprises. • Rates available to users with needs of 100 kW and The tax abatement program enacted by the state will greater were cut by roughly 35.00%, as new provid- support the move to colocation as users find they will ers leveraged different value propositions to provide a only qualify for the program by occupying these facili- lower cost for space, power and cooling. ties. INDUSTRY TRENDS INDUSTRY TRENDS • Large wholesale data center deals expanded beyond Data center investments will grow as more United States traditional markets into secondary markets around the companies will be required to store data in countries country. where the data is consumed due to new regulations stemming from the NSA backlash. • The average cost of unplanned data center outages in- creased to$7,900 per minute, up 41.00%from $5,600 End-users will increasingly look to host cloud comput- per minute in 2010*. ing requirements in the same facility as their data cen- ter requirement. • The enterprise workforce demanded higher quality IT solutions through bring your own device and cloud The leaders in cloud computing will decide to fund their computing solutions. Challenges with security slowed own telecom networks to improve security. This will put enterprises from adopting these technologies. downward pressure on the cost of bandwidth. Minneapolis/St. Paul Data Center Development(SF)** 2013 Trend 2014 Forecast 400,000 Absorption 350,000 300,000 Vacancy $ 250,000 ; t `0 200,000 - ° a " Quoted Rate • V 0 Sr, 1 so,000 100,000 — me, Construction • • 50,000 i 0 ,, , 0 The arrows are trend indicators from a year over year time period and do not 2007 2008 2009 2010 2011 2012 2013 represent a positive or negative value. Source:Ponernon Institute "Source:Contractor websites,news reports,aeria;s;Full building conversions and purpose built fac_ilit es only. 19 1 MINNEAPOLIS P:1ARKET OUTLOOK 2014 CBRE C�2014,CBRE,Inc. HEALTHCARE Written By: Chris Jacobson, Associate Susan Wilson, Associate 2013 REVIEW 2014 OUTLOOK • Containing costs and creating efficiencies were the driv- • The "retail-ization" of healthcare delivery will continue ing trends across the healthcare industry in 2013. Hos- its recent growth pattern as patients seek easy access pitals were reconfiguring space to reduce the number in retail environments. Providers will look for locations of steps physicians and nurses take in getting around. closer to patient residence with high visibility and easy Building design focused on energy efficiency with up- access. We approach the retail environments with care, graded infrastructure and new technology. as we know not all good retail makes for a good medi- cal clinic. • Medical office building sales remained strong in 2013, which were projected to hit $2 billion for the second We expect to see a continued change with the demands year in a row by year-end. set on providers to be bigger, better and cheaper. Hos- pitals and physician groups will seek mergers and ac- • Sanford Health continued to expand into Minnesota by quisitions to increase quality and reduce cost. opening a $9 million center in Bemidji in 2013. r. Investors have an increasing interest in healthcare real • Major healthcare mergers continued through 2013, estate as we approach the wave of baby-boomers en- Most notably, Franklin, Tennessee-based Community tering their senior years with the increased average Health Systems and Naples, Florida-based Health lifespan.We refer to this phenomenon as the"silver tsu- Management Associates. CHS announced it will ac- nami". This, along with 30 to 40 million newly insured quire Health Management in a deal valued at$7.6 bil- that are expected to enter the healthcare delivery sys- lion expected to close in the first quarter of 2014. tern in the corning years, keeps the interest top of mind. • In CBRE news, the company enhanced our healthcare Transition from reimbursement for procedures to reim- platform with the acquisition of KLMK, Group, a lead- bursement for patient outcomes will continue to drive ing healthcare consulting and project advisory firm, physicians to seek the space and efficiency of larger physician groups and systems. This will create demand for collaborative, technological, staff friendly and pa- 2013 2014 tient experience driven facilities. Trend Forecast Cost containment strategies and lower reimbursements Regulatory Control • • will force providers to seek the continued monetization of assets so capital can