minneapolis-st. paul office market report · connects downtown minneapolis and downtown st. paul...

OFFICE MARKET REPORTMINNEAPOLIS-ST. PAUL

www.colliers.com/msp

While Vacancy is at its Lowest since 2008, Tenant Contractions and Build-to-Suit Developments to Increase Vacancy in Coming Years

Q2 2014 | OFFICE

MARKET INDICATORSQ2 2014

VACANCY —

NET ABSORPTION

RENTAL RATE —

VACANCY25%

20%

15%

10%

5%

2006 2007 2008 2009 2010 2011 2012 2013 2014

NET ABSORPTION2,000,0001,500,0001,000,000

500,0000

(500,000)(1,000,000)(1,500,000)(2,000,000)

16.3%15.2% 14.9%

16.8% 17.2% 16.7%

966,371

253,779

(1,661,963)

(312,099)

2006 2007 2008 2009 2010 2011 2012 2013 2014

929,1691

Perc

ent V

acan

t

SF A

bsor

bed

16.1%

585,965405,989

15.6%

503,756

14.7%

Q2

YTD

503,756

VACANCY AND ABSORPTION TRENDS Vacancy in the Minneapolis-St. Paul office market dipped to 14.7 percent as of the second quarter of 2014. This marks the first time vacancy has gone below 15 percent since 2008, when vacancy was 14.9 percent. Absorption picked up from the second quarter as 357,393 square feet was absorbed, bringing the year-to-date total to 405,989.

Current activity is most robust among tenants seeking Class A space. In particular, premiere assets in the CBD, 394 Corridor and 494 Corridor are leasing up and landlords are pushing rental rates upward in select buildings. Recently renovated and upgraded Class B properties are also a preferred choice among tenants in low vacancy areas. Tenants continue to downsize their space rather than expanding when moving or renewing. Tenants are also favoring space with open floor plans, abundant natural light, fewer enclosed offices, and high ceilings.

Numerous options remain throughout the metropolitan area for Class B space, where vacancy is highest at 17.6 percent, compared to 13 percent overall for Class A. CONSTRUCTIONWe are tracking over 2.2 million square feet of space under construction for large corporate users. Target is adding a 325,000 square foot building to their campus in Brooklyn Park, UnitedHealth Group has a third tower of 505,900 square feet under construction at its campus in Eden Prairie, United Properties recently broke ground on a 240,000 square foot building in Minneapolis for Be the Match’s new headquarters and Ryan Companies began construction on the office portion of Downtown East, which will include two office towers built for Wells Fargo totaling 1,160,000 square feet. In addition Xcel Energy has plans to build a 212,000 square foot building and Kraus Anderson is planning a 80,000 square foot headquarters building, both in the Minneapolis CBD. All of these facilities will be completed by 2016, and the companies will be pulling out of multitenant space to occupy their new facilities, which will be a drag on vacancy rates in the future.

There are two additional projects on our planned construction list that may begin construction soon. Ackerberg Group is in negotiations with fast-growing Code 42, a cloud-backup IT firm, to lease space at Mozaic East, the 180,000 square foot second phase of its Mozaic project in Uptown. In addition, Mall of America Crossings has 210,000 square feet of office space planned, where construction began this quarter on the parking, retail and hotel space. Triple Five, owners of the mall, are considering speculative multi-tenant construction.

MARKET REPORT | Q2 2014 | OFFICE | MINNEAPOLIS-ST. PAUL

COLLIERS INTERNATIONAL | MINNEAPOLIS-ST. PAUL

SOUTHWESTThe vacancy rate in the southwest submarket is 15.2 percent with the lowest vacancy rate posted among Class A properties at 14.0 percent while Class B vacancy remains high at 17.3 percent. Several Class A projects in the Southwest, such as Normandale Lake Office Park and Centennial Lakes Office Park have low vacancies. But significant vacancies are available at Minnetonka Corporate Center, One MarketPointe, Northland Plaza, Minnesota Center and the sublease availability at the Best Buy Corporate Headquarters. New leases signed include EMC subleasing 30,000 square feet at Eden View Office Center, XRS and MFRA each leasing 22,000 square feet at

Minnetonka Corporate Campus and Tata Consultants expanding by 20,000 square feet at Normandale 8300 Tower.

UnitedHealth Group purchased its corporate headquarters building at 9900 Bren Road in Minnetonka for $53 million from Founders Properties. And the Normandale Lake Office Park complex is for sale by Sam Zell’s Equity Group Investments and GEM Realty Capital Inc., the two companies that purchased the 1.7 million-square-foot five building complex for $268 million in 2012. The property went from 83 percent leased at the time of the sale in 2012 to 94 percent currently.

