Forecasting

the commercial real estate market in the Fargo-Moorhead metro

Just a few short months ago, it would have been very unlikely that any of us could have accurately predicted recent events such as the impact of the coronavirus on our economy or the plunge in oil prices worldwide. Throw in the fact we are in an election year, and predicting the future becomes an even harder task.

However, when it comes to looking at what 2020 may bring in the world of commercial real estate across the Fargo-Moorhead metro, we can look at the recent past to better predict what is likely to play out in the year ahead.

Let’s take a look at some recent trends we track very closely from publicly listed properties in our market, along with some likely future outcomes in the major segments of the local commercial real estate world in the southern Red River Valley.

Office Market

Across the Fargo-Moorhead metro, we have been in an “oversupply” market of office space for a few years now. Just one year ago, we stood at roughly 1.34 million square feet of available space on the office lease market. As of early March, we are hovering around 1 million square feet of available lease space in the metro. While that shows positive progress on the demand side, that still leaves us a few years of inventory available at the current lease-up volume we are seeing. Lease rates have held pretty consistent recently; however, we do notice more leasing incentives such as rent abatements or increased fit-up allowances being offered to lure new tenants. With historically low interest rates, I would not be shocked to see demand for lease space to be neutral in 2020 as more businesses who have been leasing get off the fence to finally buy or build something they can own. Expect lease rates to remain largely stable, with inventory likely increasing to a small degree.

Industrial Market

The trend lines in our local industrial market look different than the office market, with a bit more volatility in the past 12 months, yet signs of strength now seem to be appearing. The market peaked at around 1.46 million square feet of available space about seven months ago, but it has seen a gradual decline in available space since then with strong lease-up activity at the close of 2019.

Year-over-year, we have about the same amount of inventory today as we had a year ago, however (about 1.17M SF for lease today and in March 2019). Much of that inventory is in very large distribution/logistic industrial properties that have recently come on the market (or will be coming online this spring), so it is going to take some new, large industrial users to make a dent in that inventory.

I believe the strong second half of 2019 will continue, with inventory trending downward in 2020 and rental rates remaining stable.

Retail Market

The local market for retail lease space has taken the biggest hit in the past year, with available inventory up about 25% year-over-year (currently at 842,000 SF available). Of every category we track, retail currently has the highest days on market as well at over 509 days across almost 100 listings for vacant space.

Somewhat surprisingly, the asking rents for retail space remain pretty steady. However, given the amount of inventory and climbing age of those listings, I expect downward pressure on retail rents in 2020. I also wouldn’t be shocked to see inventory climb for a couple more quarters as well.

Multi-family Market

Most owners and investors in our area are well aware of the higher than average vacancy we have experienced in the past few years. Appraisal Services Inc., a Fargo-based commercial real estate appraisal firm, has produced a quarterly apartment vacancy survey for more than 20 years.

Based on their most recent apartment survey for Q4 2019, there is reason for optimism in this market, however. With physical vacancy rates approaching almost 10% as recently as Q4 2018, we have seen improvements in vacancy rates in most areas of the metro along with a sharp reduction in new units coming online.

Even with vacancy rates above historical standards, we have not seen a softening in demand or prices for the purchase of multi-family units in the FM metro. It seems local owners are still actively seeking out new deals and are willing to pay a good cap rate to acquire them.

I expect continued improvement in the metro vacancy rates for 2020 with cap rates to remain stable to possibly decreasing (i.e. increasing values), provided we don’t see an unexpected spike in interest rates at some point later this year.