- Continuing positive absorption points to an ongoing recovery
- Vacancy rate dropped to 17.4% from 18% in 2012
- Activity dropped significantly from 2012 as space give-backs and consolidations mitigated absorption
- Landlords of core, high-quality, well-located class A buildings in the Minneapolis CBD and the West submarket are pushing net rents higher
Demand for office space slowed slightly in the second half of 2013 as many space users remained cautious. In addition, the trend of tenants leasing less space rather than more is becoming a regular occurrence. Coming off of nearly 1 million square feet (msf) of absorption in 2012, absorption dropped to 621,062 sf in 2013 with 271,506 sf in the second half of the year.
The good news is that five of the seven submarkets posted positive absorption during the past six months, led by the Northeast with 120,249 sf and the St. Paul CBD with 72,785 sf. The South/Airport and Southwest reported negative absorption. The West submarket continued to outperform with an overall 12% vacancy rate and a 10.5% class A vacancy rate. Coming off nearly 200,000 sf of absorption in the first half, recorded transaction volume slowed in the West. However, several spaces were backfilled with no down time, so they never showed up as vacancies or absorption but were positive for the submarket. Much of the activity in the West is from growing companies like OneBeacon and Bell State Bank as well as Wells Fargo’s lease expansion at Metropoint.
Downsizing, Right-Sizing Continues
The Minneapolis CBD’s absorption and vacancy were relatively unchanged. There are two reasons for this. First, tenants—particularly professional services firms—are using less space per employee as they become more efficient and utilize more collaborative workspace. Second, excess space is being returned to the market, either upon lease renewal or the expiration of a sublease, which comes back to the market as vacant space. Even if firms have not cut jobs, they are working differently and don’t require as much space when their leases expire or they relocate. Dorsey & Whitney, Moss & Barnett and Campbell Mithun are all downsizing and shedding space in downtown Minneapolis. A positive note to this trend is the desire for higher-quality space among users. As tenants downsize or consolidate, some may be willing to pay more per square foot in higher-quality buildings since they are paying for less space. The return of quality space to the market will play an important role for companies seeking this type of space in what is expected to be a supply-constrained environment for new development over the next several years.
Impact of Corporate-Owned Facilities
Another reason for weaker absorption results is the number of companies relocating from multi-tenant space to corporate campuses. The corporate space is not part of the multi-tenant universe but is competing with multi-tenant properties. Users opting to occupy their own buildings include UnitedHealth Group, CenterPoint, Xcel Energy and Wells Fargo. Wells Fargo may vacate as much as 900,000 sf in the Minneapolis CBD multi-tenant market when its 1.1-msf headquarters is completed in 2016. In addition, Best Buy and SuperValu are marketing office space at their corporate headquarters in Richfield and Eden Prairie, respectively. There are companies expanding in the market; however, not necessarily in multi-tenant space.
Class A Remains Strong, but Class B Leads Absorption
Class A buildings are performing well in most submarkets with strong occupancy and some rent growth. Class A vacancy is 14%, and the average net asking rate for class A space increased to $15.86. Some of the premier office properties in the Minneapolis CBD have traded in the past year, and their new owners are making a push for $1.00 – $2.00 psf net rate increases. It appears these efforts toward higher rent for the best space appear to be successful. In the West, class A and B rates are up nearly $1.00 psf from 18 months ago. Across the Twin Cities, class B buildings absorbed 520,649 sf, outperforming all other classes. This class B absorption was largely driven by the 207,000-sf Wells Fargo deal at MetroPoint, which was signed in 2012, and the dearth of class A opportunities in some submarkets.
Overall, new leasing activity in 2014 will likely be very comparable with 2013, although positive absorption in the multi-tenant universe will not benefit from all of this activity. Approximately 400,000 sf of absorption to the multi-tenant universe is anticipated. Most activity is expected in the West submarket where several tenants are expanding and big users are scouting for space like The Mosaic Co. and MoneyGram. The West is tight with only a handful of big blocks of vacant space. It will likely take several more quarters of strong job growth to stimulate more market-wide demand for space.
More shakeout is expected as companies continue consolidating or downsizing. Professional services firms will continue to reinvent their business models by reducing employee square footage allocations with the goal of working more efficiently.
There are also a considerable number of blocks of space coming back to the market across many submarkets in 2014, which is expected to drag down the numbers.
The silver lining is market conditions continue to hold steady and the long-term outlook for the Twin Cities office market is mostly positive. High-quality class A will continue to perform well with strong occupancy and projected rent growth. Current market fundamentals appear strongest for the West submarket and Minneapolis CBD, with an eye toward these fundamentals possibly changing.
To read more, visit the January 2014 edition of Cushman & Wakefield/NorthMarq’s Compass report, now available online. Visit the web site: www.northmarqcompass.com