Twin Cities Economy Will Continue To Gain Momentum In 2004

• Continued economic recovery and business in 2004

• Improving manufacturing industry bodes well for region’s economy

• Retail spending sparked by continuing strong housing market

For the first time in almost three years, the Twin Cities commercial real estate community can anticipate a year of improving performance in virtually every sector. Economic signs are mostly pointing up. Certainly there is more optimism in the market today among real estate professionals, especially those dealing with the hard-hit office, industrial and multifamily markets, than there was at mid-year when the economic recovery still appeared to be sputtering along.

The economic downturn between 2000 and 2002 cost the Twin Cities metropolitan area 2% of its employment base. But by comparison, employment in the 10 largest metropolitan areas of the country shrank by an average of 2.9% during the same time period, including a 13.3% reduction in jobs in the San Jose area. Chicago lost 3% of its jobs; Dallas suffered a 3.5% loss in jobs.¹ (The Twin Cities ranks as the nation’s 13th largest metropolitan area.) 

The strong performance by the economy, especially over the second half of the year, has yet to inspire much of a new wave of hiring by employers. Minnesota’s unemployment remained steady at 4.6% in November, up slightly from the 4.3% figure of November 2002.¹  In fact, according to a Dec.12, 2003, article in the Star Tribune the State’s Department of Employment and Economic Development reported all regions in Minnesota are predicted to gain jobs over the next six years.

Employment Growth Is Returning To The Manufacturing Sector

The freeze on hiring is lifting for some industries, especially those critical to the health of the industrial real estate sector. Manufacturers are beginning to hire new workers, after a three-year skid during which the state lost 40,000 manufacturing jobs.¹  Hiring is also picking up in the trucking and warehouse sectors and in the hard-hit information sector, which includes telecommunications companies.

Twin Cities manufacturers are also optimistic about their prospects for the coming year. Fifty-four percent of Twin Cities manufacturers reported improved business conditions in Wells Fargo Corporation’s year-end survey of Minnesota businesses. Seventeen percent of Twin Cities manufacturers projected increased hiring in the first half of 2004, according to the survey. The Minnesota Department of Employment and Economic Development says that while half of the lost manufacturing jobs will return by 2010, most of those jobs will return in a different capacity.

The prognosis for job growth in the business and services sector, the largest single employment market in the Twin Cities and the primary driver of demand for office space, is also encouraging. Modest employment gains were reported in that sector over the last six months of the year. Some observers question whether the recovery in the office market will be affected by the increasing tendency of U.S. businesses to send service-sector jobs in overseas markets such as India. Although the actual number of jobs lost to overseas markets is low as a percent of the total Twin Cities employment market at present, it is a worrisome trend that bears close future attention from the commercial real estate industry.

Region Benefits From Increasing Business Ties To Global Economy

Minnesota manufacturers are also learning to thrive in a global economy, as indicated by the record third quarter rise of 17.2% -- to $2.7 billion -- in state exports of manufactured goods. Significantly, exports of computers and electronics – the state’s leading industry – grew by 8.2% to $851 million during the quarter. Exports of medical products and devices manufactured in Minnesota increased by 80% during the quarter -- to $478 million. State exports grew by 7.3% through the first three quarters of 2003, compared to the national growth rate of 2% for the same period.²

Leadership In Medical Technology Is On The Upswing

Nationally, no industrial sector seems more ready for growth than the medical/bio-tech areas. Medical technology companies are critical to the health of the Twin Cities economy -- almost more than in any other metropolitan area of the country. Leadership in the Twin Cities medical technology industry comes from such well-known corporate names as Medtronic Inc., 3M, Guidant Cardiac Rhythm Management, Boston Scientific/Scimed Inc., Starkey Laboratories Inc. and St. Jude Medical Inc., to name but a few. Medical technology companies will also be one of the employment drivers of the future: the state has projected employment growth of 30% for medical scientists and 21% for electrical engineers associated with the medical technology industry between 1998 and 2008. Related fields will grow as well: employment of health practitioners and technicians is predicted to increase by 21% in the 10 years after 1998.

Low Interest Rates Fuel Housing Starts, Office Demand

Fueled by continued low interest rates, new housing permits through November totaled 10,595, for 17,598 planned units. Both figures are much higher than the totals for all of 2002, when 9,851 permits were issued for 15,962 units.³

Landlords of Twin Cities office buildings have also experienced a positive benefit from the strong new housing market, as the mortgage lending industry has been one of the few industry sectors that has actually increased demand for office space in the past few years.

All told, 2004 is shaping up to be a year of solid economic expansion for the Twin Cities. Demand is returning for office and industrial space. Renter demand for apartments will return as the economy adds new jobs. Over the past 25 years, the Twin Cities economy has rebounded coming out of an economic downturn at a faster pace than the nation as a whole.

¹ Department of Employment and Economic Development (DEED), Minnesota Workforce Center
² DEED, Quarterly Export Statistics
³ Builders Association of the Twin Cities