Market Intelligence

MARKET INTELLIGENCE

Minneapolis/St. Paul OfficeQ2 2018 MARKETBEAT

Minneapolis/St. Paul OfficeQ2 2018 MARKETBEAT

Economy The Twin Cities employment market continued to ti second quarter of 2018 as 22,100 jobs were added year. The region is effectively at full employment as unemployment has fallen -30 basis points (bps) fro quarter 2017 to its current rate of 2.9%. The constr pool continues to influence commercial real estate access to transit, amenities and housing are top of employee attraction and retention equation. Market Overview Driven by a strong economy, high employment and growth, the overall vacancy in the second quarter 2 decreased -50 bps from first quarter 2018 in the T office market. In a continuing trend, leasing remain subset of tenants gave back space to reduce their f That downsizing, along with large users that traded Q2 17 Q2 18 12-Month Forecast .0M 2.0M 3.2% 2.9% 4.3% 3.8% Q2 17 Q2 18 12-Month Forecast 17.0% 17.1% 149k 274k 1.2M 2.2M $25.21 $25.32 Econom The Twin Ci second qua year. The re unemploym quarter 201 pool continu access to tr employee a Market Driven by a growth, the decreased - office mark subset of te That downsi space in fav continued t and vacanc The overall Class B spa vacant. Co commodity with layout asking rates $25.00 $26.00

MINNEAPOLIS/ST. PAUL OFFICE

MINNEAPOLIS/ST. PAUL OFFICE

Economic Indicators

Economic Indicators

12-Month Forecast

Minneapolis Employment

Q2 17

Q2 18

Minneapolis Unemployment

U.S. Unemployment

Minneapolis Employment

2.0M

2.0M

ECONOMIC OVERVIEW

Minneapolis Unemployment

3.2%

2.9%

*Numbers bove are quarterly averages; Q2 2018 data based on May values

Market Indicators (Overall, All Classes)

Market Indicators (Overall, All Classes) *Numbers above are quarterly averages; Q2 2018 data based on May values The Twin Cities employment market continued to tighten in the second quarter of 2018 as 22,100 jobs were added year-over-year. The region is effectively at full employment as unemployment has fallen -30 basis points (bps) from second quarter 2017 to its current rate of 2.9%. The constrained labor pool continues to influence commercial real estate decisions as access to transit, amenities and housing are top of mind in the employee attraction and retention equation. U.S. Unemployment 4.3% 3.8%

Vacancy

YTD Net Absorption (sf)

Under Construction (sf)

Average Asking Rent*

12-Month Forecast

Q2 17

Q2 18

*Rental rates reflect gross asking $psf/year

Overall Net Absorption/Overall Asking Rent 4-QTR TRAILING AVERAGE

Vacancy

17.0% 17.1%

YTD Net Absorption (sf)

149k

274k

225 275

Under Construction (sf)

1.2M

2.2M

MARKET OVERVIEW

OUTLOOK

Driven by a strong economy, high employment and steady job growth, the overall vacancy in the second quarter 2018 decreased -50 bps from first quarter 2018 in the Twin Cities office market. In a continuing trend, leasing remained active as a subset of tenants gave back space to reduce their footprints. That downsizing, along with large users that traded multi-tenant space in favor of single-tenant and corporate campuses, continued to limit more impressive improvements to absorption and vacancy rates. The overall market continued to battle an excess inventory of Class B space as 20.8% of product in the asset class remains vacant. Competition amongst Class B properties offering generic commodity space is forcing landlords to become more innovative with layout options, and aggressive with tenant allowances and asking rates, to better position their buildings to attract tenants. Landlords have taken note of recent leasing success by coworking operators and have started marketing fully furnished spec suites as co-working spaces. The Twin Cities is also seeing evidence of the national trend of large “enterprise” or corporate users that are occupying co- working spaces as a more flexible alternative to traditional leased space. The office investment sales market continues working its way through a number of carryover transactions that are still pending. Most of the deals trading in the first half of 2018 were stabilized properties. That is not surprising as buyers had been focused on executing value-add strategies over the past few years and are now looking to capitalize on higher values as lease- up strategies were executed.

The expectation is for flat to slightly negative absorption in the second half of 2018. Companies may pause expansion plans due to the length of the current growth cycle, which is approaching a record. Tenants could continue to expand their search criteria due to more remote working, improving transit/connectivity and a desire to appeal to a broader employee base in a tight labor market. Transaction costs are continuing to escalate with construction costs being a main factor.

