1. Landlords Have Vacancy
The Minneapolis CBD is experiencing above average fluctuations in vacancy, which is pressuring landlords to act in one of two ways to compete for tenants: renovating building common areas and upgrading amenities or holding tight and making little or no upgrades and cutting rent.
2. Landlords Upgrade Buildings, Or They Don’t.
Many landlords of traditionally Class-B or Class-C buildings are making drastic improvements to building interiors adding or upgrading amenities like; state of the art fitness centers, decks or patios, multiple shared conference & training rooms, bike storage, onsite retail or dining and game rooms.
Because landlords of traditionally labeled Class-B or Class-C buildings are making property upgrades, we are seeing the lines blurring from the long-established A, B, C, rating to more of a 5-star system. The 5-star system of categorizing office buildings appears to be mirroring the way hotels have been traditionally rated and buildings are receiving “stars” for things like; amenities, floor plates, ceiling heights and proximity to mass transit.
With this evolving classification system new types of buildings are emerging that are luring companies into non-traditional product types. One type of reclassification that the Minneapolis CBD is seeing is the Class-A-Retro or the Urban-Creative building. A Class-A-Retro building would have aspects of a warehouse or industrial building of the past but have fully modern and amenity rich-interiors.
Because new product types like Class-A-Retro are emerging it is also changing rental rate considerations in the CBD. For example, if a landlord of a Class-B building does not improve the building, then they can potentially charge a lower rental rate. Whereas, if a Class-C building has upgraded, these upgrades do not come cheap and rehab costs to upgrade these buildings and increasing construction prices lead to higher rental rates. So, in some cases, we are seeing that the Class-C remodel buildings are asking the same rents as a traditional Class-B building.
3. Tenants Have More Choices to Make Intentional Decisions
Because tenants looking to move within or relocate to the CBD, are critically evaluating these costs when making decisions, they are less and less concerned with the “class” of a building and what it looks like on the outside, but more interested in the inside of the building and what it can offer from a culture and amenities standpoint.
From a tenant brokerage standpoint, we’re seeing tenants approaching the market in two ways; lease space in a fully renovated building and pay a premium rate, regardless of its classification, or consider a building that has not been renovated and lacks amenities for a below market rate.
Here’s the catch, with a fully renovated building, we are seeing tenants who are able to become more efficient with their space. Take the common areas for example; a tenant may not need a training room or large conference room built into their actual suite because with an open floor plate and less columns, an office tenant can get creative with their layout and find efficiencies they normally couldn’t. This allows them to reduce their overall footprint and lower leasing costs.
With an upgraded amenity package in a lower class building, tenants are using their real estate as a recruiting and retention strategy to attract talent that they would otherwise have to pay for.
See the full Q4 Office Market Report>>