be made available for equip- Hospital - ment, staff and delivery related investment. Physician Integration • • Cost containment also means creating efficiencies and Independent delivering lower cost procedures to an expanding range • Physician Practices V of patients. Providers will need to move higher acuity uses from hospitals to medical office buildings which in Formation of New turn will require more sophisticated design and care- Delivery Models, i.e. Payer • ♦ ful attention to provider tenant mix than the traditional - Provider Mergers medical office buildings. The arrows are trend indicators from a year over year time period and do not Advances in medical knowledge will lead to new treat- represent a positive or negative vale. ments. Medical spaces will require flexibility to ensure existing space can be adjusted to keep up with new treatment needs. Lack of flexibility will shorten the life of a facility as changes in equipment and delivery meth- ods improve. Owners of medical real estate will need to be keenly aware of advances in medicine and how such advances affect their provider tenants. 20 1 MINNEAPOLIS MARKET OUTLOOK 2014 CBRE 2014,CBRE,Inc VALUATION AND ADVISORY SERVICES Written By: Mike Moynagh, MAI 2013 REVIEW OFFICE MULTI-HOUSING • The office market exhibited positive absorption in the Overall, 2013 proved to be another successful year for first half of 2013, but absorption leveled off in the sec- a majority of Twin Cities apartment owners. and half of the year. Apartment cap rates remained low despite the increas- • Rental rates increased throughout the year. es to lending rates. • New construction was primarily limited to build-to-suit Effective rent growth was again positive coming off a projects. strong 2012, reportedly around 3.00%, give or take. INDUSTRIAL Absorption was positive for the year although the last • The Minneapolis/St. Paul industrial market showed rel- quarter of 2013 witnessed a slight slow down. This was atively strong fundamentals throughout 2013. on a per property level due to supply increases coupled with the seasonality of the Minnesota rental market. • Leasing and sales activity in the office warehouse sector was stronger than the bulk warehouse and office show- 2013 again finished strong in occupancy with a major- room property types. There was continued interest by ity of submarkets (if not all) continuing to operate at a institutional investors for quality and stable investment level above stabilized. The overall supply increased sig- grade product with cap rates being compressed to all nificantly in select submarkets, which resulted in lease- time lows. up concession offerings at select properties in the fourth quarter of 2013. • Speculative development began following an overall return of market fundamentals including new construc- HOTEL tion in the most desirable areas of the Twin Cities. Hotel operating performance in 2013 generally con- tinued the positive performance growth that started in • Asking rental rates increased slightly for office ware- 2012.This market improvement along with the increase house product. in availability of hotel mortgage financing, resulted in more hotel property sales than in 2012. RETAIL • The Twin Cities area retail market witnessed positive net Property owners and buyers also continued investing in absorption in 2013, and retained one of the largest franchisor required property improvement plans (PIP) amounts of new retail space under construction. and renovations to upgrade their facilities in order to compete in their respective markets. • The new construction was driven by the continued solid performance of retail real estate investments and the One of the notable hotel sales of 2013 was the sale by continued overall economic growth within the Twin Cit- the Carlson Real Estate Company of the Radisson Pla- ies market. za Hotel in the Minneapolis CBD to Chartres Lodging Group. The hotel is currently undergoing an extensive • Investor interests increased with the rise in rental rates renovation that is scheduled for completion in 2014. and decrease in vacancy rates. Based upon our obser- Upon completion, the hotel is to be rebranded as an vation, overall cap rates for properties with long-term upper-upscale Radisson Blu. It reportedly will be only net lease credit tenants decreased in 2013 from the the fifth Radisson Blu in the Americas. year-end of 2012. 