Chuck Howard Partner Equity Commercial Services

Office development in the Minneapolis market has drastically declined. The vacancy rate ranges between 17 percent and 21 percent, and there is very little speculative office development under construction or planned. Current office development that has recently taken place or will take place in the next 12 to 14 months is for single-user properties, such as Best Buy’s new 1.5 million-square-foot headquarters in Richfield, General Mills’ 350,000-square-foot headquarters expansion in Golden Valley or small speculative office projects tied to mixed-use, retail and residential developments.

“New construction of multi-tenant office space in the Minneapolis market is negligible,” says Chuck Howard, a partner with Minneapolis-based Equity Commercial Services. “There is currently 160,000 square feet to 200,000 square feet of space under construction.”

The market has taken a big hit from the relocations of Best Buy, General Mills, American Express Financial Services, Target Corporation and US Bankcorp/Piper Jafferay to new offices during the past year. These companies vacated 3.75 million square feet of space, or 8.2 percent, of the total vacant space on the market.

“Many of the companies that took down large amounts of space in the past have downsized and have excess space under lease, have moved into single-user non-competitive properties or have shelved any expansion until economic conditions improve,” Howard says. In the first half of 2003, the Minneapolis market absorption was negative 500,000 square feet.

The overall vacancy rate in the Minneapolis market is 18 percent and 21 percent including sublease space. These numbers are up from 2002 levels of 16 percent and 20 percent respectively. “The rise in vacancy levels continues to be caused by company downsizing, relocation of large users to single-user buildings, and campus and business failures,” Howard says. Adding to the problems, the economy has failed to gain any sustained momentum. This lack of economic growth has stalled any anticipated tenants’ growth and market improvement.

“Although the entire Minneapolis office market is suffering from record high vacancies, the hardest hit sector of the market has been the Minneapolis central business district (CBD),” Howard says. In addition to the relocations to non-competitive properties, the failure or downsizing of companies such as Arthur Andersen, Retek, AT&T and Qwest has caused the Minneapolis CBD to reach a vacancy rate of 21 percent including sublease space.

For new leases, Class A rental rates in Minneapolis range between $10 and $16 in the CBD and between $12 and $18 in the suburbs. Included in these rents, which are $1 to $3 less than in 2002, are higher transaction costs to the landlord, such as free rent, larger tenant improvement allowances and higher commissions. The high vacancy rates have pushed rental rates down by 40 percent across the Minneapolis market compared to rates achieved in the late 1990s.

The sector of the market with the greatest potential for growth, driven by the availability of land, good infrastructure and rapidly growing populations, is the northern ring of the Minneapolis/St. Paul metropolitan area, which includes Plymouth, Maple Grove and Brookland Park. Two major corridors, Interstate 35W and Interstate 94, have had significant development in the past, which will attract additional development in the future. In 2001 and 2002, large companies such as Medtronics, Target Corporation and Wells Fargo built new office space in this sector, which also has the fastest growing population in the Twin Cities.

“The positive news is that the declining office market has hit its low point,” Howard says. “With businesses stabilizing, the economy set to improve and no new construction, the office market can only move is in a more positive direction.”

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