CLASS B ABSORPTION LEADS THE WAY
The office market experienced 346,000 square feet (sf) of positive direct absorption in the first quarter of 2013, with more than 315,000 sf in class B spaces. Direct space vacancy dropped from 18.0% to 17.6%. Although class A direct vacancy rose slightly to 13.7%, it is still well below other classes, some of which are above 22.0%. Available sublease space remained slight, adding just over 1.0% of additional vacancy to the market.
Six of the seven submarkets recorded positive absorption in the first quarter of 2013. The West submarket led the way with more than 165,000 sf of direct absorption, all but 10,000 sf in Class B, and direct vacancy dropped nearly 2.0% to 13.2%. The Southwest submarket experienced 122,000 sf of positive direct absorption, and direct vacancy fell from 17.1% to 16.2%. After seeing 105,500 sf of negative absorption in 2012, the Northwest absorbed more than 46,000 sf in the first quarter, most in Class B, and direct vacancy declined to 34.6%. The Northeast submarket absorbed 38,000 sf, nearly all in Class B, and direct vacancy decreased to 18.0%. The South/Airport submarket saw positive direct absorption of nearly 38,000 sf, and the direct vacancy rate dropped to 16.6%. The St. Paul CBD absorbed 19,000 sf of direct space in the first quarter and direct vacancy dropped slightly to 23.4%. The Minneapolis CBD ended 2012 strong, absorbing more than 396,000 sf, but 2013 started slow, with more than 83,000 sf of negative absorption in the first quarter; direct vacancy rose from 16.1% to 16.8%.
ASKING RENTAL RATES
The direct weighted average asking rate across all property types and submarkets was $21.25 psf in the first quarter of 2013, a slight decrease from $21.43 in the fourth quarter of 2012. Rental rates are expected to increase while slightly fewer concessions are being offered by landlords.
With nearly 350,000 sf of positive absorption in the first quarter, it is anticipated 2013 will be the strongest year for the office market since 2006, with nearly 1.3 msf of absorption. In addition, with no new office construction completions scheduled for 2013 and no new speculative office product currently underway, the office market vacancy rate should drop below 16.0% for the first time since 2008.