 Surging demand for space in several key suburban submarkets is setting off a new cycle of speculative multi-tenant office development in the Twin Cities. Several major new projects are under construction or planned for construction in the Southwest and West submarkets, and a flurry of small to medium-sized development is occurring in the Northeast submarket.
While many of the larger development projects are not set to come on line until 2007 or 2008, the effects of the rising cost of new construction are already beginning to be priced into the market. Rental rates are beginning to see steady upward pressure in some submarkets like the Southwest and South/Airport, especially for Class A space. Quoted rental rates rose slightly during the first half of the year, to a market-wide average of $12.27 per square foot from the $12.05 rate quoted at year end.
The new development cycle will likely accelerate in the near future as current and projected demand for space exceeds the available inventory in the suburban submarkets, while the Minneapolis and St. Paul Central Business Districts (CBDs) continue a more gradual recovery pace.
Vacancy plunged another 1.2% in the first half to a market-wide figure of 14.9%/16.7%—down from 16.1%/18.2%. Vacancy rates for individual submarkets vary widely. The Southwest submarket recorded 10% vacancy for direct space at the low end, and at the higher end, the St. Paul CBD vacancy stabilized during the first half at 22.6%. The Minneapolis CBD vacancy rate decreased by 1.6% to 16.8%.
Click on each link below for a quick submarket overview. More details on each submarket are available using the navigation at the top of the screen.
Southwest Submarket
Absorption surged to positive 272,264 sq. ft. Rental rates are experiencing increased upward pressure, although quoted rates have not shown significant increases.
South/Airport Submarket
Net absorption of positive 193,370 sq. ft. was at its strongest level since 1999. Vacancy also edged down to 10.4%, including a 7.6% vacancy rate for competitive Class A space.
Minneapolis CBD
Class A vacancy dropped to 14.3% where demand remained strongest in the upper floors of office towers, continuing a multi-year trend.
West Submarket
Absorption soared to positive 201,079 sq. ft.—the most since 2000.
St. Paul CBD
Demand for office space improved slightly, resulting in net positive absorption of 15,844 sq. ft. New leasing activity was light, with only a few smaller transactions closing.
Northwest Submarket
Vacancy remained flat. Rental rates were stable at $10.42 per square foot on average.
Northeast Submarket
The Northeast submarket was bustling with tenant activity in the first half of the year with a number of companies relocating and expanding and a significant number searching for larger blocks of space.
The Outlook
The Twin Cities market is at a point where the downward trend in vacancy is likely to accelerate across all submarkets. As this happens, pressure will mount for new speculative office development—some of which is already taking place in select suburban submarkets. The total amount of new development underway, planned and/or in preliminary proposal stages is 8.7 million square feet across the market. However, developers have been cautious about launching new projects due in part to higher construction costs.
United Properties projects approximately 500,000 sq. ft. of total absorption for the Twin Cities market during the second half of the year. Assuming that figure is reached, the market-wide vacancy rate will be reduced to the 12% range—a mark last reached in 2000.
Redevelopment will play a greater role than ever in terms of new development activity, as the supply of developable land within the core of the metropolitan area is constrained. |