Q2 ABSORPTION

200,000

100,000

0

(100,000)

(200,000)

(8,097)

147,004

35,013

(14,761)

47,156 64,495

SF A

bsor

bed

Airport/Southof the River

MinneapolisCBD

Southwest St. PaulCBD

St. PaulSuburban

West Northwest

86,583

Q2 VACANCY

25

20

15

10

5

15.1%

% V

acan

t

Airport/Southof the River

MinneapolisCBD

Southwest St. PaulCBD

St. PaulSuburban

West Northwest

12.7%15.2%

20%

15.4%11.6%

19.9%

FORECASTWe have a strong outlook for Class A space as tenants seek prime assets in prime markets including the Minneapolis CBD and the 394 Corridor in the West submarket. Class B & C will need to reposition or upgrade to stay competitive. Most future development will be concentrated among build-to-suit projects and redevelopment of existing buildings in infill and urban areas. Vacancy will be pushed upward by corporate users vacating multitenant space for their own facilities and the trend towards downsizing space requirements. While some landlords have been able to push rental rates upward, additional increases may be tempered by these factors.

The 1.7 million square foot Normandale Lake Office Park complex is for sale by Sam Zell’s Equity Group Investments and GEM Realty Capital Inc.. The two companies purchase the property in 2012 for $268 million.



MINNEAPOLIS CBDThe vacancy rate in the Minneapolis CBD ticked downward to 12.7 percent, from 13.3 percent in Quarter One. Absorption was up at 147,004 square feet, bringing the year-to-date total to 151,248 square feet. Vacancy among Class A properties is low at 10.1 percent, compared to the overall Class A vacancy rate of 13.0 percent.

There is a wave of tenant downsizing and corporate development that is limiting absorption and will contribute to negative absorption in the future. Dorsey & Whitney, Campbell Mithun, Augsburg Fortress, and Martin Williams are all downsizing their space as they move. As mentioned in the overview, Wells Fargo, Xcel Energy and CenterPoint Energy are all moving out of multitenant space to occupy new facilities, while TCF bank is moving out of 270,000 square feet in the CBD for space in Plymouth.

Landlords in the CBD are responding to market conditions and tenant preferences by upgrading their common spaces to stand out among the options available to tenants. The TCF Tower, Capella Tower and The Investor’s Building in the Baker Block are renovating and upgrading while RBC Plaza is adding office space that was

formerly retail at Gaviidae II and 510 Marquette is in the process of being completely renovated, and is nearly full. Block E’s transformation to Mayo Clinic Square will include office space in addition to a sports medicine clinic, retail space and a Lynx and Timberwolves practice facility

On the positive side, the Star Tribune signed a lease for 138,000 square feet at 225 South Sixth as its former building is being razed to make way for the Downtown East Development. Weber Shandwick is moving from Bloomington to occupy 46,000 square feet at 510 Marquette. And the merger talks between Lindquist & Vennum and Oppenheimer Wolff & Donnely could be good news or bad news for the IDS Center, where Lindquist & Vennum currently resides, and the Campbell Mithun Tower where Oppenheimer Wolff & Donnely is currently a tenant. The potential new law firm could consolidate in either of these headquarter locations or pull out and relocate to new space in the CBD.

Office

MINNEAPOLIS CBD VACANCY BY CLASS

Class C

Class B

Class A

0 5% 10% 15% 20%

Percent Vacant

16.5%

11%

10.1%

Fifth Street Towers is for sale by Zeller Realty Corp and Invesco. The owners purchased the property at a Sheriff’s sale in 2012.



Office

ST. PAUL CBD/ST. PAUL SUBURBANThe vacancy rate in the St. Paul CBD is 20.0 percent for Quarter Two of 2014. This is up from 19.8 percent at Quarter One due to 14,761 square feet of negative absorption which brings year-to-date absorption to negative 87,648.

The St. Paul Suburban submarket is 15.4 percent vacancy and had positive absorption of 47, 156 square feet, although year-to-date absorption in the submarket was negative at 21,769 square feet.

The Metro Transit Central Corridor Green line opened in June. This light rail service connects downtown Minneapolis and downtown St. Paul giving CBD office workers another transit option. The St. Paul Saints baseball stadium is under construction and scheduled to be completed in 2015. Both of these projects are positive news for overall activity in the St. Paul CBD

In Woodbury, The Hartford building at 500 Bielenburg Drive sold for $18 million. The property is 346,000 square feet, bringing the per square foot cost to $52.

