Minneapolis CBD Office Market Insights (January 2018)

  •  The high level of leasing activity is being offset by blocks of space returning to the market.
  •  Annual absorption totaled 308,863 sf with vacancies that actually ticked 20 basis points higher to 19.6% due to new additions to the multi-tenant universe.
  •  Tenants are spending more on TIs to create space that can attract and retain workers in a very tight labor market.

Second half absorption totaled 103,000 sf, which is sluggish considering that represents less than 0.4% of the 27 million sf submarket. What the numbers don’t show is that activity is higher than ever. The urban migration into downtown from the suburbs is continuing, and companies are active doing new lease deals as they continue to relocate, expand, and right-size.

The Class B sector continues to be challenged by a huge surplus of vacancies and a rate of 27.5%. That glut is due in part to a couple of struggling properties, such as the Northstar Center, which has been in foreclosure. In addition, there also are some large blocks of Class A space returning to the market. For example, law firm Faegre Baker Daniels is giving back 80,000 sf at Wells Fargo Center. That shows that it is not necessarily a divide between Class A and Class B, but pockets of vacancy are emerging more on a property-by-property basis, where properties with amenities and character are gaining the most tenants.

The upper floors of CBD buildings continue to command the most attention and garner higher rents, while there is an abundance of “commodity” space in low-rise buildings and lower floors of office towers. Landlords at those properties will need to step up their game and get more creative to take their offerings to the next level and improve occupancies. The “amenities arms race” is fierce in the Minneapolis CBD, with owners investing significant capital on improvements, and in some cases, creating new amenity floors. Landlords also are continuing to use fully furnished spec suites to successfully market available space.

Notable Lease Deals:

  • Faegre Baker Daniels leased 62,000 sf at Baker Center
  • Calabrio leased 102,000 sf at 405 Washington Ave N
  • WeWork leased 46,000 sf at MoZaic East in Uptown
  • S. Bancorp leased 42,000 sf at 800 Nicollet Mall
  • Select Comfort moved into 238,000 sf at 1001 3rd Av. S.
  • WeWork occupied 53,000 sf at Capella Tower
  • Industrious occupied to a 35,000 sf expansion at T3
  • Amazon expanded its presence at T3 with an option that will bring its occupancy from 104,000 to 140,000 sf.

New Development:

  • United Properties is building The Nordic, a 194,700 sf building in the North Loop that will deliver in early 2019.
  • Ackerberg Group is developing the 185,000 sf MoZaic East Phase II at Fremont Ave. S. and 29th Street that will deliver in Q1 2019.
  • Ned Abdul is building the 180,000 sf Swervo Washington that also will deliver in Q1 2019.
  • The Dayton’s Project is now underway. The mixed-use redevelopment of the former Macy’s department store at 700 Nicollet Mall is expected to deliver nearly 750,000 sf of office space when it opens in summer 2019.

Outlook

The forecast is for negative absorption in the first half of 2018, with 149,000,000 sf total coming back from Wells Fargo and ING and a couple of other blocks. However, leasing activity again will defy those numbers with numerous deals in the works and many tenants actively looking for space.

The timing is ripe for struggling Class B and Class C buildings in the traditional CBD to reinvent themselves.

Owners are watching to see if parking emerges as a deterrent for some employers to locate downtown. Some areas of the CBD are facing a parking shortage and rising costs.

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