HEARTLAND SNAPSHOT, OCTOBER 2004

Minneapolis/St. Paul Office Market

Currently, there is no planned office development within the Central Business District (CBD) cores of both Minneapolis and St. Paul, according to Nils Snyder, senior associate with Welsh Companies. “There is, however, speculation about the next tower site and a few developers are starting the early stages of the process (talking with tenants and looking for potential sites). Most of the development activity has been found in two categories: office condominiums and healthcare facilities,” he says.

One major development taking place in Minneapolis is the redevelopment of the former Sears site, named Midtown Exchange, by Ryan Companies. “The impact of the development will be felt in the revitalization of an economically depressed area and the relocation of Allina’s corporate headquarters and its 1,100 employees to the site,” Snyder says.

“Office condominium development has added a new twist to the market,” he says. “Many small- and mid-sized businesses have bought condominiums in the hopes of realizing an appreciation of value like that of their homes.” The condominium market is untested and has yet to go through a full cycle. “This new product has pulled many would-be tenants out of the market for the time being, decreasing the amount of potential small- and mid-sized tenants looking to lease space,” he says.

The majority of development activity in the area has been in the high growth areas of the Twin Cities — including the northeast and northwest submarkets. “The reason for the growth in these markets is the population booms and the lack of available quality space in other areas versus the availability of raw land in those other markets,” Snyder says. Woodbury and Maple Grove have seen an increase in building activity, particularly medical buildings, to help support the growing population’s requirements.

MSP Commercial, headed by Dick Zehring, is a new development company focusing primarily on the metropolitan east side. The company looks for retail-type sites to develop into medical and professional office developments.

Two major tenants in the market that have filled a significant amount of space recently include Target and US Bank. Target recently absorbed 150,000 square feet while US Bank filled a large sublease of 270,000 square feet, both of which were in the downtown Minneapolis market.

Average Class A asking rates in the downtown Minneapolis CBD are $12 to $14 net — and most of the available space is found in lower rise elevator banks. The upper elevator banks of space (above 30) have been averaging $16.

The overall market has closely followed the Minneapolis CBD market with average rates throughout the metropolitan area near $12 net. “The rates are expected to rise in the next year,” he says.

The Minneapolis CBD market is currently experiencing a 17 percent vacancy factor. “If sublease space is inserted into the equation the percentage jumps to 21 percent,” Snyder says. The overall market vacancy is near 16.5 percent with a sublease market pushing the rate up 2 points to 18.6 percent.

“In the near future, both the Minneapolis CBD and Minneapolis city neighborhoods will continue to be strong areas of the city,” he says. The other areas to watch are the emerging markets located along the major freeway corridors including Maple Grove along Interstate 94 West; Blaine along Interstate 35W North; Woodbury along I-94 East; the Chaska Savage area on the southern end of Highway 169 South; and Lakeville along I-35 South.

“The Twin Cities market is still in a depressed real estate cycle,” Snyder says. “Tenants are finding excellent deal terms, but landlords are starting to tighten the reigns — looking at the potential of an improving economy and cutting back on many incentives that were once common place.”

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