Market Notes Vol. 2

Nov 5, 2016

2007 Market Recovery Differs From
Those Of The Past

The office market recovery which is underway differs from all others in the past! Real estate development cycles typically take eight to ten years to run their course. Strong market conditions and economic growth fueled by available capital eventually leads to overbuilding, higher vacancies and declining rates. Once this occurs, development activity declines until gradually vacancies are absorbed, rates rise and new development activity again emerges. What makes the current cycle so different from historical standards is the rising costs of new construction.

Over the past twenty years Class A net rental rates of $15 to $18 per square foot generally justified new construction throughout the market. In today’s environment, net rental rates of $18 to $19 in the suburbs and $22 to $23 net in the
Minneapolis CBD (Central Business District) are projected to support new construction. Rising costs for labor and materials, coupled with escalating land values, have made this cycle very different from those of the past.

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