Stable Office Market Leads to Exciting Construction Deliveries in 2019
VACANCY AND ABSORPTION TRENDS
The multi-tenant office market ended Q4 2018 with steady momentum, leading to year end positive absorption, lower vacancy and higher rental rates than year end 2017. For Q4, metro-wide absorption was slightly positive, mostly led by new construction completions and steady leasing in the Minneapolis CBD. The largest change in the market has been rental rates, which have maintained their upward trend. Premier buildings with great location and amenities continue to see the majority of the leasing activity, even as rental rates rise.
Year-long changes in leasing activity, business growth or closures and construction appeared to actualize in Q4. The largest swing in market figures occurred in the St. Paul Suburban market, where the Prime Therapeutics HQ was completed. Prime Therapeutics will consolidate several locations throughout the south metro into the new 380,000-square-foot campus and as a result, will affect vacancy numbers in those markets. The St. Paul CBD was most affected by Ditech vacating space they were slowly leaving throughout the year. In Q4, the Minneapolis CBD saw tenants take up full occupancy of spaces that had been signed in previous quarters in 2018. At the close of Q4 2018, a spike in the normal amount of leasing activity points to an active first half of 2019, which will likely change vacancy numbers in Q1.
The St. Paul Suburban market had 331,000 square feet of positive absorption, due to the new aforementioned Prime Therapeutics building, creating the largest positive change for any submarket. At year end 2018, the steady leasing activity of the Minneapolis CBD was top in the metro, with 540,000 square feet of positive absorption. This CBD absorption figure reflects just over half of the total metro absorption on the year, illustrating that the urban core of Minneapolis remains in high demand.
Rising rental rates have been a major factor in the office market climate in 2018, with overall rental rates rising 6% in the Twin Cities metro. The West/Northwest and Minneapolis CBD, which have been the two submarkets with the highest rents, also led in rental rate growth, with average asking rates rising 10% and 6% respectively.
This exemplifies the fact that rates for buildings with premier locations and amenities are asking for and achieving higher rents. Buildings and submarkets that do not offer the same location and amenities are therefore seeing little rent growth. Examples include: the St. Paul Suburban and Airport/South of the River submarkets, which both have modest demand and only 1% annual rent growth.
New office construction projects that broke ground in 2018 and are expected to be delivered in 2019 will lead overall market trends. There are two new buildings under construction in the North Loop neighborhood of the Minneapolis CBD that will add 400,000 square feet of new space in 2019. There is also the 800,000-square-foot Dayton’s renovation project in the Minneapolis CBD that should finish in late 2019. Significant new completions in the Minneapolis CBD will lead changes in the overall Twin Cities market over the coming year. In Q4 2018, no new construction projects in the suburban markets have broken ground.
The sales market saw several large Minneapolis CBD buildings trade in Q4 and throughout 2018. Stabilized Class A buildings, both in the CBD as well as the hot West/Northwest submarket, saw the most investment activity. Institutional investors continue to have the most interest in those two submarkets.