AIRPORT/SOUTH OF THE RIVERThe vacancy rate in the Airport/South of the River submarket is 15.1 percent, and there was negative absorption of 8,097 square feet for the quarter, but strong absorption during the first quarter puts year-to-date absorption at 164,303 square feet.

Large leases signed during the quarter include WUXI for 20,000 square feet at Mendota Heights Business Center and Springleaf at Mendota Office Center II.

Prime Therapeutics, headquartered in Eagan, is a growing company in the Airport/South of the River submarket. The company also leases space in the Southwest submarket and is looking at both submarkets for expansion options that could total up to 100,000 square feet.

Office

WEST/NORTHWESTThe vacancy rate in the West submarket is 11.6 percent, the lowest of the submarkets we track. Vacancy in Class A properties is even lower at 8.9 percent, the only below-10 percent Class A vacancy among the submarkets we track. In the Northwest submarket, vacancy is significantly higher at 19.9 percent. The Northwest submarket is less than half the total size of the West submarket and lacks the proximity to the CBD and concentration of Class A office space and tenants.

During the First Quarter of 2014, TCF signed a lease for 330,000 square feet at Plymouth Corporate Center, where it will consolidate operations from its location in downtown Minneapolis in addition to a service center in Brooklyn Center. The move will begin in 2015 and happen in phases through 2016.

Polaris purchased a 120,000 square foot building in Plymouth, Bass Creek Corporate Center for $10.8 million. It will use it as one of their corporate headquarters building, in addition to an existing headquarters office in Medina.

MoneyGram renewed its 90,000 square foot lease at 1550 Tower at West End in St. Louis Park, but it is unlikely they will renew their lease on another office in Brooklyn Center. Another large lease signed during the quarter at the 1550 Tower 50,000 square feet by Concur.

Artis REIT purchased the 601 Tower at Carlson, a 288,000 square foot tower at the northwest corner of Interstate 494 and 394 in Minnetonka. The sale price was $75 million, or $260 per square foot.

Office



SIGNIFICANT SALE AND LEASE ACTIVITY

LEASES

TENANT BUILDING ADDRESS CITY SUBMARKET SIZE (SF)

WUXI Mendota Heights Business Center 2520 Pilot Knob Mendota Heights

Airport/South of River 20,000

Springleaf Mendota Office Center II 1270 Northland Dr Mendota Heights

Airport/South of River 17,000

Star Tribune Capella Tower 225 South Sixth Minneapolis Minneapolis CBD 138,000

US Bank - Expansion US Bank Plaza 200-220 South 2nd Ave Minneapolis Minneapolis CBD 76,221

Weber Shandwick 510 Marquette 510 Marquette Minneapolis Minneapolis CBD 46,000

SportsData Fifth Street Towers 150 S 5th St Minneapolis Minneapolis CBD 19,577

EMC - Sublease Eden View Office Center 7480 East Flying Cloud Dr Eden Prairie Southwest 30,000

XRS Minnetonka Corporate Campus 12800-12900 Whitewater Dr Minnetonka Southwest 22,000

MFRA Minnetonka Corporate Campus 12800-12900 Whitewater Dr Minnetonka Southwest 22,000

Tata Consultants - Expansion Normandale 8300 Tower 8300 Norman Center Dr Bloomington Southwest 20,300

NTY Franchise Company - Sublease Baker Road Corporate Center 4350 Baker Rd Minnetonka Southwest 10,499

HLB Tautges Redpath Alliance Bank Center 41 5th St St. Paul St. Paul Suburban 11,723

MoneyGram - renewal 1550 Tower 1550 Tower St. Louis Park West/Northwest 90,000

Concur 1550 Tower 1550 Utica Ave St. Louis Park West/Northwest 50,000

Minnesota Autism Center 500 Medtronic Pkwy 500 Medtronic Pkwy Fridley West/Northwest 10,638

SALES

BUILDING ADDRESS CITY BUYER SELLER SUBMARKET PRICE PRICE PSF SIZE

Two Appletree Square 8011 34th Ave S Bloomington Two Appletree LLC ATS II

Associates LPAirport/South of the River $3,950,000 $39 100,681

Minnesota Autism Center 3800 Tesseract Pl Eagan Autism Opportunities

FoundationLTC Properties Inc

Airport/South of the River $2,650,000 $74 35,800

Rand Tower 527 Marquette Ave Minneapolis Felton Properties Inc

Alex. Brown Realty JV Hempel Properties

Minneapolis CBD $16,400,000 $115 143,000

Gaviidae Common II 501 Nicollet Mall Minneapolis CenterPoint Energy United Properties Minneapolis CBD $11,775,000 $103 114,862