JULY 2018

Navigating the Minneapolis-St. Paul Commercial Real Estate Market

OFFICE MARKET

Twin Cities Office Market Stays Active Amid Shrinking Footprints A tale of two markets? A glass that is half full or half empty? Two steps forward and one step back? A variety of descriptors have been thrown out over the past few years to describe the Twin Cities office market, and they are all still true today. TRENDS TO WATCH Co-Working continues to expand

improving transit/connectivity in the metro, or a desire to appeal to a broader employee base in a tight labor market.

Co-Working now represents just over 1.0% of the Twin Cities office market with both local and national firms, including WeWork, growing operations. Locally based Life Time Fitness is moving forward with plans to open three new locations for its Life Time Work model, a concept that combines co-working with on-site fitness amenities. Landlords are dipping a toe in the water by marketing fully furnished spec suites as co-working spaces. The Twin Cities is also seeing evidence of the national trend of large “enterprise” or corporate users that are occupying co-working spaces as a more flexible alternative to traditional leased space. One Silicon Valley-based company is reportedly considering space at WeWork for 200+ employees to open a new location in the Twin Cities. Tenants broaden their search Traditionally, tenants have kept a laser focus on specific geographic markets within the metro. However, more examples are emerging of companies that are willing to expand their search criteria to find the right fit. Some firms are conducting a metro-wide search, while others are willing to consider different space options ranging from single-story office showroom space in the suburbs to a Downtown Minneapolis high-rise. That shift could be due to a variety of factors, such as more remote working,

Creative office overload? Owners are continuing to take older,

Despite a strong economy, high employment and steady job growth, the office market has had a difficult time capitalizing on that robust business expansion. The common theme is that leasing remains active, but tenants continue to give back space as they shrink footprints. That downsizing, along with big users that have traded multi-tenant space in favor of build-to-suits and corporate campuses, continues to slow the pace of absorption. Some pockets of the metro have been hit harder by vacancies than others. However, most submarkets are battling a surplus of Class B space. Competition within Class B buildings offering generic commodity space is forcing landlords to be more innovative to better position their buildings to attract tenants. Class A properties continue to do well, which is evident in the uptick in rents that occurred during the first half. Class B and C rents remain flat, and concessions are more prevalent in Class B buildings that face more competitive pressure.

underperforming buildings and transform them into cool creative environments. Fifth Street Towers, Baker Center, West End Office Park and the Dayton’s redevelopment are a few of the projects that have already delivered or have renovation projects underway or planned. It remains to be seen how deep the market is for creative office space, and how much rent tenants will be willing to pay for these expensive redevelopments. OUTLOOK The expectation is for flat to slightly negative absorption in the second half of 2018. Companies may be getting a bit nervous about the length of the current growth cycle, and there could be more caution creeping into expansion plans. Transaction costs, especially the cost of construction, are continuing to rise. This is resulting in longer average lease terms, which are required to offset higher upfront costs.

OFFICE VACANCY & ABSORPTION

Source: Cushman & Wakefield

TOTAL # OF BLDGS

% VACANT

% VACANT W/SUBLEASE

Q1 2018 ABSORPTION

Q2 2018 ABSORPTION

1ST HALF 18 ABSORPTION

SUBMARKET

NRA VACANT SPACE

Mpls CBD Northeast Northwest

111

27,040,097 8,218,576 2,331,471 6,119,640 14,635,436

5,232,3471 1,077,913 420,905 978,518 2,249,270 1,307,246 1,012,515 12,278,708

19.4% 13.1% 18.1% 16.0% 15.4% 19.8% 11.0% 16.6%

20.0% 15.0% 19.6% 16.6% 16.3% 21.6% 11.7% 17.5%

(126,657)

225,757 49,164 (18,544)

99,100 59,471 (11,692) (68,292) (111,994) 104,001 183,204 112,610

134

10,307 6,852

37 89

South/Airport Southwest St. Paul CBD

(70,714) (6,139) (41,741) 14,720 (213,372)

2,422

143

118,749

38 97

6,615,071 9,166,314

(70,253)

West

89,281

649

74,126,605

396,576

Total Market

OFFICE ABSORPTION, CONSTRUCTION & VACANCY

Source: Cushman & Wakefield

• ABSORPTION • CONSTRUCTION

• VACANCY

20%

5M

19.9

19.6

19.2

18.0

17.4

16%

4M

16.6

16.7

16.6

16.0 15.6

15.9

12%

3M

CO-WORKING still flaming hot, now 1.0% of Twin Cities office market

8%

2M

0.98

0.97

4%

1M

0.63

0.62

0.52

0.48

0.30

0.33

0.27

0.17

0.15

0.07

0.02

0.18

0%

0M

SQUARE FEET

0.00

0.00

0.00

0.00

0.00

0.00

(0.15)

