The COVID-19 pandemic took a big bite out of the Minneapolis-St. Paul office market during the first quarter of 2021, as the sector lost nearly a million square feet of tenancy. But the future? Will these empty office spaces start filling back up as pandemic restrictions are eased and COVID cases continue to fall?
That’s the big question addressed in the first quarter Minneapolis-St. Paul office report recently released from Colliers.
As the Colliers report says, many Twin Cities employers are now grappling with the questions of when, how and whether to bring all or some of their workers back to the physical office. The challenge for office brokers is that there aren’t many answers to these questions yet. As Colliers reports, many companies are not putting back-to-the-office plans in effect until after Labor Day.
Because of this delay in decision-making, office leasing activity remains low across the country, and the Twin Cities is no exception. For tenants with office leases that are expiring, the “blend and extend” strategy is common: These companies are extending lease terms and blending them with the old rate as a way to buy time until they are ready to make longer-term office space decisions.
And what about the commonly expressed theory that the pandemic is chasing companies from downtown locations to the suburbs? Colliers says that relatively few companies have actually made this move so far. This doesn’t mean that some might not move to the suburbs eventually: Colliers says that tenants that have never before considered the suburbs are at least thinking about the possibilities now.
Some office tenants are also considering leasing smaller amounts of space as more of their employees work at least part-time from home. Others are exploring the hub-and-spoke model, keeping a small downtown office location and renting satellite offices in the suburbs.
Target is a good example of the upheaval in the downown office space that the pandemic might eventually cause. The retailer announced in the first quarter that it will leave nearly 1 million square feet at City Center as it begins a more robust work-from-home strategy. Target plans on hoteling workers in its other corporate office spaces downtown and in Brooklyn Park, Minnesota.
This doesn’t mean that Target won’t remain a major presence in the Twin Cities’ downtown, though: The company will remained headquartered in nearly 1.5 million square feet of owned space and another 500,000 square feet of rented space downtown.
Target has also not listed the City Center space for sublease yet. Colliers says this might mean that the retailer wants to test is flex working model after the pandemic before making any long-term decisions.
Colliers did say that though the Minneapolis CBD faces challenges, there are bright spots. Last fall, Deluxe Corporation signed a 95,000-square-foot lease at 801 Marquette. In the first quarter, EY signed a 30,000-square-foot deal as the first tenant at the newly built Dayton’s Project. RBC Gateway is filling up quickly, too. Tenants looking to lease in this downtown office tower scheduled for completion next year will now have to settle for office spaces under 100,000 square feet.
As for the numbers, they tell the story of an office market that is still working through the disruption caused by the pandemic. Colliers said that the vacancy rate for the entire Twin Cities office market stood at 9.3 percent at the end of the first quarter. The market also saw negative 824,542 square feet of absorption during the quarter.
In the Minneapolis CBD itself, the vacancy rate hit 11.7 percent at the end of the quarter. This sector, though, did see 218,311 square feet of absorption.