Vacancy rates in the Minneapolis-St. Paul office market continued to rise in the fourth quarter of the year, according to the latest data from Newmark. The culprit? To no one’s surprise, it’s still the COVID-19 pandemic.
When the pandemic started back in March of last year, companies across the Twin Cities region told their employees to work from home. That hasn’t changed for most companies, leaving offices across the area largely quiet. It’s not surprising, then, that the Twin Cities office market continued to struggle as 2020 drew to an end.
According to Newmark’s fourth quarter office report, the office vacancy rate for the Twin Cities area rose to 11.9 percent. The quarter also saw negative absorption of 716,000 square feet.
For the entire year, the Minneapolis-St. Paul office market saw negative absorption of 762,200 square feet. Any gains saw in the first and second quarters slipped away in the third and fourth.
Another trend? The market is seeing more sublease space. According to Newmark, the availability of sublease space in the Twin Cities office market increased by 225,000 square feet in the fourth quarter. In all, sublease space accounted for more than one-third of the new vacancies in the office market here.
Not every submarket has been hit the same by the pandemic. Newmark said that tenants shedding the largest blocks of space are in predominently Class-B properties in the market’s main suburban office corridors. The largest exist took place at One Carlson Parkway, where SRF Consulting left the entire 80,00-square-foot property for two floors at the renovated 3701 Wayzata Blvd. building.
Other tenants vacating office space this quarter included Oracle, leaving 21,500 square feet at Normandale Lake Office Park, and Wipfli, leaving 26,500 square feet at Centennial Lakes Park II.
The Southwest submarket saw the largest amount of new vacant space. Here, 308,000 square feet, an increase of 9.5 percent, went back into the market. The Southwest submarket’s vacancy grew to 12.6 percent in the fourth quarter, a full percentage point higher than the previous quarter’s vacancy rate of 11.5 percent.
Ryan Bohrer, director with Newmark, said that the majority of office landlords, especially on the institutional side, are attempting to hold tight to their pro formas on the rents underwritten for 2020 and 2021.
“With that said, we have been able to negotiate significant concessions packages in the form of well above ‘market’ free rent and tenant improvement allowances for our clients,” Bohrer said. “We are also seeing landlords offer large moving allowances and furniture allowances to entice tenants to relocate.”
There were some positives, though, in the report. Deluxe left the suburbs for 95,000 square feet at 801 Marquette in the Minneapolis CBD. Hines Interest purchased a parkig lot in the Minneapolis CBD with plans to build an office htere. And Fredrikson & Byron signed a 178,191-square-foot lease, ensuring that the law firm will remain downtown.
“It’s an interesting time as most companies in the Twin Cities are taking a ‘wait and see’ approach,” Bohrer said. “But for the forward-thinking companies willing to commit to five-plus-year leases right now, there are hungry landlords and major concession packages.”
And largely undeterred by reduced leasing activity, asking rents across the office market have barely budged, with the current overall market average rent in the Twin Cities area standing firm at $29.14 a square foot. Newmark said that few office landlords have lowered their rents during the pandemic, instead focusing on concessions to tenants seeking flexible lease terms and short-term renewals.