State of the Real Estate Market Highlights

by Robert Strachota

For the past 10 years or so, the U.S. and Minnesota economies have experienced record-breaking expansion. At the same time, debt is up but the delinquency rate on debt is low. For Minnesota, unemployment is low, wages and income are strong, and the job market is diverse. These are all good signs, and there are other signs as well. It’s hard to drive any distance in this area without seeing construction cranes. Some people have speculated that we may be building too much, too fast, but so far, the market seems to be absorbing all the new construction and local architects report they are still busy with new projects.

What’s different than ten years ago? There is less clueless lending and gross overbuilding than we saw in the past. Developers can’t just wildly leap into the market now; they have to have financial backers with some skin in the game, some credibility. Lenders aren’t throwing money around either; there is much stricter underwriting. Lenders aren’t the only ones showing some restraint. People in the real estate industry also learned a lot from the economic crisis of ten years ago, and they are on guard not to make the same mistakes again. There is more self-discipline, more thoughtfulness.

I anticipate the real estate market will soften in the next two years for the Twin Cities and the region. Soften does not mean crash. This will not be like the great real estate recession of 10 years ago. Instead, values will likely be somewhat static – not declining, but also not enjoying the steady increases of the past several years.

The marketplace is experiencing a balanced discipline unlike what I have seen in the past 40 years. Yes, even in the apartment market, which seems to keep expanding at what some people see as a questionable pace.

So, my overall message today is: relax! Real estate values are not going to fall off a cliff like they did in 2009 or 2010. For most real estate executives, it is business as usual. We are just being careful not to “buy on the come.” The cash flow numbers must make sense today, not three to five years from now.