Economy Market View – 2015 Recap

According to the latest Beige Book, seven of twelve Federal Reserve Districts, including the Minneapolis District, reported increasing economic activity.  Economic activity in four of the remaining five districts was noted as mixed or flat, with economic activity declining in the Kansas City district, due to weakness in the energy and manufacturing sectors.

Construction, business investment, and consumer spending continue to take on leadership roles in driving the domestic economy, while global economic concerns as well as conditions in the oil and gas industry and manufacturing sector continue to serve as drags on more robust growth.  Fostering growth in the construction sector, the pace of homebuilding has begun to accelerate and commercial construction activity remains strong across numerous major markets.  Business investment and consumer spending levels also remain encouraging; with conditions in the labor market continuing to tighten.

The energy industry continues to be hamstrung by a glut of supply and tepid demand, resulting in lower commodity prices.  In the state of North Dakota, the number of active drilling rigs has fallen to the lowest levels observed since 2009.  Spot prices for West Texas Intermediate and Brent crude both declined by over 30.0% in 2015, putting significant pressure on producers, with retail gasoline prices falling by roughly 26.8% providing considerable relief to consumers and supporting healthy retail sales.

Although the overall economy expanded for the 81st consecutive month in February 2016, activity in the manufacturing sector contracted for the 5th consecutive month in this period, yet nine of 18 manufacturing industries continued to report growth.  According to the latest ISM Report on Business, the manufacturing sector showed some improvement in February of 2016 compared to year-end 2015, but the Purchasing Manager’s Index (PMI) remained below the pivotal 50.0% mark.  The PMI registered 49.5% in February 2016, up from 48.0% in December of 2015, but down from 52.9% recorded in February 2015.
PMI chartA strong dollar and the downturn in the oil and gas industry are also adversely affecting conditions in the manufacturing sector, with choppy and uneven results recorded across the manufacturing sector during the year.  Manufacturers that rely on oil as an input cost have fared relatively well, while companies that provide goods to oil and gas companies have suffered.  All segments in the manufacturing sector, however, have been impacted to varying degrees by the strength of the dollar, as international export levels at several major ports have sagged.

Several other economic indicators remain mixed.  Activity in the non-manufacturing sector increased for the 73rd consecutive month in February 2016, with the Non-Manufacturing Index (NMI) standing at 53.4%, yet the most recent NMI readings have fallen below the rolling 12-month average of 56.6%.  After falling by 0.3% in December 2015, the Conference Board Leading Economic Index also slipped another 0.2% to 123.7 in January 2016.  In spite of rising concerns, most economic indicators continue to signal modest economic expansion in the months ahead.

National Employment

While representing a slight deceleration from the 2.2% increase recorded in 2014, non-farm employment at the national level increased by 2.0% year-over-year in December 2015 on the net addition of over 2.7 million jobs.  Employment growth in the service-producing sectors increased by 2.1% over the year ended in December, up from 1.9% posted 12 months prior.  The goods-producing sectors also noted improvements, but the pace of growth decelerated from 2.9% in 2014 to 1.0% in 2015.  Marking the second consecutive year of positive, albeit modest, improvements, headcounts in the public/government sector increased by 0.5% in 2015, on par with the growth recorded one-year ago.  The following chart presents non-farm employment growth at the national level.

US non-farm employment growthFacilitated by employment growth, the national non-seasonally adjusted unemployment rate decreased to 4.8% in December 2015, remaining unchanged compared to the month prior, but down 60 basis points from 5.4% recorded in December of 2014.  Tight conditions in the construction sector are creating significant upward pressure on skilled labor wages, yet wage growth remains uneven across employment sectors.

Conditions in the labor market are healthy in the majority of major markets.  Non-farm employment increased by over 3.0% annually in 18 of the largest 84 metropolitan areas during year, with 16 of the 18 markets also boasting unemployment rates below 5.0%.  The pace of job growth remains strong across a number of markets in the West region, but hiring activity continues to gain momentum in several Midwestern markets.

The following tables present the nation’s top 10 leaders and laggards in unemployment rates and employment growth.

unemployment rate

Leading non-farm employment growth in the Midwest region were the Sioux Falls and Grand Rapids metropolitan areas, which witnessed year-over-year employment growth of 4.1% and 3.8%, respectively.  Non-farm employment in the Twin Cities metropolitan area increased by 1.8% year-over-year in 2015 on the net addition of approximately 34,000 jobs.  Job growth within several of the Twin Cities largest employment sectors, including education/health services, professional/business services, and financial activities, remained particularly encouraging, though the strongest growth was within the leisure/hospitality sector during the year.

TC non-farm employment growthUnemployment rates within 68 of the largest 84 metropolitan areas were below 5.0% at the close of 2015.  Labor markets are tightest in the Midwest region, with seven of the largest metropolitan areas enjoying unemployment rates at or below 3.5%.  The non-seasonally adjusted unemployment rate in the state of Minnesota stood at 3.6% in December 2015, unchanged compared to the year prior, but up 60 basis points compared to 3.0% posted in November of 2015.  Labor markets in most Minnesota metropolitan areas remain relatively tight.  Unemployment remains lowest in the Mankato area (2.5%), followed by the Rochester (2.9%) and Twin Cities (3.1%) areas, while unemployment stands above the statewide rate in the St. Cloud (3.7%) and Duluth (5.5%) areas.