21 1 i.N EAPOLIS , RKEF IL) , 2O _t CBRE 2014,CBRE,Inc VALUATION AND ADVISORY SERVICES Written By: e Moynagh, MAI 2014 OUTLOOK OFFICE MULTI-HOUSING • The office market will exhibit moderate improvement In the multifamily market, cap rates are expected to in 2014. remain low through 2014, assuming no interest rate spikes. Effective rent growth is expected to be positive • Absorption will be positive despite tenants seeking to falling between 1.00% to 2.00%. This is still less than improve efficiencies in regards to workspace designs previous years as new construction completions begin to impact occupancy and concessions appear in select • Vacancy will continue to decline. The premium space in submarkets. the market is currently in high demand which will push the top of market rents higher. Occupancy rates will remain high, but will continue to decline through 2014 to a more stabilized level. This INDUSTRIAL will be a result of construction completions and a con- • Growth in the industrial market is anticipated to be tinued improvement in the residential for sale market. steady and is expected to follow the general strength- ening of the economy. Urban areas of Minneapolis will likely witness some short-term vacancy pains in its new construction, Class • Longer lease terms are anticipated. We expect to see A product, resulting in concession offerings and slower an increase of deals extending between seven and 10 than anticipated absorption. The overall supply will years in comparison to the three and four year leases witness significant increases for the next couple years. that have been typical in previous years. Only time will tell how these supply increases will im- pact occupancy, absorption and rental rates. • Some concern is noted related to the recently passed tax by the Minnesota State Legislature. This could result Although a majority of the looming market-rate sup- in significant increases in operating costs to distributors. ply increases are of Class A and A/B properties within urban core and first ring submarkets, there will likely • Improvement is expected in the manufacturing sector be a slight downward vacancy trickle-down effect to the statewide. Market demand for quality bulk warehouse older urban and suburban properties. Tenants will take product with 28' and higher clear height is expected to advantage of any short-term concession offerings in continue.Tenants will continue to have leverage but less new construction developments. so for higher quality investment grade product. HOTELS RETAIL The ongoing improvement in the lodging market has • Based on the strong performance for the retail market also resulted in some new hotel development with a in 2013, market growth is expected to continue into number of proposed hotels that could break ground 2014 within the Twin Cities retail market. in 2014. • Job growth and an increase in consumer confidence We expect that in 2014, the Twin Cities lodging market will play a large role in the retail industry. will continue with the positive performance improve- ment of the last two years and expect an average to • Investors,we believe, remain somewhat cautious for in- good lodging investment demand for most property vestment grade retail properties and what happens to types if they become available. interest rates. 22 1 MINNEAPOLIS MARKET OUTLOOK 201 4 C B R E ©2014,CBRE,Inc. CBRE MINNEAPOLIS/ST. PAUL SERVICE LINES ASSET SERVICES GLOBAL CLIENT STRATEGIES 1 CONSULTING Our Asset Services group transforms assets into opportunities Our Global Client Strategies organization drives superior through customized, value-added solutions that deliver mea- business performance for our clients by maximizing value from curable results in property management, leasing, tenant rela- their real estate assets and management practices. The group tions, project and construction management, technical servic- delivers consulting solutions that combine business intelligence es, sustainable business practices, risk management, business with organizational strategies, portfolio optimization, expense continuity planning, purchasing and financial reporting. management strategies and labor analysis. BROKERAGE SERVICES GLOBAL CORPORATE SERVICES CBRE provides a complete spectrum of commercial real estate Our Global Corporate Services group delivers customized, in- brokerage services for tenants/occupiers, property owners and novative workplace solutions in multiple markets worldwide. narrowly focused vertical industries in the