 Proof of the cyclical nature of the multi-tenant office market is on full display in the Twin Cities this year.
The Southwest, West and Minneapolis Central Business District (CBD) are in growth mode at mid-year. Talk of significant new development activity is rife in these submarkets, especially for high-image Class A product.
Other submarkets, including the Northeast, Northwest and South/Airport, are also seeing developers move forward with new construction projects and plans. Only the St. Paul CBD, still recovering from the state of Minnesota’s multi-year withdrawal from the CBD’s multi-tenant office space, is missing from the new development conversation at this point. Even so, signs point to a continuing gradual recovery in private sector demand for multi-tenant office space in the St. Paul CBD.
At mid-year, the Twin Cities overall vacancy rate is hovering at a five-year low of 14.7% (16% including sublease space), down from 15.2%/17.5% at year-end 2006. The declining vacancy rate is supported by 286,000 sq. ft. of positive absorption. The market totaled positive 1,400,000 sq. ft. of absorption for all of 2006.
Rental Rates Rising
Rental rates are rising in six of the seven Twin Cities submarkets. The average quoted rental rate for all property classes is $12.78 per square foot, up from $12.38 per square foot at year end. Rate increases are sharpest among Class A properties, where the average quoted rate is $14.94 per square foot versus $14.41 per square foot six months ago. The average quoted rate for Class B properties is slightly higher at $10.93 per square foot; the quoted rate for Class C properties inched up to $8.94 per square foot.
The market saw delivery of 302,000 sq. ft. of new product across several submarkets and negative 205,000 sq. ft. of absorption in the St. Paul CBD. Five of the seven submarkets posted solid growth in absorption, led by the Minneapolis CBD (positive 232,000 sq. ft.) and the Southwest (positive 183,000 sq. ft.), followed by the Northeast (35,000 sq. ft.), the Northwest (27,000 sq. ft.) and the South/Airport (21,000 sq. ft.). The West submarket slipped to negative 5,900 sq. ft.of absorption due to Allianz moving out of 100,000 sq. ft. at MetroPoint North and into the second phase of their regional headquarters.
Quality Rules in Minneapolis CBD
Space users in the Minneapolis CBD are seeking higher quality and unique office space in the Nicollet Mall area and the North Loop/Warehouse District creative quarter. Read more
Southwest Submarket Poised for Growth
The Southwest submarket is poised for continued strong growth. The overall vacancy rate is 10.3%/11.6% (7.4%/7.9% for the Class A market). Both numbers are the lowest of all the Twin Cities submarkets. Read more
Fuse Lit in West Submarket
Rental rates moved higher in the West submarket during the first half, including a boost in the Class A rate to a quoted average of $16.86 per square foot—the highest in the Twin Cities market. Read more
Confident St. Paul CBD Sees Better Times Ahead
Numbers alone do not tell the full story about the multi-tenant office market in the St. Paul CBD. Read more
New Construction in Northeast
Competition for tenants is heating up in the Northeast submarket as more new multi-tenant product comes on line. The Woodbury-Lake Elmo area is seeing the fastest growth, with three new buildings totaling 100,000 sq. ft. added to the area in the first half. Read more
New Product Fills Pipeline in South/Airport Submarket
New development is outpacing demand for office space in the South/Airport submarket this year, resulting in a 2% increase in vacancy over the first half. Read more
Maple Grove Is Star of Northwest Submarket
Maple Grove continued to be the sweet spot for growth in user demand in the Northwest submarket, accounting for a majority of the 27,000 sq. ft. of positive first-half absorption. Read more
The Outlook
Leasing demand is heating up in the Twin Cities, evidenced by the 286,000 sq. ft. of positive first-half absorption, and will continue to grow during the second half of the year. The Twin Cities office markets will likely see another 1 million square feet of positive absorption during the second half of the year. If that occurs, the overall vacancy rate could decline another percentage point to the 13.7% range.
Rental rates are also projected to continue rising significantly, especially in submarkets where the supply of higher quality space is limited.
Developers are moving forward with new office projects in selected submarkets. Approximately 1 million square feet of new multi-tenant product is set to come on line by the end of this year—a significant portion of which is speculative.
By this time next year another 1.5 million square feet of new multi-tenant product could be under construction, based on current plans—perhaps including a large new office tower in the Minneapolis CBD.
A major new development phase is taking root in a number of the suburban markets, despite a market-wide vacancy rate in the mid-teens. By comparison, the market vacancy rate was 6.7% in 1997 (when we saw the first significant product delivery from the last big development phase).
User demand for high-quality Class A space is a significant driver of new construction. Many tenants today, especially mid- to large space users, want to be in the highest quality space available—even if it means paying a premium rental rate. Users perceive such space to be important to their ability to project a strong corporate image and to attract and retain employees.
While user demand for the higher quality office space is strong, the same can’t be said for some of the older, more functionally challenged Class B and C space. Vacancy for Class B and C properties is in the high teens and above in several submarkets, including a 28.2% vacancy rate for Class C space in the Southwest, 19.2% Class C vacancy in the Northeast, 26.1% vacancy for Class C space in the St. Paul CBD, and a 19.7% vacancy rate for Class B space in the Minneapolis CBD. As newer, better quality space comes onto the market, filling the holes in some of the older, more functionally challenged space will become increasingly difficult.
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