Minnesota, led by the Twin Cities of Minneapolis and St. Paul, has an overall healthy commercial real estate market. Especially healthy are the retail and medical office submarkets. New construction retail is pushing up the cost of land and is combining with rising energy costs to push up the costs of construction and operation for both retail and medical office properties. Accordingly, rents are up, but vacancies are not down. Particularly, the medical office submarket is dealing with pent up demand because of a years long hospital building moratorium that has recently been lifted. To meet the demand, developers Twin Cities area have an estimated one million square feet of medical office space coming online in 2007. Most of the construction is being done on hospital campuses, as off campus medical construction can be a risky proposition.

The general office submarket is just coming out of slump, spurred by a strong economy and somewhat by the demand for medical office space. Rents are starting to come up and vacancies are beginning to drop. Investors in office property, however, are being cost conscious, waiting for the best deals on the properties they can find. Office properties aren't changing hands that much, and, in this regard, the submarket is stable.


An interesting trend in the Twin Cities area is to package different types of properties and sell them together. This is particularly happening with core downtown office and industrial properties. The point of packaging the properties this way is two fold. Promoters are able to market the more costly packages to larger investors such as pension funds, and they are able to allow a weaker market - the industrial market, in this case - to piggy back on a stronger market. Though the office market, generally, is slowly coming out of slump, it is being led out of that slump by the downtown office market, which is very hot right now. Rents are up and vacancies are down around 10%, sometimes even lower.

Developers in the Twin Cities area continue to turn office space into residential condos, even though forecasters expect housing in the Twin Cities to continue to drop in price. The housing market is especially weak as the market is flooded with a record 34,000 homes, including increasing foreclosures. Forecasters think rising interest rates may spur hesitant buyers to jump into the market, and enterprising buyers could make some money from foreclosure sales.