Repositioned Class B Office Leads the Way in Third Quarter

VACANCY AND ABSORPTION TRENDS

The third quarter Twin Cities office market experienced 528,000 square feet of positive absorption in the multitenant office market – the highest quarterly total of 2018. The West/Northwest had the highest positive absorption at 187,000 square feet, while the Minneapolis CBD was the second-best performing submarket with 169,000 square feet of absorption. Class B office space was the best performing product type, but all three building classes saw positive absorption metro-wide. The same could be said for submarkets, where each of our six tracked submarkets saw positive absorption.

Vacancy rates decreased significantly from 14.3% to 13.8% in the multi-tenant market, as several tenants took up occupancy in redeveloped space, for leases that had been signed in previous quarters. The West/Northwest had the lowest overall vacancy rate of 10.8%, which is not new for the submarket as it has had the lowest rate in the metro for several consecutive years. Class A office had a vacancy rate of 12.6%, which is down from 13.4% at this time last year. Class B office has seen the largest change in vacancy rate since last year, with vacancy dropping nearly 1.5%, from 17.2% to 15.6%.

Vacancy rates decreased significantly from 14.3% to 13.8% in the multi-tenant market, as several tenants took up occupancy in redeveloped space, for leases that had been signed in previous quarters. The West/Northwest had the lowest overall vacancy rate of 10.8%, which is not new for the submarket as it has had the lowest rate in the metro for several consecutive years. Class A office had a vacancy rate of 12.6%, which is down from 13.4% at this time last year. Class B office has seen the largest change in vacancy rate since last year, with vacancy dropping nearly 1.5%, from 17.2% to 15.6%.

The owner of Baker Center renovated the Wells Fargo space, as well as the building's common areas in early 2017 and to date has signed over 200,000 square feet of space. West End Center was struggling with vacancy, but after a renovation, is now achieving top-of-market rental rates and is nearly 100% occupied. Both buildings have been able to secure tenants who were looking for Class A space.

New construction is the impending force that will most directly impact the multi-tenant office market in upcoming quarters. There is currently just over 2 million square feet of office space under construction, which is a high threshold for the Twin Cities market. 800,000 square feet of this new construction is multi-tenant, which is expected to impact the leasing market significantly. There is another 800,000 square feet of multi-tenant users who are vacating their current spaces, in favor of single tenant space, which will also impact the 1.2 million square feet of planned single-tenant construction. These factors may cause vacancy rates to remain steady, or increase slightly in the next year or so.

 

Colliers International Minneapolis-St. Paul vacancy trends and future outlook