HEARTLAND SNAPSHOT, SEPTEMBER 2007

Minneapolis/St. Paul Office Market

Leasing demand is heating up in the Twin Cities, as evidenced by the 330,000 square feet of positive absorption in the first half of the year. Demand will continue to build the rest of the year, with the office market likely seeing another 1 million square feet of positive absorption. This will bring 2007 absorption levels close to the 2006 level of 1.4 million square feet. If this growth occurs, the overall vacancy rate could decline a full percentage point from its current 5-year low of 14.7 percent. This is down from the 15.2 percent rate at year-end 2006.

Rental rates are also projected to continue rising significantly, especially in submarkets where the supply of higher quality space is limited. Developers are moving forward with new office projects in selected submarkets. According to United Properties data, approximately 9 million square feet is currently under construction or in the planning stages in the Twin Cities market, with approximately 1 million square feet set to come online by the end of this year, a significant portion of which is speculative. Also, another 1.5 million square feet of new multi-tenant product could be under construction by this time next year.

Overall, rental rates are rising in six of the seven Twin Cities submarkets. The average quoted rental rate for all property classes is $12.78 per square foot, up from $12.38 per square foot in 2006. Rate increases are sharpest among Class A properties, where the average quoted rate is $14.94 per square foot compared to $14.41 per square foot 6 months ago.

Talk of significant new development activity is heating up in the Southwest and West submarkets, especially for high-image, Class A product.

In the Southwest, large space users are actively exploring options for more space. To meet demand, new development activity is coming on strong, with 855,000 square feet of new product currently under construction. Some of the more notable projects include Duke’s 330,000-square-foot Norman Point II project and the first two phases of Opus’ 685,000-square-foot Excelsior Crossings. Locally based Cargill has already leased the 435,000-square-foot first phase, and the 250,000-square-foot second phase is now under development on a speculative basis.

The Southwest submarket is poised for strong, continued growth. The overall vacancy rate is 10.3 percent (7.4 percent for the Class A market). Both numbers are the lowest of all the Twin Cities submarkets. Rental rates are also moving up, in tandem with a sharp decline in concessions, especially free rent incentives. The average quoted rental rate for Class A properties in the submarket is $15.51 per square foot; the quoted rental rate for all office types averages $13.84 per square foot.

The West submarket saw rental rates move higher during the first half, including a boost in the Class A rate to a quoted average of $16.86 per square foot, the highest in the Twin Cities market. Vacancy in the Class A market is 7.8 percent; the overall vacancy rate is 12.0 percent. Solid absorption in Class A properties was offset by a negative slide in Class B properties, resulting in negative total absorption of 6,000 square feet. Several larger users are actively seeking space, setting the stage for ongoing growth in the submarket over the next 6 months.           

Other submarkets are also seeing growth. In the Northwest, Maple Grove continues to be the sweet spot for growth in user demand, accounting for a majority of the 27,000 square feet of positive first-half absorption. Vacancy in Class A properties is 8.9 percent, the third lowest in the Twin Cities. Overall vacancy is 14.6 percent; however, the Class C market is at 24.8 percent.

In the Northeast submarket, competition for tenants is heating up as more new multi-tenant product comes on line. The Woodbury/Lake Elmo area is seeing the fastest growth, with three new buildings totaling 100,000 square feet added to the area so far this year. Also under construction and scheduled for second-half delivery is a 20,000-square-foot building in Roseville that will include Keller Williams as a tenant. In addition, United Properties has 40,000 square feet under construction for the third phase of Eagle Point Business Park.

With the possible construction of a large, new office tower, better times are ahead for the St. Paul Central Business District (CBD). Confidence is high among area landlords, despite a first-half slowdown in leasing activity, as rental rates are rebounding. The city is also preparing to host the 2008 Republican National Convention at the Xcel Center downtown. Several high-profile properties have changed hands in the past 18 months, and some of the new owners are raising quoted rental rates aggressively. Numbers alone do not tell the full story about the multi-tenant office market in the St. Paul CBD.

— Bill Rothstein is a vice president with United Properties Brokerage Services.

©2007 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.