MN unemploymentFor-Sale Residential

Sales activity and prices increased by sizeable margins in the national for-sale residential market during the year.  Existing home sales activity increased by 6.3% in 2015, compared to a decline in 2014, while the pace of new single-unit home sales advanced at a more rapid rate, increasing by 14.6% in 2015.  Activity within both the single-unit and multi-unit segments also showed improvement, as renewed demand continues to build for townhome and condominium product.  In turn, the national median home sale price increased by 6.9% in 2015, rising from $208,400 to $222,700 during this period.

Among regions, pricing increases in the for-sale residential sector were led by the West region, which witnessed the region’s median home sale price increase to $323,600 at the close of 2015, up 8.4% compared to the year prior.  In the West region, the for-sale residential sector remains strong across most markets, with an aggressive pace of growth recorded in the Denver, Portland, and Seattle markets during the year.  In the Denver market, the median home sale price has increased by over 20.0% within the last 24 months.  Sale prices also are rising at a robust pace in markets hit hardest by the subprime crisis, with the median sale prices increasing by at least 9.0% in the Las Vegas, Orlando, and Phoenix markets in 2015.  Although noting significant upward pressure in 2015, for-sale residential product remains a relative bargain in the Midwest region, with a median home sale price standing at $171,600 in the fourth quarter of 2015, nearly 20.0% below the national average.

Progress continues to be noted within the for-sale residential sector in the Twin Cities market.  Increasing from approximately 49,600 in 2014 to 56,390 in 2015, the number of closed home sale transactions in the Twin Cities market increased by 13.7% over the year ended December 2015.  Indicating healthy demand, the average days on market decreased by 2.6% and the percentage of original list price received increased by 1.0% during this same period.  Due to stronger competition among buyers, the median home sale price in the Twin Cities metropolitan area increased by 7.0% over the year ended December 2015, increasing to $220,000 at the close of the year.


Employment growth and progress in the for-sale residential sector have supported a more optimistic outlook from homebuilders, and confidence among homebuilders rose to the highest levels in more than a decade in 2015.  The National Association of Home Builders/Wells Fargo Housing Market Index increased to 60 in June 2015 and remained at or above that level through the close of 2015.

Both commercial and residential construction activity remains strong in the Twin Cities market.  In the city of Minneapolis alone, construction permits were issued for development projects valued at nearly $1.4 billion in 2015, marking the fourth consecutive year of over $1.0 billion in permitting activity.  Construction is scheduled for completion on the new Vikings Stadium and massive Downtown East project in 2016, yet a number of significant development projects remain in various stages of the construction pipeline throughout the region that will support healthy activity into at least the intermediate term.

Apartment Market

Facilitated by healthy employment growth and favorable demographic trends, the apartment market continues to remain strong at the national, regional, and local levels, in spite of a wider new construction pipeline.  Asking rents at the national level continued on an upward trend in 2015, marking the 6th consecutive year of asking rent growth in excess of 2.5%, while vacancy rates in the national apartment market remained essentially unchanged.  Conditions in the Midwest regional and Twin Cities apartment markets closely mirrored trends observed at the national level, as underlying fundamentals and investment activity remain strong.

Sales volume in for 50+ unit apartment properties in the Twin Cities market increased by approximately 6.4% over the year ended in December 2015, reaching nearly $900 million during the year.  Apartment pricing in the Twin Cities market also continued on an upward trend during the year, and the average price per unit in the Twin Cities market increased by 32.0%, rising from $112,850 in 2014 to nearly $150,000 in 2015.  Upward pressure on pricing in the Twin Cities market has been supported by a greater composition of sales activity involving newly built Class ‘A’ properties in the region’s core.

TC 50+ unit sales activity

Notable transactions in the Twin Cities market during the year involved several Class A buildings in the core of Minneapolis, including 222 Hennepin, The Paxon, and The Walkway.  These three transactions combined to account for approximately 22.0% of sales volume involving 50+ unit properties in the Twin Cities market in 2015.  Several large suburban apartment assets also traded in 2015.  Valley Creek Apartments, a 402-unit apartment property in Woodbury, sold as a value-add property for $54.25 million in May of 2015, after selling for $33 million five year prior.  Sales activity involving small- and mid-size properties also remained healthy through 2015.

CRE Market

Fundamentals across the industrial, office, and retail sectors also continue to demonstrate improvement, with the most robust growth recorded within the industrial sector.  Led by demand for logistics space, market conditions in the industrial sector at the national, regional, and local levels continued to improve in 2015, with strong absorption figures driving vacancy rates lower and putting upward pressure on asking rents.  Absorption in the office sector has been supported by a more intense pace of employment growth within the traditional office-using employment sectors.  Vacancy rates in office sector continue to trend downward, putting upward pressure on asking rents.  In spite of the rise in e-commerce and the pursuit of smaller footprints by retailers, the retail sector also noted positive absorption in 2015.  Combined with a more restrained pace of new development activity, demand for retail space facilitated improvements in occupancy levels and asking rents.

Fueled by improving to strong underlying fundamentals, the availability of low interest rate financing, and attractive yields relative to alternative investments, investment activity in the commercial real estate market remained strong in 2015.  Sales volume for property and portfolio sales of more than $2.5 million increased for the 6th consecutive year in 2015, with sales volume increasing on a year-over-year basis in three of the four major property types.  The strongest year-over-year growth in sales volume was recorded within the industrial sector, yet overall sales volume continued to be led by the apartment and office sectors.  The following chart presents national sales volume in the four major property types for property and portfolio sales of greater than $2.5 million.

CRE investment activityFor additional details on the performance of the national, regional, and local commercial real estate markets, please see our 2015 property sectors recaps at

Data referenced in this report was current as of March 7, 2016, and includes preliminary employment numbers as reported by the Bureau of Labor Statistics, which are subject to revision.

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