The real estate outlook is improving, with new leasing activity on the rise, potential tenants demanding spec suites and people continuing to purchase new homes.

MINNEAPOLIS, MN — Despite a year of increasing office vacancy rates due to remote work, real estate experts are optimistic about growth in this market — and in others that were able to weather the pandemic.

The real estate outlook is improving, with new leasing activity on the rise, potential tenants demanding spec suites and people continuing to purchase new homes. Experts discussed current real estate market conditions and outlook during a virtual panel held by the Minnesota Dakotas Chapter CCIM on Tuesday.

The vacancy rate in the Twin Cities office market was 21.5% last quarter — a figure that’s widely expected to increase as companies continue adopting remote work policies as well as subleasing and shedding space, said Katie Tufford, a senior director and broker with Cushman & Wakefield.

“We wouldn’t be surprised if we see a 30% vacancy rate in the next year or so,” Tufford said.

Vacancy statistics are reflected in market absorption figures. The year-to-date overall absorption in the Twin Cities office market was 20,918 square feet during the first quarter of 2020. This year, during that same quarter, the absorption was a negative 831,261 square feet, according to Cushman & Wakefield figures.

Companies downsizing their space are driving absorption figures. Companies like 3M, Hewlett Packard Enterprise, and Novus Media are giving up 30,000 to 50,000 square feet in their respective submarkets. And Target’s nearly 1 million square feet in downtown Minneapolis will likely impact second-quarter figures as it hits the sublease market, Tufford said.

Still, new leasing activity has rebounded. Last year, new leasing activity hit its highest level since the start of the pandemic. And major companies like Bremer Bank, Fox Rothschild LLP, Winthrop & Weinstine P.A., Voya Financial, Maslon LLP, Lathrop GPM, and Norwest Equity Partners are all looking in the downtown Minneapolis market, she said.

“It’s definitely getting better out there,” Tufford said. “The asking rates are ticking up, but the concessions that landlords are giving in exchange for higher face rates shouldn’t be ignored.”

Spec suites — or spaces built out to meet tenant needs — are rising in demand. Around 80-90% of the deals Tufford has seen over the last six months involved spec suites, she said.

“Landlords are betting hard that tenants will want to press the easy button when they come back to work, and look to move into more efficient space indicative of their brand and culture,” Tufford said.

Retailers in specific Twin Cities markets will drive activity this year, said Ted Gonsior, executive vice president and retail advisory market lead in JLL’s Minneapolis office.

Companies specializing in grocery, pet supplies, restaurants, coffee, alcohol, financial services, personal banking, affordable retail, home improvement supplies, car services, entertainment options and outdoor goods were able to pivot during the pandemic — ensuring their survival and pushing them to expand locations, Gonsior said.

“Retail will continue to be centered around bricks and mortar,” he said.

Specifically, he anticipates retail to grow in Woodbury, Roseville, Maple Grove and Minnetonka — all communities with already strong retail presences, Gonsior said.

In the multifamily market, there’s far less excitement from Sean Sweeney, co-founder of Hall Sweeney Properties.

For the seventh consecutive year, sales of multifamily exceeded $1 billion last year — even though sale volume last year was down by 21% compared to the previous year. But as the year went on, sales in the sector “stabilized” and rebounded in the second half, Sweeney said, citing Cushman & Wakefield data.

Last year set a record in terms of new apartment units delivered in the Twin Cities metro, with over 10,000 new units going online. This year, an estimated 9,500 new units are expected to finish, while next year, around half that number are expected to open. This is due to material cost issues and slowing rent growth, Sweeney said.

“Once you start construction, you’re 12, 16 or 18 months from completion. So if you didn’t start in the first half of last year, there’s a chance you’re not delivering this year — it could be a 2023 deliver,” he said. “With COVID and everything that happened last year, obviously, a lot of people pressed pause for a while.”