The office sector in Minneapolis-St. Paul isn’t unusual today: It faces challenges.
With so many employees still working from home, companies are reducing the amount of office space they need. That is leaving high vacancy rates throughout the Minneapolis-St. Paul office market.
And are things getting better? That depends largely on the type of office property. Many companies are moving to higher-quality Class-A buildings to entice their employees to return to the office at least on a hybrid basis. But Class-B and -C buildings? They continue to struggle to attract tenants.
We spoke with Ryan Pires, vice president for asset management at KBS, about the challenges that the office sector faces in Minneapolis. Here is some of what he had to say.
Can you give us some insight into the current Minneapolis-St. Paul office market and your outlook for the remainder of 2024 and beyond?
Ryan Pires: Post-pandemic leasing continues to be a struggle in downtown Minneapolis and across the metro. While companies are reevaluating their space requirements, most are prioritizing flexibility, and, more importantly, amenities that help draw employees into the office.
Even though the return to office has been slow, we are increasingly seeing the importance and need for premium office space. With only one office property under construction, revitalizing older office space is a key part of bringing employees back into the office. There’s a flight to quality among tenants and this will continue to be important in Minneapolis.
According to JLL, the majority of the 2.5 million square feet of current office tenant requirements are for less than 25,000 square feet of space. Leasing activity for smaller deals is likely to remain strong in 2024, and spec suites will remain attractive. We believe in the strength of converting vacant space, whenever possible, into spec suites because they offer the flexibility companies are looking for. Spec suites tend to lease faster, and tenants tend to pay more for this space. They perform well because they offer tenants a move-in ready space that meets their needs and saves them time.
Downtown Minneapolis has lost some of its biggest companies due to lingering safety concerns. KBS’ 60 South Sixth is in the heart of downtown so securing the safety of tenants has never been more important. We’re consistently looking at the latest trends in safety technology and working with the Minneapolis Police Department to offer tenant safety classes. Consumers and businesses want a reason to come and stay so we’re doing our part to encourage retail and business to return to the city safely.
What are businesses considering when moving to or expanding their office space within Minneapolis? Which amenities and building features are influencing decisions?
Companies are encouraging employees to return-to-office by providing better experiences in-office versus being remote. They’re seeking Class-A buildings with great amenities.
We believe that the investments we make to improve tenant satisfaction will pay off with higher retention and lower vacancies. For example, a few years ago, we repositioned and rebranded 60 South Sixth with a multimillion-dollar renovation that includes a hospitality-inspired tenant lounge and a high-end art-inspired lobby renovation. We updated the gym by adding state-of-the-art fitness equipment and turned 38,518 square feet of vacant space into well-designed and furnished spec suites. The newly renovated space is unique for the area. When Fredrikson & Byron moved in last year they commented on how well the high-end finishes in the lobby and even from the parking garage naturally flow into their own newly designed space.
In addition, tenants are looking for more collaborative open spaces as well as privacy, seeking huddle rooms and phone booths. They’re trying to create a sense of community through shared social spaces and task-focused work environments. Fredrikson’s new office space is a good example of this trend. They incorporated a variety of welcoming meeting spaces that encourage camaraderie but also offer offices when employees need a quiet place to work.
Which submarkets are seeing the most leasing activity? How does the demand for office space downtown compare to the suburbs?
While leasing in the suburbs has not yet reached pre-pandemic levels, the activity is considerably higher than downtown. Bloomington continues to be an attractive submarket. It is well located with an abundance of shopping, dining, hotel and entertainment options.
KBS’ Northland Center is an example of how the company supports leasing and retention by making capital improvements to its properties each year. We recently completed nearly $1 million in renovations at Northland Center, further enhancing its appeal to companies seeking top-tier space in the Bloomington area. These renovations included refreshing the lobbies of both buildings and the addition of 25,000 square feet of spec suite space.
As someone who understands the market, we know how much Minnesotans want to be outside whenever the weather is nice, so taking advantage of outside space is paramount. With this in mind, at Northland Center we made use of all the functional exterior space it has. We added outdoor seating areas with comfortable chairs and tables, giving employees both interior and exterior areas to work or relax. We try to tailor amenities to each property and one of the most popular amenities, the new pickleball court, is one of the most cost-effective features we added.
We strive to create a welcoming, hospitality-inspired environment at each property that will positively impact occupancy, and the renovation helped us do that. In fact, we signed over 145,000 square feet in new and renewal leases at the 492,514-square-foot office park last year.
What are some of the unique opportunities and challenges impacting the Minneapolis office market?
Downtown Minneapolis was uniquely impacted by social unrest during the pandemic, which has kept some consumers and businesses away. We hope that by creating a safe and welcoming environment people will want to return the city back into the vibrant place it used to be. Spring is one of the best times of the year and we’re encouraged by the amount of people we’re seeing in the city and returning to the office. According to The Minneapolis Downtown Council, 65% of workers from the top-15 employers have some weekly office presence in 2023 and we see this trend improving in 2024.
As tenants continue to seek new and recently renovated properties, vacancy will likely climb higher in older, outdated buildings, so it’s good to see that Minnesota ranks high for office conversions. About three out of every five future apartment units are former office units. This is positive for the overall community, as well as the owners of higher-quality or upgraded Class-A assets as it should take older office buildings out of the market. A further contraction of supply should be beneficial in the long term as tenants seek out smaller but nicer office space.
