For the first time in five quarters, the Minneapolis office market in the third quarter of this year posted positive absorption numbers. That doesn’t mean, though, that the office market here still doesn’t face challenges.
The third quarter Minneapolis office report released in October by JLL shows that the office sector in this city has been resilient throughout the COVID-19 pandemic. But it also shows that the city and its surrounding suburbs haven’t been immune to the challenges that the entire country has faced during the last 20 months.
The COVID-19 pandemic has hit some commercial real estate sectors harder than others. The office sector, though, faces a particularly uncertain future. Many companies scuttled their plans to bring workers back to the office in September because of the rise of the Delta variant.
Now, it’s uncertain when or how many employees will return to the office buildings in downtown Minneapolis and its suburbs on a full- or part-time basis. Many companies are planning a hybrid work arrangement in which employees work part of the time from the office and the rest from home. How this impacts the office market throughout the Minneapolis area remains to be seen.
According to JLL’s report, two big new occupiers that moved into the Minneapolis CBD helped move the market into positive absorption during the third quarter.
Deluxe Corporation relocated from the suburbs to 801 Marquette, taking 95,000 square feet off the market. And Life Time Work moved into Thirty, the converted YMCA building on the west end of the Minneapolis CBD, filling 53,000 square feet. These two moves accounted for the bulk of the positive office absorption during the third quarter.
In another big move, three of the four buildings in the Metropoint office campus in St. Louis Park, Minnesota, sold in July for $63.5 million to ABS Management. Other than Thrivent’s $130 million sale-leaseback of its headquarters in February, the Metropoint sale was the largest office trade in 2021 so far.
Overall, the total vacancy rate for the Minneapolis office market stood at 18 percent for the third quarter, according to JLL. At the same time, 531,419 square feet of new office space was under construction.
The average direct asking rent for office space in this market fell a bit to $28.65 a square foot, while the average sublease asking rent was $25.86 a square foot.
For the year of 2021 so far, net absorption in the Minneapolis office market was negative 819,134 square feet.
What does the future hold? No one knows for sure, but big office deals are on the horizon. JLL pointed to Target as an example.
In the first quarter of 2021, Target announced plans to sublease its City Center site in the Minneapolis CBD. That will make Target the biggest sublessor in the country when its 890,000 square feet of office space is officially listed, something that is likely to happen in the fourth quarter of this year.
The next major office delivery will be RBC Gateway in early 2022. This Minneapolis CBD development anchoring the east end of Nicollet Avenue will also include a Four Seasons hotel and condominiums. This in addition to the 531,000 square feet of office space. Fortunately, the majority of this office space is already pre-leased.