Market Intelligence

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.