HEARTLAND SNAPSHOT, OCTOBER 2008

Minneapolis/St. Paul Office Market

The Minneapolis/St. Paul office market may seem like an auto showroom; there are plenty of tire kickers but not enough buyers.

The year started off extremely slow, with negative absorption of more than 427,000 square feet. Much of that occurred when GMAC-Rescap vacated 270,000 square feet at 8400 Normandale Tower, which also contributed to a wealth of sublease space on the market.

During the second quarter, activity took a turn upwards, and absorption moved into positive territory at 21,334 square feet; nevertheless, while activity has picked up this summer, deals are not getting done as quickly as they were a year ago.

The slower activity has limited spec development, especially since lenders have upped the ante on preleasing thresholds that must be reached before construction begins. Additionally, developers face pressure from an increasing amount of sublease space. Sublease space accounts for approximately 1.5 million square feet, which is the most the market has seen since the dot-com bust.

Still, several developments have been completed or are in the works, primarily in the Twin Cities’ southwest submarket. Many of these developments have — or will attain — LEED certification, which is becoming a noticeable standard among new buildings in the Minneapolis/St. Paul market.

Chief among these LEED-certified projects is Duke Realty Corporation’s 322,000-square-foot Norman Pointe II, which came online late last year.

Completed in September, Ryan’s Two MarketPointe adds another 240,000 square feet of Class A space to the market. CB Richard Ellis signed on as the lead tenant at the development, taking about one-third of the space.

United Properties is continuing work on the 8200 Tower in Normandale Lake Office Park. The 274,000-square-foot building should be finished by April 2009. Several tenants have already signed on, including Benfield Group of London, which is relocating from a nearby building and taking more than 100,000 square feet. United Properties is developing the building for owner TIAA-CREF.

The heavy spec development activity has dramatically increased the vacancy rate in the southwest submarket, which now stands at 17.2 percent, representing an approximately 3 percent increase since the start of the year. On the plus side, tenants now have several options for large blocks of contiguous space, which has been very limited in the past couple years.

Moving forward, developers will be eyeing the west submarket. While it is half the size of the southwest submarket, the vacancy rate in the west has been steadily declining over the past 5 years, and now stands at less than 10 percent. There are only three blocks — Northland Corporate Center, Atria and the former Honeywell headquarters — of available space for more than 100,000 square feet. 

Developers have several projects on the drawing board, underway or newly occupied in the west submarket:

• Opus’ 690,000-square-foot Excelsior Crossings: This project is partially under construction, with Cargill anchoring the entire project.  Cargill has signed a lease for two of the buildings, and has an option for the land on the third. Additionally, Opus’ Xenia Ridge project will total 250,000 square feet.

• Duke’s 250,000-square-foot Waterford Pond and 277,000-square-foot Minneapolis West Business Center, with as many as four buildings totaling 1.1 million square feet

• Carlson’s 300,000-square-foot 801 Carlson Parkway

• Industrial Equities’ 114,000-square-foot Plymouth Woods Office Center II

• Welsh’s 100,000-square-foot Baker Road Corporate Center, which is currently 85 percent occupied.

• TOLD Development’s approximately 125,000-square-foot Wedgewood project

Not all of these projects will take off in the near term; nevertheless, they demonstrate the west submarket’s emergence as a major business center.

The Minneapolis CBD remains the largest office center. It posted strong absorption of more than 155,000 square feet in the second quarter of this year, with vacancy falling 50 basis points to 16.5 percent. Two large pending deals include firms looking to relocate from the suburbs to downtown. An architectural firm, DLR Group, and an undisclosed international marketing firm, are both searching for 20,000 square feet in the CBD.

Such activity may be one of the compelling reasons for Hines to acquire property on Marquette Avenue. Houston-based Hines has plans in the works to build a massive office tower totaling more than 1 million square feet in size. Construction is expected to begin late next year, with completion expected a few years later. Hines already has a significant presence in the CBD.

Several major leases completed in the past few months include:

• Capella Education: 400,000 square feet in 225 South Sixth, downtown Minneapolis (to be renamed Capella Tower)

• ECMC Group: 107,200 square feet in Apollo/Endeavor Business Center, Oakdale, Minnesota

• GE Capital Corp.: 88,500 square feet in First National Bank Building, St. Paul, Minnesota

Leases such as these have kept vacancy rates from skyrocketing. Overall, the Twin Cities vacancy rate stands at 17.2 percent, which is up from the 16.3 percent at the start of the year. Class A space is at 13.1 percent.

We are encouraged by the continued growth in employment. Despite the downturn in the economy, Minneapolis/St. Paul has witnessed job growth in sectors that fill office space, averaging more than 1 percent over the past 2 years. Now, it is just a question of turning those tire kickers into buyers.

— Dick Keller is a senior vice president, and Mark Stevens and Kai Thomsen are senior associates in Colliers Turley Martin Tucker’s office in Minneapolis/St. Paul. Keller specializes in the Minneapolis CBD, Stevens in the southwest submarket and Thomsen in the west submarket.

©2008 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.