It’s not easy working as an office broker today. More than two years into the COVID-19 pandemic, many companies still don’t know when, or how, they’ll bring their workers back to the office. Others are debating how much office space they’ll need and wondering what amenities they’ll must offer to pry employees away from their home workspaces and back into the office.
And in downtowns across the country? Many offer towers remain mostly quiet, with a skeleton staff of workers commuting into and out of the city each day, while the majority of their co-workers log their hours from their homes, apartments or cabins on the lake.
Challenges in the Twin Cities
The Minneapolis-St. Paul office market is no exception. It might face even more challenges than others as a result of the murder of George Floyd in 2020 and the protests that followed. Just ask the brokers working this market.
Steven Chirhart with Minneapolis-based TaTonka Real Estate Advisors said that the office market is in the middle of what looks to be a long period of uncertainty. No one yet knows what the office sector will look like in one year, two years or beyond.
Much of this is the result of the COVID-19 pandemic, of course. It didn’t take long after companies sent their employees home to work remotely, for them to discover that bringing them back to the office would be a true challenge.
Even today, many employers are unsure of their back-to-work plans, with some opting for a hybrid schedule in which some employees work part of the time from home and other days in the office. This uncertainty means that many companies are still not sure how much office space they’ll need in the future and how this office space will look.
And Chirhart said that the Minneapolis market faces even more uncertainty than others. The murder of George Floyd in 2020 and the protests that followed caused many residents to avoid downtown Minneapolis-St. Paul. That reticent remains for many, which, in combination with so many still working from home, has led to a slower-than-expected recovery in the city’s downtown office market.
“In the Minneapolis CBD we were hit with some tragic events, the George Floyd death and surging crime,” Chirhart said. “That made people afraid to come back to the office. There was maybe more concern with crime than there was with COVID.”
This has led to a bifurcated office market. Chirhart said that office activity has been higher in suburban areas than it has been in the Minneapolis CBD.
Jim Damiani, executive managing director and tenant advisory office specialist in Newmark’s Minneapolis-St. Paul office, said that not all suburban areas are created equal when it comes to the office market, either.
He said that suburban markets with more walkability and amenities, including those that have created their own downtown areas with restaurants and shops, are seeing more office activity than are suburban markets in which office buildings tend to be surrounded by concrete parking lots and highways.
Those neighborhood amenities are key to a strong office market today, Damiani said.
“Today, the whole key to getting people back to the office, whether full-time or hybrid, is the experience,” Damiani said. “Is the experience better for people when they are working remotely from home or is it better in the office? Getting people back to the office is not a one-size-fits-all approach. Every company has a different culture and structure. I’d love to be able to tell my clients, ‘Here is what you need to do. It works for everyone.’ Unfortunately, that’s not the case. That will never be the case.”
A downtown bounce-back?
The suburban office market doesn’t rely as heavily on public transportation, another factor in the higher activity in this slice of the sector. Chirhart said that many office workers don’t feel safe in either downtown or on the public transportation they’d need to get there.
Then there’s the natural reluctance from workers to return to an office setting when they’ve already proven during the last two years or more that they can work from home and still be productive, Chirhart said.
“I think the downtown office market is going to feel this for a while longer,” he said.
How much longer? That’s a difficult question to answer, but Chirhart said that more than half of the office space in downtown Minneapolis-St. Paul remains empty, with a noticeably smaller group of workers trekking to downtown offices each morning.
“People learned to work remotely so effectively, they are reluctant to come back to the office,” he said.
Damiani said he has seen some positive changes in downtown Minneapolis-St. Paul during the last month. More people are slowly returning to the office and to downtown, he said.
One piece of evidence for this? Damiani said that when he takes a lunch break while working from downtown — he works in the office most every day — he now has to wait in line to order his meals. That wasn’t the case not too long ago.
On the negative side, Damiani still has fewer options for his lunch breaks, as many restaurants in the downtown area remain closed.
Damiani has also seen positive signs from his perspective as a commercial broker. His company recently closed a lease for a client that is moving from the suburbs to Minneapolis, and will bring 200 jobs with it. His company also closed the deal that will bring Deluxe’s headquarters to downtown from the suburbs, all 100,000 or so square feet of it.
“Every time you hear that a company like Target is putting downtown space on sublease, someone else is planning to take advantage of the good market conditions in the city itself,” Damiani said.
As Damiani says, downtown has the infrastructure, the multifamily housing opportunities, sporting events, theaters, restaurants and retail space in place. Because of this, downtown will bounce back from the pandemic.
But how long will this bounce-back take?
“I think it will take a couple of years,” Damiani said. “People have to feel good about coming back. When that happens, then the retailers will say they are ready to open. Once more retailers open, more people will come back downtown. It is a process, but it will definitely come back. It’s just a matter of when.”
Quality spaces matter
This has all led to a flight to quality in the Minnesota office market. Companies that are moving are often selecting higher-quality office space that they might not have been able to afford before the pandemic.
Others are targeting higher-quality spaces to entice hesitant workers to return to the office, Chirhart said.
And while doing this, many companies are moving from larger offices to smaller spaces that might cost more per square foot. He points to one client of his that moved from 7,000 square feet of office space to 4,000. That 4,000-square-foot space is higher quality and comes with more amenities. But even with the higher per-square-foot cost of the new office, the client is saving money with the move.
This trend, if it continues, will have a long-term impact on the local office market.
