When US Bank moved out of the Meridian Crossings office development in Richfield, Minnesota, it left behind 340,000 square feet of now-vacant office space. And that move is one major reason for the rough second quarter experienced by the Minneapolis-St. Paul office sector.
In its second quarter Minneapolis-St. Paul Office Market trends report, Newmark reported that the local office market saw negative absorption of 498,187 square feet from April through the end of June. Much of that negative figure, of course, came from the space left behind by US Bank.
US Bank’s move, though, doesn’t account for all the Twin Cities’ office woes. Newmark reported that office leasing activity in the Minneapolis-St. Paul market slowed to 886,793 square feet during the second quarter. That is down significantly from an average of 1.6 million square feet a quarter during the previous five quarters.
The reason? Newmark said that most companies are reducing the amount of office space that they occupy. They are also making longer-term decisions by either committing to new office spaces or renewing leases for longer terms.
Jim Damiani, executive managing director with the Minneapolis office of Newmark, said that despite these numbers, leasing activity remains resilient in the Twin Cities market. That’s especially true in the region’s higher-quality office spaces.
“What we are seeing, though, is that people are taking less space,” Damiani said. “We are still seeing leasing activity. But because companies are leasing less space, our absorption for the entire office market is negative right now.”
Damiani, though, said that office leasing activity might be rising soon. During the early years of the COVID-19 pandemic, tenants were closing six-month or 12-month office leases. Many of those companies are now ready to sign longer-term leases and end their string of shorter-term office leases.
As Damiani says, tenants were “kicking the can down the road” instead of making long-term decisions during the pandemic. That has changed, and a growing number of companies are ready to lock into long-term leases today.
“We are going to see a lot of lease expirations coming at the same time,” Damiani said. “That is good or bad, depending on who you are.”
Newmark reported, too, that now that the North Loop Green mixed-use development is complete, there is no new office space under construction in the Twin Cities market.
But what about the future? Newmark predicts that office vacancy rates throughout the Twin Cities market are expected to continue to rise through 2028. Newmark forecasts that the local office vacancy rate will top out at more than 30% at this time.
Not all office properties will experience the same challenges, though. Damiani said that higher-quality office space with modern amenities is attracting more tenants. It’s the older properties that don’t boast modern amenities that are struggling the most.
Damiani said that he sees this trend in downtown Minneapolis. He pointed to the recently completed North Loop Green mixed-use development. The office component of this project is doing well, attracting a steady stream of tenants.
Then there’s the 10 West End office development in suburban St. Louis Park. This new office property is filling up quickly, Damiani said. Demand here is so strong that the property’s owners have been able to charge higher-than-expected rents.
“Those office properties that give companies a chance to offer their employees the best experiences are doing well right now,” Damiani said. “We are seeing a demand for quality office space. If companies can now fit into 20,000 square feet when before the pandemic they needed 50,000, they can now spend more per-square-foot and take the nicest space in town.”
And what about the workforce? Are employees more likely to commute to their Twin Cities-area office if the space in the building is of a higher quality? Are they more likely to come into the office at least on a part-time basis if they are commuting to a building with on-site healthy food choices, a high-end gym and comfortable collaboration spaces?
Damiani said that they are.
“You have to ‘earn the commute,’ as they say,” Damiani said. “You want to make sure that you can give your employees something that they can’t get at home. Maybe they don’t have that walkability at home. They can’t walk to a coffee shop or restaurant. If you move your company to an area with walkability, that might be something you can give your employees that they currently don’t have access to.”
Damiani points to the building from which he works. The property has a large third-floor space with couches, fireplaces and a rooftop deck. It’s a nice place to get away for an hour to catch up on emails.
“The hybrid work schedule is here to stay,” Damiani said. “You need to find some way to bring your employees back to the office at least on a hybrid schedule. These amenities are one way to do it.”
Damiani said that some office building owners are getting especially creative when it comes to creating spaces that will entice employees into the office and tenants into their buildings.
He said that some building owners are adding pickleball courts to their properties, while others are adding hotel rooms in their buildings to accommodate workers that might be flying in from out of town.
“They are thinking out of the box,” Damiani said. “They are coming up with new, creative ways to make the office experience that much better.”
The newly completed North Loop Green is a good example of an office property that is designed to attract both tenants and employees. The property contains a hotel with a rooftop pool and fitness center. Office tenants in the building get access to these amenities. North Loop Green also offers parking, another key perk for employees today.
10 West End in St. Louis Park boasts a high walkability factor, located close to restaurants and retailers, another perk that is attractive to both tenants and their workers. 10 West End also offers free parking while its interiors are flooded with natural light, creating a healthier working environment.
But what about older office buildings that lack these amenities? What is happening to them?
Damiani said that some of the older office stock in downtown Minneapolis has been converted to multifamily residential. The problem with this solution is that so few office buildings work for conversions: They need the right floorplate and location. Not every outdated office building, then, can be converted to a different use.
And some of the most troubled office properties in the Twin Cities region are large suburban office campuses, which can’t be easily converted to multifamily use.
“You used to get 5,000 people into these campuses. Then COVID hits and only 100 people are coming in. That’s a big challenge,” Damiani said.
While many of these larger suburban office complexes aren’t prime candidates for conversion, Damiani did point to the former Prudential office campus in Plymouth. The Plymouth City Council earlier this year approved plans to turn the office campus into a mixed-use development that will include multifamily properties, healthcare uses and a grocery store.
“Mixed-use developments are very successful today,” Damiani said. “The live/work/play concept is popular. It’s just an example of how creative developments can succeed today, even with the challenges developers face.”