(4%)

(1M)

(8%)

(2M)

(1.83)

(10%)

(3M) 2008 2009 2010 2011

2012 2013 2014 2015 2016 2017 1H 18

ABOUT THE AUTHOR

THE COMPASS REPORT Copyright © 2018 Cushman & Wakefield. All rights reserved. The information contained within this report is gathered from multiple sources considered to be reliable. The information may contain errors or omissions and is presented without any warranty or representations as to its accuracy. It is our intent to provide the best possible information while leaving the reader the responsibility of further verification before using this report for business and/or financial decisions. The report was created by experts using Twin Cities commercial property data from the first six months of 2018. The Compass report includes information for multi-tenant office, industrial and retail projects greater than 20,000 SF and multifamily for-rent properties. Not included are owner occupied, government or single-tenant buildings. Not all information and insights we’ve collected can be published in any given issue.

ABOUT CUSHMAN & WAKEFIELD Cushman & Wakefield is a leading global real estate services firm that delivers exceptional value by putting ideas into action for real estate occupiers and owners. Cushman & Wakefield is among the largest real estate services firms with 48,000 employees in approximately 400 offices and 70 countries. In 2017, the firm had revenue of $6.9 billion across core services of property, facilities and project management, leasing, capital markets, valuation and other services. To learn more, visit www.cushmanwakefield.com or follow @CushWake on Twitter. ABOUT THE MINNEAPOLIS-ST. PAUL OFFICE

#1 Commercial Real Estate Brokerage Firm & Commercial Property Management Firm by Minneapolis/St Paul Business Journal More than $2.3 billion annual transactions 85 brokers 30MSF of assets under management Employs nearly 500 professionals

3500 American Blvd W Suite 200 Minneapolis, MN 55431 952 831 1000 | cushmanwakefield.com

West Office Market Second Quarter 2018

Inventory

West Area Map

Total Direct Absorption (Square Feet)

150,000

10

94

35W

8%

35E

100,000

50,000

694

169

94

0

12

WEST

394

38%

54%

94

(50,000)

(100,000)

494

35W

61

(150,000)

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2014 2015 2016 2017 2018

Direct Vacancy Rate

West Office Market Statistics 2018 Q2

Class C

Class A Class B

25%

TOTAL # OF BUILDINGS NRA VACANT SPACE SUBLEASE SPACE

PERCENT VACANT

% VACANT W/ SUBLEASE

2018 YTD TOTAL AVG RATE TOTAL OE & T

WEST

20%

Class A

32 4,980,763 576,476 58,132 11.60% 12.70% 38,990 $19.69 $14.42

15%

Class B

49 3,492,673 356,043 2,246 10.20% 10.30% 72,207 $14.54 $11.24

10%

5%

Class C

16 692,878 79,996

0

11.50% 11.50% -7,196 $9.59 $8.94

0%

Total West

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2014 2015 2016 2017 2018

97 9,166,314 1,012,515 60,378 11.00% 11.70% 104,001 $16.93 $12.77

Minneapolis CBD Office Market Second Quarter 2018

Inventory

Total Direct Absorption (Square Feet)

Minneapolis CBD Area Map

400,000

300,000

6%

694

169

94

200,000

100,000

394

0

MINNEAPOLIS CBD

53%

41%

(100,000)

(200,000)

(300,000)

494

(400,000)

35W

(500,000)

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2014 2015 2016 2017 2018

Direct Vacancy Rate

Minneapolis CBD Office Market Statistics 2018 Q2

Class C

Class A Class B

35%

PERCENT VACANT

% VACANT W/ SUBLEASE

2018 YTD TOTAL AVG RATE TOTAL OE & T

MPLS CBD TOTAL # OF

BUILDINGS NRA VACANT SPACE SUBLEASE SPACE

30%

25%

Class A

25

14,278,100 2,067,920

58,707

14.50%

14.90% 78,282

$18.63

$14.58

20%

15%

Class B

57

11,062,745 2,908,093

87,443

26.30%

27.10%

23,154

$15.23

$10.99

10%

Class C

29

1,699,252

256,328

29,530

15.10%

16.80%

-2,336

$13.99

$8.08

5%

0%

Total Minneapolis CBD

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2014 2015 2016 2017 2018

111

27,040,097 5,232,341

175,680

19.40% 20.00% 99,100 $17.05

$12.83