Stagnant. That’s the word that jumps out in the Minneapolis-St. Paul first quarter 2021 office market report released yesterday by Newmark.
As the report says, leasing activity in the Twin Cities office market has remained slow thanks to the lingering effects of the COVID-19 pandemic. Newmark says that lease offers continue to include flexible lease terms and include creative tenant improvement packages.
At the same time, sublease spaces are being steadily added to the market at an average rate of 150,000 square feet a month. These sublease spaces have become a key facet of the Minneapolis-St. Paul office landscape in both the central business districts and suburban submarkets, Newmark says.
The numbers, though, tell the real story of just how sluggish the office market is today. Newmark reported that net office absorption came in at negative 623,898 square feet in the Twin Cities in the first quarter of the year. That’s the third consecutive quarter of negative absorption in this market.
The Southwest submarket was the only submarket with positive office absorption in the quarter. And its net absorption was only 848 square feet.
The office market’s overall vacancy rate rose to 14.4 percent in the quarter, Newmark said. That’s up from 11.9 percent in the fourth quarter of 2020.
The pandemic also slowed progress on the long-awaited The Dayton’s Project, an 800,000-square-foot renovation of a 12-story building at 700 Nicollet. Ernst & Young signed on as the first tenant here, taking 30,000 square feet. The Dayton’s Project did finish construction during the first quarter, but the project has struggled to attract additional tenants. As Newmark says, its key attraction, a 50-vendor food hall, has sat vacant during the pandemic.
The second significant office project delivered during the quarter was 10 West End, which brought 363,000 square feet of office space to the market. Located in the I-394 corridor, a major corridor of the suburban office market, 10 West End nabbed two tenant while under construction. But partly because 10 West End opened with significant vacancy, the West submarket’s vacancy rate rose to 15.6 percent in the first quarter of this year, up from 11.7 percent in the fourth quarter of 2020.
The future will bring additional challenges to the office market, Newmark says. That’s because many of the Twin Cities’ largest businesses are downsizing their office space or considering such a move.
Target, for instance, is planning to end its downtown presence in City Center, which will release 985,000 square feet back to the Minneapolis CBD. The 3,500 employees here will move to Target’s Brooklyn Park, Minnesota, headquarters, other downtown offices or work on a hybrid schedule.
Prime Therapeutics, a pharmaceutical company whose parent company is Blue Cross Blue Shield, said that 700 employees will leave its Normandale Lake, 8400 Tower office. Prime Therapeutics will either move their workers into its new Eagan, Minnesota, headquarters or assign them to a hybrid work schedule.
Wells Fargo also contributed to the negative absorption in the Twin Cities office market. The comapny left 148,000 square feet at Spectrum Commerce Center in Eagan.
But there is some hope. As Newmark says, some office tenants are setting timetables to bring employees back to into the office. It’s unclear, though, how many of these employees will be back on a full-time basis. Employees are seeking flexbility, with many wanting to work in the office on some days and remotely on others.
This hybrid model might inspire companies to reduce the amount of square feet they need, though not drastically.
But as vaccines continue to roll out across the Twin Cities area, companies will gradually bring their workforces back to the office, at least on a flexible hybrid schedule.