Like much of the American economy, the commercial real estate market has fallen in recent years. However, according to Moody’s Investor Service, US commercial retail prices have seen modest increases from November 2009 to January 2010. This is from a record low in October 2009. Is this the start of a recovery for commercial real estate and particularly what’s the trend in the Minneapolis area? The following are opinions given by two real estate agents, who have a combined experience of 45 years in commercial real estate.

What is the current situation in your opinion?

First, it is important to understand that the problems in commercial real estate are not the same as those in the current residential real estate crisis. The residential real estate crisis was caused by a large amount of bad debt allowed by too lax rating standards. There is no such thing as commercial insolvency; Instead, many companies collapsed due to a long and deep recession, thus creating much more inventory on the market. Apparently, the rate of company bankruptcies has slowed down and it appears that most of the companies that are still in business now are going to survive. Many of the larger corporations have actually improved their cash situation. There is no “poisonous” debt that has yet to “get through” like in the case of residential real estate. However, this does not mean that we will not see commercial foreclosures yet due to the economy. The economy must continue to improve so that companies can start investing again. We believe that the worst is over, in fact, for the first time in several months we have seen a bit of user activity (companies looking to buy or lease). Before that, all the activity was from companies looking to sell or lease spaces. This does not mean that we hope things will prosper anytime soon. Even companies that are in good financial shape are more reluctant to make a move right now, because there is still a lot of uncertainty. We see that the buying process is taking much longer and lease commitments are being made for shorter terms than in the past. Many reports we see suggest that money will start flowing back to commercial real estate in late 2010.

What are some of the main factors that could affect recovery?

An important factor is fear. Businesses are afraid to make big changes right now. If the economy continues to improve, we believe there could be a significant pickup in acquisition activity as companies gain confidence. The industrial and retail sector tends to lead the recovery, while the office space tends to follow. We need to see continued strengthening in retail property sales to start moving. There are a significant number of “big boxes” (ie, large retail outlets or distribution spaces) that are on the market right now. Retailers and distributors are going to think hard before purchasing a 450,000 square foot facility. We see that these types of properties are unoccupied for a long time, unless someone comes up with creative ways to use them.

Are there still good “deals” in terms of property acquisition?

Rental rates are still at an all-time low. Even if average prices have risen slightly across the country, we think it should be able to bottom out or very close to minimum rates. Now would be a great time to negotiate some long-term lease rates.

How does Minneapolis / St. Paul compare to the rest of the nation?

While things have slowed down significantly in this region, we are not seeing the devastating situation Detroit is experiencing with the auto industry recession. We also see New York, San Francisco, and Washington DC as hit harder than Minneapolis. The Twin City area has a fair amount of diversity and has a high concentration of businesses in Health and Medical Technology. These markets tend to do better in recessions than other industries. There is a possibility that the Twin Cities will experience a strong economic recovery before many other regions of the country.

When was the last time commercial real estate flourished?

The mid-1990s through the early 2000s were very good times for commercial real estate. After September 11 there was a big recession. Commercial real estate rallied between 2003 and 2005 and was actually booming for the 2 years prior to the October 2008 stock market crash.

When do you think it will start to thrive again??

We believe that the industrial sector of this economy needs to expand significantly so that we can see the type of activity that occurred during the 1990s. The dot-com boom in the late 1990s created a huge expansion in the technology sector. When the industry thrives, the demand for warehousing and manufacturing space increases. Office space continues as growing companies expand their support functions. The jobs created by the industry stimulate the retail industry, which continues to drive economic growth.

The medical technology sector could be a segment that could help commercial real estate in the Minneapolis area. While this area has been weaker of late, the population of the US (and the rest of the world) continues to age and should drive greater demand for medical technology and health products. Additionally, the drive to reduce healthcare costs could create increased demand for technology to improve efficiency. The medical industry is one of the few industries where nearly 100% of its manufacturing is still in the US, so a boom in medical technology could create storage, manufacturing space, and storage needs. more office space.

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