Vacancy Edges Lower, But Slowdown in Activity Casts Mid-Year Shadow over Office Market

Activity in the Twin Cities multi-tenant office market slowed in the first half of 2013. The market seemed to take a deep breath in the wake of the nearly 1 million square feet (msf) of absorption that occurred in 2012. The recovery is still underway, albeit at a slower-than-anticipated pace.

Tepid demand limited the decrease in overall vacancy to just a 0.5% downward tick, resulting in a mid-year market-wide vacancy rate of 17.5% for direct space, 18.7% including available sublease space. The market is on track to record a third consecutive year of declining vacancy.

Office absorbThe West submarket was again the top performer, posting 198,000 square feet (sf) of absorption. The Southwest delivered 125,000 sf of absorption. In all, six of the seven Twin Cities submarkets recorded positive absorption—the lone exception being the Minneapolis Central Business District (CBD), which confounded expectations with negative 104,000 sf of absorption.

Outlook
The Twin Cities office leasing market is off to a slower-than-anticipated start this year. It now appears that total absorption for the year will be in the neighborhood of 675,000 sf, versus an earlier projection of 1.3 msf. Since January 2013, Twin Cities employers have added more than 20,000 jobs in areas critical to the health of the office market—financial services, business and professional services and information technology—compared with adding only 13,000 jobs in the same areas for all of 2012. It will take several more quarters of solid job growth to rekindle more robust demand. Economic uncertainty is also tamping down demand as corporate America continues to take a conservative view of economic trends.

Many companies are rethinking how they use their office space—in particular, allocating less space per employee. Some major employers in the Minneapolis CBD have taken that approach, which means that even if their head count stays the same, they still need less space when their leases come up for renewal. This trend could significantly affect the multi-tenant office market for some time.

One more trend to watch in coming months is the repurposing of outdated office properties to other uses. It’s happening in both of the CBDs, where some existing office buildings are being converted to residential uses, for example. Flexibility may be a key to survival for some landlords.

To read more, visit the July 2013 edition of Cushman & Wakefield/NorthMarq’s Compass report, now available online.  Visit the web site: www.northmarqcompass.com

About Cushman & Wakefield/NorthMarq

​Cushman & Wakefield/NorthMarq is a joint venture formed in September 2011 by NorthMarq Real Estate Services and the Minnesota operations of global real estate services firm Cushman & Wakefield. By combining the talent of both organizations at the regional level with the global platform of Cushman & Wakefield, we offer clients the best combination of regional strength and global capabilities. The result: the leading commercial real estate firm by all measures in the Upper Midwest.
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