UnitedHealth Group 9900 Bren Rd E Minnetonka UnitedHealth GroupFounders Proper-ties OBO 9900 Bren Road LLC

Southwest $53,000,000 $153 346,000

Penn American Center

2740 W American Blvd Bloomington AtWater Group Captex

Development Co Southwest $8,000,000 $115 69,330

166 4th Street East 166 4th St E Saint Paul South Metro Human Services

St Paul Radiology PA St. Paul CBD $2,500,000 $45 55,196

The Hartford 500 Bielenberg Dr Woodbury Intrepid Holdings LLP

Hartford Life Insurance Co St. Paul Suburban $18,000,000 $52 346,000

Red Fox Road 1275 Red Fox Rd Arden Hills ElmTree Funds Todd Interests St. Paul Suburban $7,777,777 $104 74,511

601 Tower 601 Carlson Pkwy Minnetonka Artis REIT KBS REIT II West/Northwest $75,000,000 $260 288,458

Bass Creek Corporate Center 9955 59th Ave N Plymouth Polaris Industries Inc Westminster

Funds West/Northwest $10,856,102 $90 120,122



Market Statistics

The above table is summarized data on multi-tenant office buildings greater than 20,000 square feet. Not included are single-tenant, owner-occupied, medical or government buildings.

AIRPORT/SOUTH OF THE RIVER A 1,773,357 248,250 14.0% 12,550 14.7% $13.87 6,192 112,344 B 3,570,547 604,932 16.9% 5,001 17.1% $11.66 5,743 56,628 C 1,248,655 143,668 11.5% 0 11.5% $10.21 (20,032) (4,669)Totals: 6,592,559 996,850 15.1% 17,551 15.4% $11.82 (8,097) 164,303

MINNEAPOLIS CBD A 12,854,246 1,296,840 10.1% 180,217 11.5% $17.17 35,326 16,200 B 10,832,341 1,788,970 16.5% 199,998 18.4% $12.19 62,483 (4,962)C 3,951,345 433,597 11.0% 10,007 11.2% $10.05 49,195 140,010 Totals: 27,637,932 3,519,407 12.7% 390,222 14.1% $12.60 147,004 151,248

SOUTHWEST A 9,473,521 1,322,743 14.0% 45,971 14.4% $14.82 (13,778) 29,652 B 5,751,919 997,207 17.3% 109,609 19.2% $11.46 15,857 (46,857)C 926,675 137,284 14.8% 0 14.8% $10.17 32,934 11,387 Totals: 16,152,115 2,457,234 15.2% 155,580 16.2% $13.12 35,013 (5,818)

ST. PAUL CBD A 2,128,667 339,600 16.0% 28,550 17.3% $12.64 (22,228) (100,762)B 5,016,179 1,206,219 24.0% 9,289 24.2% $11.38 4,257 (12,072)C 831,936 46,139 5.5% 4,003 6.0% $8.00 3,210 25,186 Totals: 7,976,782 1,591,958 20.0% 41,842 20.5% $11.54 (14,761) (87,648)

ST. PAUL SUBURBAN A 2,895,775 613,835 21.2% 20,840 21.9% $13.90 (20,852) (47,698)B 6,322,108 916,678 14.5% 72,000 15.6% $10.90 36,601 19,889 C 2,165,179 222,160 10.3% 0 10.3% $9.48 31,407 6,040 Totals: 11,383,062 1,752,673 15.4% 92,840 16.2% $11.77 47,156 (21,769)

WEST/NORTHWEST A 5,279,479 643,497 12.2% 101,550 14.1% $15.77 39,298 84,293 B 5,752,829 1,035,713 18.0% 93,762 19.6% $12.00 105,271 83,229 C 2,077,520 201,120 9.7% 0 9.7% $7.83 6,509 38,151 Totals: 13,109,828 1,880,330 14.3% 195,312 15.8% $12.72 151,078 205,673

WEST A 4,038,190 357,430 8.9% 83,480 10.9% $17.14 44,967 83,028 B 4,013,898 610,726 15.2% 91,602 17.5% $12.50 14,524 (14,792)C 761,893 56,733 7.4% 0 7.4% $8.40 5,004 34,297 Totals: 8,813,981 1,024,889 11.6% 175,082 13.6% $13.37 64,495 102,533 NORTHWEST A 1,241,289 286,067 23.0% 18,070 24.5% $14.09 (5,669) 1,265 B 1,738,931 424,987 24.4% 2,160 24.6% $10.65 90,747 98,021 C 1,315,627 144,387 11.0% 0 11.0% $7.15 1,505 3,854 Totals: 4,295,847 855,441 19.9% 20,230 20.4% $11.53 86,583 103,140

