TWIN CITIES COMPANIES IN AN EXPANSIVE MOOD ENTERING 2005

Business optimism ‘highest ever’ according to the Federal Reserve Bank of Minneapolis
Industrial companies claiming largest share of new hires, business/professional services eke out small gains
With Midwest’s best pay scales, Twin Cities remains high on retailers’ radar screens

Minnesota companies are brimming with confidence for 2005, according to an end-of-the-year survey from the Federal Reserve Bank of Minneapolis. It may not be a break-away year for the economy, but it’s shaping up to be a solid year of growth for economic sectors.

Growth may be strongest in the manufacturing sector, which would primarily benefit industrial property owners and landlords. Manufacturers are raising prices at the same time demand is increasing. Minnesota’s large, diverse industrial sector is benefiting from the dollar’s weakness on the international currency markets, which is boosting demand for American-made goods for sale both domestically and abroad.

Manufacturing Sector Will Lead 2005 Job Growth
State-wide job growth of 0.08% is anticipated by the Minneapolis Fed and other economic experts, which would mean 14,000 to 15,000 new jobs in the Twin Cities area.

Twin Cities unemployment remains significantly lower than the national average, however. The November 2004 unemployment rate is 3.7% for the metropolitan area, a decrease of almost 1% from the 4.8% figure at the start of the year and nearly 1.5% lower than November’s 5.2% national rate. Employment grew by approximately 15,000 jobs in the Twin Cities in 2004.

Job growth in 2005 is likely to be strongest within the industrial sector, including both manufacturing and transportation industries. Office job growth will be stronger than in 2004, especially among small and mid-sized companies, based on current trends.

Three of the leading job-generating sectors in the Twin Cities between November 2003 and November 2004 were in the industrial area, led by manufacturing with a 2.5% gain; wholesale trade, up 2.8%; and transportation, warehouse and utilities, up 1.3%. Job gains were greatest in the education and health sector, up 3.3%, and for leisure and hospitality workers, up 2.3%.

Hiring by business and professional services firms increased just slightly during the past year, up 0.3%. Financial sector jobs were flat, and information sector jobs showed no growth. Government hiring in the state also increased, by 0.9%, during the same time period. Higher productivity is seen as one of the primary reasons for the slow recovery in office demand. Companies have made huge gains in productivity in recent years, which allows them to get more work done with fewer employees even as their businesses are expanding. Not all of those productivity gains are technology-related. There is also evidence that companies are reducing their per-employee allotments of office space, which also deflates demand.

Office properties did receive a boost from new hiring in the educational/healthcare sector, which surged 3.3%. Increased demand for multi-tenant office space by private educational institutions was a major factor in the office market during the past year. Higher employment in the healthcare industry was also a good tonic for the growing market for multi-tenant medical office space in the Twin Cities.

Retailers Like What They See in the Twin Cities
Twin Cities retail developers are counting on another year of continued growth in consumer spending in the region, with approximately 2.5 million square feet of new retail space scheduled to come on line in 2005. The majority of that new space will be in the Community and Neighborhood retail categories. Consumers are unlikely to disappoint. The region boasts one of the highest-paid work forces in the nation, with a corresponding propensity to spend more than average as well.

Residents of the Twin Cities were paid an average of $37,787 per year in 2002, according to the most recent report from the U.S. Bureau of Economic Analysis (BEA). That number ranked the Twin Cities at the top of the income mountain among major Midwestern metropolitan areas, including such cities as Chicago ($35,583), Milwaukee ($34,308), Kansas City ($32,467) and Indianapolis ($32,516). Minnesotans as a whole ranked eighth in the nation in personal income in 2001, according to the BEA.

New job growth will likely also fuel growth in consumer spending in the Twin Cities in 2005. Retailers will continue to aggressively courting the affluent Twin Cities consumer market, further fueling the boom in retail development that has swept the region in recent years.

The for-sale housing market may slow slightly in 2005, in response to higher interest rates. But homebuilders are optimistic about continued high demand for housing in 2005, following a record year of activity in 2004, according to the Builders Association of the Twin Cities. Building activity in 2004 was almost evenly split between single-family homes and attached homes (condominiums/townhomes/apartments), according to the Builders Association. Almost 10,000 new residential permits were issued in the Twin Cities in 2004. Higher housing prices didn’t put a damper on the market in 2004: the median price for a home in the Twin Cities rose 8.8% to $222,000 between November 2003 and November 2004, according to the Minneapolis Area Realtors Association. Retail sales of household goods such as home furnishings and décor will likely remain robust, as people invest in their new homes and upgrade existing dwellings.

THE OUTLOOK
Overall, 2005 is shaping up as a solid year of economic growth for the Twin Cities area. Employers should be more active in hiring, led by the resurgent manufacturing industry. Office jobs are mounting a comeback, a trend that will likely lead to an improvement by 1-2% in office vacancy rates by year end and a reversal of the steady decline in rental rates seen in recent years. With office and industrial rental rates likely at their lowest point in the current real estate cycle, smart space users will be looking to deal for space at today’s rates in anticipation of future growth. The supply of new space, particularly office space, is not projected to increase rapidly during the next one to two years. That’s especially true in the Minneapolis Central Business District, where new office construction is years away.

Commercial property tax increases will almost certainly be an issue when the State Legislature convenes in January for the 2005 session. The state faces a $700 million budget deficit, according to a December announcement, and raising property taxes may be seen as one way to increase government revenues. Republican Governor Tim Pawlenty has reiterated his “no new taxes” campaign pledge, however.