Healthcare: Worst may be over for commercial real estate

By Burl Gilyard for Finance & Commerce

There is clearly some percolating optimism in local commercial real estate circles for the year ahead. But the numbers still tell a tough story of a potentially long, slow comeback.

In a newly released market survey, Bloomington-based NorthMarq found modestly improving fortunes for local commercial real estate in the last six months of 2010.

NorthMarq, a diversified commercial real estate services firm, is projecting that 2011 will be a “turnaround” year for the industry, but that the recovery will be “a longer – and bumpier – ride” than previous cycles.

The office, retail and medical office sectors all posted small gains in occupied space. The industrial sector lost some ground, posting negative absorption. In all cases, the total numbers were fairly small, indicating the second half of 2010 was close to a statistical flatline.

Absorption measures the change in occupied space from one reporting period to the next. It is used as a way to measure the true health of a real estate market. For example, if a tenant signs a new lease at a building for 50,000 square feet, but vacates 50,000 square feet in another building, the deal amounts to zero absorption for the overall market. True absorption is driven by existing companies expanding or new companies leasing space.

NorthMarq reported:

* Positive absorption of 202,000 square feet in the local office market.

* The local retail market saw 374,000 square feet of positive absorption.

* The medical office market recorded 90,000 square feet of positive absorption.

* The industrial market was the only sector to see a drop, reporting 216,000 square feet of negative absorption.

NorthMarq released its latest findings in its biannual “Compass” report on Thursday morning.

Downtown Minneapolis posted the best numbers for the second half of the year, with nearly 202,000 square feet of absorption. Even so, NorthMarq reported the vacancy rate at 21.5 percent for downtown Minneapolis office space, counting available sublease space.

Overall, NorthMarq reported an office vacancy rate of 19.9 percent across the Twin Cities, but that number climbs to 22.5 percent counting available sublease space. NorthMarq tallies approximately 14.4 million square feet of local vacant office space and nearly 1.9 million square feet up for sublease.

But NorthMarq’s report argues that the market bottomed out from a vacancy standpoint in 2010.

“I think that we’re beginning to see an increase in activity,” said Dan Gleason, senior vice president with NorthMarq. “We saw a little bit of positive absorption. We believe we’ve come through the worst of it.”

Gleason said brokers are seeing some signals that companies are more confident about making business planning decisions.

“They’re more comfortable making long-term commitments — many of them are suggesting that they may be doing some hiring in 2011,” Gleason said.

But with the glut of space still available, Gleason noted that rental rates could still fall further as landlords compete to sign deals.

NorthMarq’s report shows that rental rates are continuing to drop. The firm reported an average net rental rate of $12.43 a square foot for local office space, down from $12.61 at the end of June.

The local industrial market suffered from downsizings outweighing expansions.

Jason Meyer, senior vice president with NorthMarq, said the mood in the market has improved, even if the market fundamentals have not shifted substantially yet.

“I think there is a good sentiment of optimism in that activity has picked up. There’s just more positivity,” Meyer said.

NorthMarq reports a local industrial vacancy rate of 17.2 percent, or 20.2 percent counting available sublease space. There is more than 20 million square feet of local industrial space up for lease or sublease, according to the report.

“When you’re negotiating a deal, the market conditions are still what they have been,” Meyer said.

Looking ahead, there is concern about facilities that will be left behind as companies move out of state. For example, Bethesda, Md.-based Lockheed Martin has announced plans to close its 623,000-square-foot facility in Eagan.

On Thursday, the state of Minnesota reported a loss of 22,400 jobs in December. Since the need for more space is driven by job growth, the new numbers are discouraging for the prospects of companies needing to lease more space.

The state’s Department of Employment and Economic Development (DEED) reported that Minnesota added a total of 29,300 jobs in 2010. The state’s unemployment rate now stands at 7 percent.

But NorthMarq’s report strikes an optimistic tone for the year ahead.

Looking to the local office market, the NorthMarq report notes: “Tough times may not be over for landlords in the Twin Cities office market, but for the most part they’re not nearly as bad as they were a year ago. Based on current projections, 2011 is shaping up to be a decent year for most submarkets.”

NorthMarq projects that the local office market could report as much as 1 million square feet of positive absorption this year.

By the Numbers

22.5 percent

Local office vacancy, including sublease

20.2 percent

Local industrial vacancy, including sublease

[finance-commerce.com]

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