office, industrial and Strategically positioned to answer the real estate needs of our retail sectors. corporate, healthcare, government and institutional clients, the group combines expertise in portfolio management, trans- CAPITAL MARKETS action services and facilities and project management. Our Capital Markets group integrates the company's invest- ment sales and debt and structured finance businesses into HEALTHCARE SERVICES a single, complementary global service offering. CBRE is the Our Healthcare group professionals provide a comprehen- worldwide leader in the acquisition and disposition of income- sive range of real estate and facilities management services to producing properties for third-party owners,and our mortgage healthcare providers. Our specialized staff focuses on hospital banking group is a leader in debt and structured finance for and medical office development, clinical facilities manage- all property types. ment (inclusive of energy management), medical office build- ing leasing and management, brokerage services and moneti- DEVELOPMENT & INVESTMENT SERVICES zation of non-core real estate assets. Our wholly-owned, independently operated subsidiary, Tram- mell Crow Company, services users of and investors in, office, INVESTMENT MANAGEMENT industrial, retail, healthcare, student housing, on-airport dis- CBRE Investors is a wholly-owned, but independently oper- tribution, multifamily residential and mixed-use projects. For ated, real estate investment management firm. Investment users of real estate,the firm offers build-to-suit and redevelop- funds and programs are diversified by strategy, region and/or ment opportunities. relative risk/return, and are executed by dedicated investment management teams focused on a specific geography and style FACILITIES MANAGEMENT of investing. Managing corporate, institutional, not-for-profit and govern- ment space users around the world,the Facilities Management INDUSTRIAL SERVICES group delivers the highest level of customer service and value, The Industrial Services group addresses the needs of owners enabling clients to focus on their core business. By partnering and occupiers at every stage of the supply chain, with a spe- with our clients, our approach to facilities management goes cial emphasis on ports, intermodals and air cargo. These pro- well beyond traditional service models. fessionals also work closely with research and development, manufacturing, assembly warehouse and distribution, as well FINANCIAL CONSULTING as land acquisition and disposition. Financial Consulting Group (FCG) professionals are special- ists who provide sophisticated financial and analytical consul- LAND tation to facilitate informed decision making. We apply finan- Land Services is a network of experienced commercial property cial and analytical thinking to decision-making with regard to professionals focusing exclusively on real estate land transac- sale, lease, investment and other real estate transactions. De- tions. Our mission is to accelerate our clients' success through mand for such an approach extends the continuum of required superior market knowledge, industry-leading technology, a services beyond basic analysis to in-depth financial interpreta- team approach, collaboration among lines of business, shar- tion and value-added consulting, which includes a credible ing of best practices and a global real estate perspective. rationale to support the real estate decision process. 23 MINNEAPOLIS MARKET OUTLOOK 2014 C B R E ©2014,CBRE,Inc. CBRE MINNEAPOLIS/ST. PAUL SERVICE LINES PROJECT MANAGEMENT RETAIL SERVICES As one of the world's largest providers of professional real Retail Services offers solutions to the unique needs of retailers estate project management services, we offer a full menu of and retail property owners, buyers and sellers. Our expertise solutions to address challenges that real estate occupiers and includes both urban and suburban real estate and all types investors face globally. Our solutions include project manage- of retail centers. Our integrated real estate services include ment, outsourcing strategies, program management services, strategic planning, retailer site acquisition, disposition, invest- interior build-outs, moves/adds/changes, capital improve- ment sales,leasing,finance,asset services and mall and urban ments and building renovations and tenant improvements. expertise. OFFICE SERVICES VALUATION & ADVISORY SERVICES Office