“I am definitely seeing a flight to quality in the new office leases I am closing, whether it’s a renewal or a relocation,” Chirhart said. “People are trying to create office spaces that entice their employees to come back. If they are in a ‘B’ building, they are looking to move to a quality ‘A’ building. They might be moving to a space that is $4 or $5 a square foot more expensive than their previous building. To offset that, they are taking 25% to 30% less space because not everyone will be in the office at the same time.”
The higher-quality space is a key to bringing employees back, Chirhart said. Employers want to offer their workers amenities that make coming into the office, even on a part-time basis, as attractive as working from home.
This could mean larger break rooms and lunch areas; places for after-work happy hours and social events; larger windows to bring in more light; on-site fitness centers and cafeterias; and on-site covered parking.
“Companies are focusing on improving the quality of their spaces,” Chirhart said. “That started before COVID and it isn’t going away.”
Damiani said he recently met with a client who asked him if the company should adopt a hybrid-work model. Damiani said that he couldn’t tell that client what to do, but he did advise that the client not make any long-term decisions yet on the amount of space it needed and the layout of that space.
“Get the employees back and see what their wants, desires, likes and dislikes are,” Damiani said. “If it is hybrid, set a policy with their input. Try it out for six months. No companies know what will work until they try it out. What works today might change in six months.”
This uncertainty means that flexibility in the office world is critical. This flexibility is especially important when tenants are signing leases, Damiani said. He recommends that clients target office buildings in which they can expand, contract, terminate, extend or renew a lease without struggle.
“These are all rights that landlords might not like giving, but if you want to thrive in an office building, you need that flexibility in the lease language,” Damiani said. “And you need it, too, in the design of your space the furniture you use. If only 23% of people want to come into the office and you need to contract your space, you need that flexibility. It is about being flexible with every aspect of your lease, space, design and future.”
This can be challenging for both landlords and tenants, Damiani said. Many landlords say they can’t afford to be that flexible. As the landlords say, they have a mortgage to pay and they need more certainty when signing tenants to leases.
And Damiani’s response?
“If I was a tenant, I would probably not move to a building where landlords wouldn’t give me that flexibility,” he said. “I’d seek out a different space.”
But even as companies focus on amenities, Chirhart said, the technology that made working from home possible isn’t going away. He pointed to Zoom and Microsoft Teams meetings. Companies can realize significant savings by using this technology: Instead of sending their workers across the country or globe for meetings, they can instead set up a Zoom meeting.
That’s far less expensive than booking flights and hotel rooms for traveling employees.
The bigger challenges
Chirhart said that office vacancies continue to rise in the CBDs of Minneapolis-St. Paul. His concern? If these vacancy rates start rising to 25% or 30%, landlords could struggle financially. That could result in a crash in the downtown areas.
“I am concerned,” Chirhart said. “No one wants to see our landlords fail. And if tenants are questioning whether their landlords have the funds to maintain their buildings or pay for improvements, that’s not good, either.”
Chirhart said that the office buildings seeing the greatest challenges today are Class-C and lower Class-B properties. These buildings don’t have many amenities to attract companies looking for new office space. That has lessened the demand for them.
Another change? Chirhart is seeing a surge in office subleases today throughout the Minneapolis-St. Paul market. That isn’t unusual: Sublease volume is growing steadily in office markets across the country.
For his part? Chirhart said that he, too, is adapting to the new market left behind by COVID. In the past, 60% to 70% of his business was in the office sector, predominantly office leasing. In 2021, 70% of his business was in sales and a good portion of that was in industrial and land.
“As a broker with 30-some years in the business, I’ve had to adapt the way I do business to take advantage of other sectors,” he said.
When does he see the office sector returning to at least something approaching normalcy, especially in the harder-hit downtown areas? Chirhart said that changes must be made. Workers and tourists alike must feel safe in downtown again. This might not happen until there are more people shopping downtown retailers and eating at restaurants in the CBD.
“Downtown retail is tragic right now,” Chirhart said. “So many restaurants in our skyways had to close. If we had a 12-month to 18-month period where offices were mostly closed, I think those restaurants could have weathered this. Going on two-years-plus, though, might have permanently shut the lights on those spaces.”
The positive news? Developers had not overbuilt office space in the Twin Cities and its suburbs before the pandemic hit. That is fortunate and means that there is less empty space than there could have been. And as companies adjust to the new reality of work, landlords, building owners and office brokers will soon have a better understanding of what the new office market will look like.
“If the economy can sustain its growth – and I know inflation is a huge concern – than we can recover from this,” Chirhart said. “We are going to adapt to a very different work model going forward. There will be more flexibility for workers who choose whether to work remotely or work from home. They can work up at the cabin or they can choose a hybrid model. We just have to see how the working world changes.”
Damiani said that vacancy rates remain up in downtown Minneapolis office buildings that lack the amenities or modern feel of Class-A spaces. He says that many of these spaces will eventually be transformed from offices to housing, hotels or other uses.
As an example of an office building that is attracting new tenants today? Damiani points to 10 West End, an office development in suburban St. Louis Park. That office development sits in the middle of a busy area filled with restaurants, bars, fitness centers and entertainment options. The office space itself is new and boasts several on-site amenities.
So far, this newer space is already more than 70% leased.
“It is a higher-cost alternative, but it has all the amenities and walkability that people want,” Damiani said. If you are trying to get people back to the office, and two years is a long time for them to be away, you have to give them something better to come back to. If it’s just the old office with no amenities or walkability, they are not going to want to come back to that.”