JULY 2016

EXECUTIVE SUMMARY

Navigating the Minneapolis/St. Paul Commercial Real Estate Market

SECTOR HIGHLIGHTS

OVERALL MARKET TRENDS Vacancy Rate Nears Record Low as CRE Market Continues to Stabilize

VACANCY RATE9.9%

Lowest multi-tenant rate across all property types since 2000

NEW CONSTRUCTION463,000 square feet

Multi-tenant pace slowing,single-tenant construction grows

ABSORPTION1.76 million square feet

Slight drop from 2015 butmarket is stabilizing

MULTI-FAMILY: Focus shifts to suburbs as new units are gobbled up

OFFICE: New projects inch closer as rents rise

MEDICAL OFFICE: Users continue to gravitate away from the campus model

LAND: Demand rises even more as developers seek next big thing

INDUSTRIAL: East metro heats up as vacancy tightens

HOTELS: Market continues to expand with new development on the way

INVESTMENT & CAPITAL MARKETS: Multi-family and office markets looking for record volumes in 2016

RETAIL: Vacancy nears all-time market record lows

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READ MORE INSIDE Photo: Stone Arch Bridge, Minneapolis

Navigating the Minneapolis/St. Paul Commercial Real Estate Market

Strong demand for building sales was evident throughout the metropolitan area. Limited supply of product resulted in upward pressure on sale prices.

8.2% vacancylowest in 15 years

INDUSTRIAL

Supply Tightens, East Metro Gains Steam

Even as some pockets become overbuilt, the Northwest and Southwest submarkets remain in demand for occupiers and investors alike.

The Northeast and Southeast submarkets

accounted for 1 msf of positive absorption.

The second half of 2016 will likely see some

slowdown, but new development and leasing

activity is expected to remain overwhelmingly

positive.

The office market is on an even keel. The space absorbed during the first half is by no means a big move for the market, yet it is a comfortable level considering that the office real estate market may be moving into the later stages of its recovery.

Robust investment sales over the past three years have driven rents higher as new owners invest in capital improvements. Some tenants may now be priced out of the class A market.

Several developers continue to prelease new development projects but will likely wait to build until they have firm anchor commitments in hand

The market will see significant negative absorption in the second half of 2016, mostly from tenants leaving the multi-tenant market for single-tenant buildings.

15.6% vacancyapproaching pre-recession levels

Market Holds Steady Course

OFFICE

The market is space constrained and competitive, and most new spaces aren’t staying vacant for long. Retailers face two major obstacles: lack of available quality space and rising rates.

6.7% vacancyreflecting competitive market

Grocery and junior box retailers fueled much of the activity in the first six months of the year, with several new Hy-Vee, Fresh Thyme, Whole Foods Market and other stores opening.

Names such as Tim Horton’s and Dunkin’ Donuts will continue to grab headlines in the fast casual sector.

With few exceptions, new construction projects have tended to be fully or mostly leased well before building opening, meaning that rent rates are high enough and vacancy is low enough to justify new construction.

Feels Pressure on Rates, Renovations

RETAIL

The common theme in 2016 continues to be the abundant investment capital in the market and where to place it. There is more demand than there is supply of for-sale assets.

Many potential buyers sought properties with a laser focus on specific property types or categories, taking a careful, thoughtful approach to their underwriting before closing.

Even with the supply lagging, the market is still on pace to match or exceed sales records for a year.

Industrial properties, meanwhile, continue to draw torrid demand but many property owners are reluctant to sell thanks to attractive yields.

$780MMulti-family sales recorded in first half of 2016

INVESTMENT & CAPITAL MARKETS

Sales Volumes Approach Records

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The Twin Cities multi-tenant market fundamentals continued to improve throughout the first half of 2016... Every sector reported positive results,

and except for a few pockets of softness, every sector should see continued improvement throughout the balance of the year.

— Mike Ohmes, Executive Vice President-Transaction & Advisory Services

EXECUTIVE SUMMARY

In the face of decreasing inventories, the land market has remained active, with sales torrid especially in the multi-family and industrial sectors.

Industrial Prices Up 10% from pre-recession peaks

With most of their inventory built out, developers are looking for the next hot development area.

Retail land sites are hot commodities, as developers sought out sites in the first-ring suburbs for new neighborhood-level retail centers.

Residential land, especially for multi-family, is tough to come by, but developers are actively seeking out parcels for housing.

Sales Active Despite Decreasing Inventories

LAND

The multi-family sector is continuing to fire on all cylinders with near-record-high occupancies, steady rent growth and robust development. Booming construction over the past four years has not put a damper on key fundamentals.

The market is expected to deliver about 3,900 new units this year, topping last year’s 3,100, but development has shifted outward into such suburbs as Maple Grove, Woodbury and Edina.

A steady pipeline of new units remains to keep developers busy into 2017, but the market could take a step back after that, especially if aging Millennials follow through on their interest in home ownership.

Concessions have already started to creep into the class A market, but it remains to be seen whether they will stay.

Market Keeps Foot on the Gas

MULTI-FAMILY

3.2% vacancyapartment vacancy metro-wide

As the Twin Cities healthcare market continues adjusting to new models of healthcare delivery and the impacts of the Affordable Care Act, demand for space in the multi-tenant medical office market continued at a solid pace in the first half of 2016.