TOTAL ALL MARKETS A 34,405,045 4,464,765 13.0% 389,678 14.1% $11.51 23,958 94,029 B 37,245,923 6,549,719 17.6% 489,659 18.9% $11.62 230,212 95,855 C 11,201,310 1,183,968 10.6% 14,010 10.7% $9.49 103,223 216,105 Totals: 82,852,278 12,198,452 14.7% 893,347 15.8% $12.42 357,393 405,989

SUBMARKET TOTALSF

DIRECTVACANT SF

% VACANT DIRECT

SUBLEASE VACANT SF

% VACANT W/SUBLEASE

ASKING RATE

Q2 2014 ABSORPTION

YTDABSORPTION



The above table is summarized data on multi- and single-tenant office buildings greater than 10,000 square feet. Owner-occupied properties are also included. Not included are government or medical buildings.

Market Statistics (EXPANDED MARKET)

AIRPORT/SOUTH OF THE RIVER A 3,958,092 562,680 14.2% 12,550 14.5% $14.21 6,420 118,419 B 6,470,920 982,959 15.2% 5,001 15.3% $11.87 18,702 76,307 C 2,954,419 497,656 16.8% 0 16.8% $10.68 (20,476) 224 Totals: 13,383,431 2,043,295 15.3% 17,551 15.4% $12.22 4,646 194,950

MINNEAPOLIS CBD A 13,618,828 1,297,962 9.5% 180,217 10.9% $17.17 35,326 16,530 B 12,182,900 1,815,808 14.9% 199,998 16.5% $12.07 69,715 2,270 C 5,888,685 433,597 7.4% 10,007 7.5% $10.05 49,195 140,010 Totals: 31,690,413 3,547,367 11.2% 390,222 12.4% $12.52 154,236 158,810

SOUTHWEST A 11,321,141 1,371,402 12.1% 45,971 12.5% $14.70 (18,059) 623,556 B 7,636,921 1,123,854 14.7% 123,951 16.3% $11.33 23,913 (64,435)C 3,232,574 576,099 17.8% 0 17.8% $10.83 27,037 11,916 Totals: 22,190,636 3,071,355 13.8% 169,922 14.6% $12.87 32,891 571,037

ST. PAUL CBD A 2,773,960 346,099 12.5% 28,550 13.5% $14.45 (22,228) (100,762)B 5,953,723 1,206,219 20.3% 9,289 20.4% $11.27 4,257 (12,072)C 3,002,535 74,320 2.5% 6,803 2.7% $8.00 3,210 25,186 Totals: 11,730,218 1,626,638 13.9% 44,642 14.2% $12.06 (14,761) (87,648)

ST. PAUL SUBURBAN A 4,332,783 1,101,885 25.4% 20,840 25.9% $13.96 6,959 11,133 B 10,629,527 1,204,922 11.3% 82,022 12.1% $10.83 65,605 61,912 C 7,384,992 256,697 3.5% 0 3.5% $9.45 74,724 43,250 Totals: 22,347,302 2,563,504 11.5% 102,862 11.9% $11.78 147,288 116,295

WEST/NORTHWEST A 6,951,715 734,746 10.6% 103,696 12.1% $15.64 34,779 80,712 B 9,160,819 1,209,341 13.2% 331,228 16.8% $11.79 43,177 27,153 C 5,172,532 258,021 5.0% 0 5.0% $8.33 17,775 31,208 Totals: 21,285,066 2,202,108 10.3% 434,924 12.4% $12.64 95,731 139,073 TOTAL ALL MARKETS A 42,956,519 5,414,774 12.6% 391,824 13.5% $14.86 43,197 749,588 B 52,034,810 7,543,103 14.5% 751,489 15.9% $11.53 225,369 91,135 C 27,635,737 2,096,390 7.6% 16,810 7.6% $9.71 151,465 251,794 Totals: 122,627,066 15,054,267 12.3% 1,160,123 13.2% $12.41 420,031 1,092,517

SUBMARKET TOTALSF

DIRECTVACANT SF

% VACANT DIRECT

SUBLEASE VACANT SF

% VACANT W/SUBLEASE

ASKING RATE

Q2 2014 ABSORPTION

YTDABSORPTION


Minneapolis-St. Paul 4350 Baker Road, Suite 400 Minnetonka, MN 55343DIRECT 952 897 7700www.colliers.com/msp

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management. Residential property is excluded from this total. All statistics are for 2013.

minneapolis-st. paul office market report · connects downtown minneapolis and downtown st. paul...

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