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TWIN CITIES: Twice as nice

Minneapolis is at the hub of construction activity that is spreading across the entire Twin Cities metropolitan area. The city is riding a wave of expansion in office, retail and housing markets, while hotel and industrial sectors remain stable.

"We've got a strong economy and strong companies growing into that economy," says Stuart Ackman, senior associate in the Minneapolis office of Northbrook, Ill.-based Grubb & Ellis Co.

More than 5.6 million sq. ft. of office space is under construction in downtown Minneapolis. Housing developers cannot build rental and for-sale properties fast enough to meet the demand of residents who are trading in suburban homelife for urban living. Although retail has struggled in recent years, newcomers such as Office Depot and Target are contributing to the revitalization of the city's CBD. Even the hotel industry, which has been quiet in recent years, is seeing interest spike due in part to a major expansion under way at the Minneapolis Convention Center.

The economy of the Minneapolis-St. Paul metropolitan area is keeping pace, and in some cases, even surging ahead of the national economy. "We don't see the huge booms that other markets do, and we also don't see the huge downturns," says Collin Barr, vice president of development for Minneapolis-based Ryan Cos. U.S. Inc. "Even in the early-1990s when it wasn't a huge expansionary economy, we were growing and expanding market share modestly."

Some of the leading industries in the Twin Cities include medical instrument and supplies manufacturing, printing and publishing, transportation equipment, finance, computer and data processing services, and engineering and management services.

Strong financial markets are having a considerable impact on growing Minneapolis firms such as American Express Financial Advisors and USBancorp. The financial industry alone is responsible for more than 2.5 million sq. ft. of office space currently under construction.

"The diversity of the economy in Minneapolis, combined with the strength of financial markets, has been a good source of activity for developers," says Tim Murnane, vice president of real estate development for Opus Northwest LLC in Minnetonka, Minn.

The growing strain on existing transportation infrastructure is another factor that could hinder expansion. "I think the biggest issue that is going to impact development is infrastructure," says Murnane.

The Metropolitan Council recently announced approval for more than $1 billion in road improvement projects that will occur over the next few years. "That is critical for the growth of our area," Murnane adds. "Traffic has gotten worse in the last five years by a huge magnitude."

HQs drive office market The last time Minneapolis experienced similar development activity was in 1991, when the opening of four Class-A office buildings landed more than 3 million sq. ft. on the market. The excess space, combined with a slumping real estate market, helped to push Minneapolis vacancy rates above 20%. However, the Minneapolis market is unlikely to take a similar dive when the latest wave of development comes online, Murnane says.

One of the notable aspects of the current downtown development cycle is that a significant portion is being driven by corporate headquarters facilities. "This time around, the new downtown buildings are really build-to-suit," says Murnane. Firms such as American Express and Target will fully occupy their new office buildings, while other corporations such as Minneapolis-based USBancorp Piper Jaffray have pre-leased large chunks of space in multi-tenant towers.

Several factors are contributing to the demand for downtown office space. Proximity of a sizable labor pool with easy access to downtown is one factor. That base of employees is continuing to grow as more residents relocate to new downtown housing. Second, infrastructure improvements currently under way - and proposed - will improve accessibility. Additional parking has been created with more ramps under way. In addition, tentative plans call for a light rail transit line that would serve Minneapolis. An upswing in amenities for workers and residents - ranging from the addition of daycare and restaurants to retail and entertainment - is a third factor contributing to the demand for downtown office space.

Nevertheless, a dip in office occupancies is inevitable considering the volume of new space coming online over the next two years. When American Express and Target relocate, they leave behind sizable blocks of vacant space. "There is no question that there will be an increase in vacancy rates. The question is, how far is it going to go," says Barr. Minneapolis CBD vacancies are likely to jump from the current 4.9% to nearly 15%.

Demand increases for industrial The Minneapolis industrial market is one of the most sought after geographic areas in the Twin Cities. Although availability is limited, demand remains high due to the proximity of major interstate and highway links such as Interstate 35W, U.S. Highway 280 and U.S. Highway 36. "You're in the middle of the marketplace; therefore, you can serve the entire market efficiently," says Ackman.

But while demand remains high, supply is limited. New industrial development opportunities are few and far between in Minneapolis and throughout the first ring suburbs. Developers continue to seek out opportunities within the Minneapolis Midway and University/Broadway markets and along the U.S. Highway 36/I-35W corridor. Industrial Equities of Eagan, Minn., broke ground late this summer on its 118,400 sq. ft. Minneapolis Rail Distribution Center.

"What people are trying to do is jockey around and find land that can be assembled and put into the marketplace," says Ackman. "The creative people - the people with vision who can see these things - will be able to pick them up. But it takes a lot of work, time, patience and perseverance." Minneapolis also is stepping up its efforts to reclaim brownfields and open up new land for development.

Retail capitalizes on construction Downtown retail has floundered in the past as suburban malls lured shoppers with acres of free parking and greater accessibility. However, downtown retail is capitalizing on recent construction there. A growing daytime population of 150,000 workers is partly responsible for boosting retail activity. Minneapolis CBD vacancies decreased from 12.9% in December 1998 to 6.6% in June 1999, according to United Properties' market report. In addition to a strong office market, Minneapolis is experiencing healthy activity in its residential, restaurant and entertainment sectors.

"I've been working on downtown Minneapolis and in downtown Minneapolis since 1984, and I have not experienced this kind of positive development in every sector before," says Robin Keyworth, vice president of retail leasing and marketing in the Minneapolis office of Toronto-based Brookfield Properties LLC. Brookfield had been struggling to fill the vacancy left behind when Montgomery Ward closed its City Center store 18 months ago. Brookfield recently leased 75% of the Ward's space to Office Depot, which opened in September.

Although it is still challenging to get people to shop downtown, the retail market is as good as it's ever been, Keyworth says. The convention center expansion is one project that will have a direct impact on Minneapolis' retail business. The facility is adding 250,000 sq. ft. of meeting and exhibit space, which will allow the convention center to pursue larger conventions. "The retail industry really gains a lot from the convention center business," says Keyworth.

Hotel activity returns Minneapolis has seen a minimal amount of new hotel development in recent years, but that may soon change. Last year a Holiday Inn Express opened near the Minneapolis Convention Center and a Residence Inn was built on top of an existing parking ramp. The new hotels increased the Minneapolis CBD universe of hotel rooms by 4%. However, those were the first two hotel projects to open in downtown since the Minneapolis Hilton & Towers was completed in 1992.

Despite the lack of activity, hotel occupancies in downtown Minneapolis have been stable for the past five years. Currently, the city of Minneapolis has a total of 5,600 rooms with average daily occupancies at 68.5% and ADRs at $109.90, according to research provided by GVA Marquette Advisors in Minneapolis. "Demand has remained more or less stable in downtown Minneapolis, but it's very likely that demand has been displaced to the outer suburbs," says Matthew Robinson, vice president in the hospitality group at GVA Marquette. In particular, several new hotels have been built along the I-494 strip near the Minneapolis-St. Paul International Airport and Simon Property Group's Mall of America.

With a convention center expansion on the horizon, it is clear the Minneapolis hotel market is about to take off, leaving a history of minimal hotel development in the dust. And with the city's revitalized CBD, a highly sought-after industrial market and stable retail sector, the Twin Cities is looking twice as nice.

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