Office Market Report Q4 2015
Class B properties lead the way in absorption, with increased demand predicted in 2016
VACANCY AND ABSORPTION TRENDS
Steady demand for office space occurred during the fourth quarter, thanks to a growing Minneapolis-St. Paul economy. The vacancy rate in the Minneapolis-St. Paul office market is 13.7 percent, down from 14.1 percent at Quarter Three. There was 520,767 square feet of absorption, bringing the 2015 absorption total to 1,025,689, the most since 2005. Contributing to positive absorption during the year was the opening of Mayo Clinic Square in the Minneapolis CBD, where Mayo Clinic opened offices, and Prime Therapeutics moved into 70,000 square feet at Crosswinf Centre in the Airport/ South of the River submarket. In the St. Paul CBD, Green Tree absorbed 51,424 square feet at 180 5th Street East, and Pioneer Press moved into a floor at River Park Plaza.
Also affecting absorption included several companies that moved into new locations. Be the Match moved into its new headquarters in the Minneapolis CBD and out of approximately 200,000 square feet in the St. Paul Suburban submarket. This was a move from multi-tenant space into single-tenant, resulting in negative absorption in our multi-tenant market. UnitedHealth Group continues to vacate multi-tenant space for its corporate headquarters in Eden Prairie, and there was almost 80,000 square feet of negative absorption in the West submarket at Metropoint. TCF exited the space in the Minneapolis CBD for Plymouth Corporate Center.
As Class A vacancy decreases and rental rates increase, Class B has seen strong activity. For the year, Class B properties absorbed more than half of the total net absorption recorded in the market.At the same time, Class C properties are struggling to find demand. Few companies are choosing Class C properties for economic reasons. Exceptions include properties such as Pentagon Park in Edina, which has undergone significant renovations. Other examples include Canadian Pacific Plaza and 100 Washington Square, which were previously in the Class C category until they were upgraded to Class B with improvements to lobbies, corridors, and elevator cabs, as well as the addition of amenities such as fitness centers. Class C properties without modern office footprints and amenities will continue to struggle.
VACANCY AND ABSORPTION TRENDS (CON'T.)
There has been a significant amount of sale activity, especially among Class A properties over the last several years. We are seeing investors turn to Class B properties, especially those that are in an amenity-rich environment in prime locations. Park Place East & West, a Class B property located in close proximity to the West End in St. Louis Park, sold for $157 per square foot.
Leases signed in the last several years have tended to have terms closer to 10 years rather than the traditional three-to-five years. Tenants are motivated to sign leases before rates increase any further. Additionally, tenants have spent significant capital on improvements and furniture to meet workplace strategy goals, and find it helpful to amortize these costs over longer periods. If tenants don’t fully explore all of the costs of moving, which may include furniture, A/V, and improvements related to workplace strategies, they may have sticker shock and choose to renew rather than move. Many tenants, including financial services and law firms, are initiating a space search as the end of their lease term nears, but instead are choosing to renew after encountering high costs associated with moving.