Medical users such as TRIA Orthopaedic, Fairview and Summit Orthopedics have continued to announce plans throughout the year to leave multi-tenant properties typical of the 1990s and move into large, single-tenant projects.

Healthcare reform has created significant transition in the C-Suite of the prominent systems in this market, with as many as 11 new CEOs, COOs or CFOs already in office or expected to start soon.

Deliveries will slow in 2016, but more than 675,000 sf is on pace for opening in 2017 or beyond.

Strengthens Amid Reform Uncertainty

MEDICAL OFFICE

677,000 sf medical office space under construction

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After a near-record year in 2015, key performance indicators in the Twin Cities hotel market remained solid, driving both development and transaction activity.

$69.51 RevPARas of May 2016

HOTELS

Still Robust, New Development Underway

Minneapolis-St. Paul is still a seller’s market, with buyers bidding up prices.

Limited-service remains the hottest category for developers, with concepts catering to Millennials in development from all the major hotel chains.

A construction slowdown is expected in the Twin Cities, but projects continue all over the market in anticipation of major events such as the 2018 Super Bowl, NCAA Final Four in 2019 and more.

JULY 2016

Navigating the Minneapolis/St. Paul Commercial Real Estate Market

3500 American Blvd W Suite 200Minneapolis, MN 55431952 831 1000 / info@cushwakenm.comcushwakenm.com

3.1%TWIN CITIES

4.5%

CUSHMAN & WAKEFIELD/NORTHMARQCushman & Wakefield/NorthMarq operates the Minnesota business of Cushman & Wakefield, a

leading global real estate services firm that helps clients transform the way people work, shop, and live. The firm offers innovative solutions to its occupier and investor clients within the

Minneapolis/St Paul region and around the world. A recognized leader in real estate research, the firm publishes a broad array of proprietary reports.

THE COMPASS REPORTThe report was created by experts using Twin Cities commercial property data from the first six months of 2016. The data used for this report has been obtained from sources which we deem reliable. While every effort has been made to report accurate data, Cushman & Wakefield / NorthMarq cannot guarantee the accuracy of this market report. Furthermore, we cannot assume responsibility for any omission of data which may occur. It is our intent to provide the best possible information regarding the office, industrial, land, retail, multifamily and investment markets while leaving the reader the responsibility of further verification before using this report for business and/or financial decisions. The Compass report includes information for multi-tenant office, industrial and retail projects greater than 20,000 sq. ft. and multi-family for-rent properties. Not included are owner occupied, government or single-tenant buildings. Not all information and insights we’ve collected can be published in any given volume.

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46 msf of assets under management

More than $2.3 billion transactions annually

Top Places to Work by Star Tribune

4

PROJECTIONS FOR REMAINDER OF 2016

MARKET QUICK FACTS

EXECUTIVE SUMMARY

Employs nearly 500 professionals / 90+ brokers

#1 Commercial Real Estate Brokerage Firm & Commercial Property Management Firm by Minneapolis/St Paul Business Journal

TWIN CITIES METRO DEFINITIONThe “Twin Cities” of Minneapolis and St. Paul form the core of a metropolitan region encompassing 6,046 square miles and consisting of 13 counties: Anoka, Carver, Dakota, Hennepin, Ramsey, Scott, Washington, Isanti, Chisago, Sherburne andWright in Minnesota, as well as Pierce and St. Croix counties in Wisconsin.

NEW CONSTRUCTION1.67 msf multi-tenant space

to be delivered

ABSORPTION600-800,000 sf expected

in second half of 2016

MORE NEW CAPITALOffice and multi-family headed toward record sales volumes

*Not seasonally adjusted

BUSINESS STRENGTHSMajor business strengths in the Twin Cities include a highly educated workforce, excellent transportation services, a

diverse economic base and available capital. The metro area is home to 17 Fortune 500 companies representing a broad spectrum of industries. The Minneapolis-St. Paul area’s employment base does not rely on any single industry, which

allows it to weather recessions and economic downturns in specific industries.

More per capita Fortune 500 companies than any other US metro region Forbes, 2016

Minnesota is the #1 state for business CNBC

The 6th most inventive city worldwide Bloomberg Businessweek

North Loop ranks a Top 25 Destination in the World Fodors, 2016

HOUSING PRICES ARE UPThe Twin Cities median single-family home price (as of May 2016) is $214,700,

up 4.2% compared with $190,000 in fourth-quarter 2015.Source: Minnesota Association of Realtors

UNEMPLOYMENT RATE IS DOWNAs of May 2016, the Twin Cities unemployment rate is

the lowest it’s been since 2000

LABOR FORCE MIX IS CONSISTENTLY SOLIDMINING, LOGGING, CONSTRUCTION

MANUFACTURING

TRADE, TRANSPORTATION, UTILITIES

INFORMATION

FINANCIAL ACTIVITIES

PROFESSIONAL & BUSINESS SERVICES

EDUCATION & HEALTH

LEISURE & HOSPITALITY

OTHER SERVICES (PRIVATE)

GOVERNMENT

10%

9%18%

16%

13%

16%8%

4%

4%

2%

JULY 2016