Services represents the largest segment of CBRE's The Valuation and Advisory Services group provides indepen- transaction activity. We have more professionals specializing dent, accurate, reliable and timely valuations critical to the in the office sector than any other firm. CBRE professionals, success of every real estate transaction or financing. This is unsurpassed in their local market knowledge, are supported accomplished through the accumulation and dissemination of by leading econometric forecasting and proprietary market re- comprehensive data on commercial real estate throughout the search tools,to ensure our clients make strategic and informed world. decisions. RESEARCH & INVESTMENT STRATEGY We provide commercial real estate forecasting and invest- ment strategy services. These services cover markets around the globe in all quadrants of the real estate market, including public, private and debt and structured finance. We provide unrivaled, insightful analysis and opinions, based on a highly academic approach and access to the largest database of deal specific information. I —77.7.'_._, r-rid■ . t_,,_. :• �. . ,, . ,�`�. .. _1 °.=.5..c_::� ..,'' ." , :V�yd�� z,--fir,-: r _ . - A 1.V, I Tw: _ * -F > ,.,.aye, •77Iil •• ` r •�Y . . r 4 t , ( . . illill111110P 4 — +- _ .. ^ 1 24 j MINNEAPOLIS MARKET OUTLOOK 2014 C B R E 2014,CBRE,Inc. MINNEAPOLIS/ST. PAUL MARKET OUTLOOK 2014 LOCAL LEADERSHIP Blake Hastings Matt Nicoll Sharon Walsh Managing Director, Managing Director, Senior Office Brokerage Asset Services Operations Manager t: +1 952 924 4638 t: +1 952 924 4690 t: +1 952 924 4610 e: blake.hastings @cbre.com e:matt.nicoll @cbre.com e:sharon.walsh @cbre.com CONTRIBUTORS (IN ALPHABETICAL ORDER) Ted Abramson Keith Collins Chris Jacobson Joel Torborg Senior Associate Senior Vice President Associate Vice President t: +1 952 924 4881 t: +1 952 924 4654 t: +1 612 336 4314 t: +1 612 336 4210 e: ted.abramson @cbre.com e: keith.collins @cbre.com e:chris.jacobson @cbre.com e: joel.torborg@cbre.com Abe Appert Dan Curry Jim Leary Bryan Van Hoof Senior Vice President Associate Senior Vice President Senior Vice President t: +1 952 278 2198 t: +1 952 924 4869 t: +1 952 924 4601 t: +1 952 924 4624 e:abe.appert@cbre.com e:dan.curry@cbre.com e: jim.leary@cbre.com e:bryan.vanhoof @cbre.com Sandy Barin David Daly Mark McCary Brian Wasserman Senior Associate Vice President Senior Vice President First Vice President t: +1 952 924 4816 t: +1 612 336 4319 t: +1 612 336 4317 t: +1 '952 924 4681 e:sandy.barin @cbre.com e:david.daly @cbre.com e: mark.mccary@cbre.com e: brian.wasserman @cbre.com Ben Bastian Jerry Driessen Mike Moynagh, MAI Ryan Watts Production Analyst Vice President Managing Director First Vice President t: +1 612 336 4233 t: +1 612 336 4310 t: +1 612 336 4239 t: +1 952 924 4657 e: ben.bastian @cbre.com e:gerald.driessen @cbre.com e: mike.moynagh @cbre.com e:ryan.watts @cbre.com Jeff Budish Matt Friday Katy Mulcahy Erin Wendorf Associate First Vice President Associate Senior Associate t: +1 952 924 4842 t: +1 612 336 4209 t: +1 952 924 4872 t: +1 612 336 4308 e: jeff.budish @cbre.com e:matt.friday @cbre.com e:katy.mulcahy @cbre.com e:erin.wendorf @cbre.com Steven Buss Laura Hanneman Richard Palmiter Susan Wilson Executive Vice President Client Services Specialist Vice President Associate t: +1 952 924 4618 t: +1 952 924 4611 t: +1 952 924 4600 t: +1 952 924 4840 e:steven.buss @cbre.com e:laura.hanneman @cbre.com e: richard.palmiter @cbre.com e:susan.wilson @cbre.com Charles Caturia Brian Helmken Brian Pankratz Senior Vice President First Vice President Vice President t: +1 952 924 4628 t: +1 952 924 4659 t: +1 952 924 4665 e:charles.caturia @cbre.com e:brian.helmken @cbre.com e: brian.pankratz @cbre.com Reed Christianson Joe Hughes Eric Sheaffer First Vice President Senior Associate Client Services Specialist t: +1 612 336 4268 t: +1 612 336 4293 t: +-1 612 336 4251 e: reed.christianson @cbre.com e:joseph.hughes @cbre.com e:eric.sheaffer @cbre.com DISCLAIMER C B R E Information contained herein,including projections,has been obtained from sources believed to be reliable.While we do not doubt its accuracy,we L have not verified it and make no guarantee,warranty or representation about it.It is your responsibility to confirm independently its accuracy and completeness.This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without orior written permission of the CBRE Global Chief Economist. 0 2014,CBRE,Inc