by Dan Rafter
The trend is a strong one: Residents are moving in increasing numbers to the urban center of the Minneapolis/St. Paul area. Developers are rushing to add multifamily units to meet this demand. But the push toward downtown living is also bringing new companies to the center of Minneapolis and St. Paul, something that is changing the office market here.
Midwest Real Estate News recently spoke with Dick Keller, first vice president with the Minneapolis office of CBRE, about the increasing activity in the downtown Minneapolis/St. Paul office market, and the trends he sees for the future of this sector.
Live/work/play: Tenants are focused today on downtown CBDs or suburban markets that have a lot of amenities. They are going after these live-work-play environments. There is a lot of that in downtown Minneapolis, so companies are migrating toward that market. They want to attract the best employees, and to do that they need a presence in the downtown.
A nation-wide trend: Minneapolis isn’t alone in this trend. There was a real good example of this in Chicago, for instance, when Motorola Solutions moved from the suburbs back to the city’s downtown. A lot of companies today are looking for the synergies they get in a CBD area. At the same time, the residential component in downtown Minneapolis has exploded. Companies are now concerned about drawing from the best pool of talent possible. Being downtown opens up more of an opportunity for them to draw from the entire metro area versus being isolated in a suburb.
Low unemployment: We’re lucky, too, in that we have a low unemployment rate in Minneapolis. Historically, the unemployment rate in Minneapolis usually hovers about 2 percentage points below the national average. That is indicative of the fact that we have a pretty strong office market. It makes sense, then, that companies would want to rent an office in the center of town where they can better compete for the best workers.
High-tech boom: We are still seeing high-tech industries consuming much of the office space in the center of town. These users are looking for that brick-and-timber feel. A lot of landlords have responded to this, including Class-A buildings, by taking out ceiling tiles and going back to cement floors. That’s a real difference compared to 10 or 15 years ago. Back then we would never want to show a space that didn’t have an acoustic tiled ceiling or carpeting. The swing of the pendulum has been quite interesting. Today, there is also more of an emphasis on open space, collaborative space. A lot of these high-tech companies want a space that feels more fun. Some of the more astute landlords have catered to that trend and have revamped their spaces accordingly.
Hot in the North Loop: The North Loop submarket of Minneapolis is one of the hottest office markets we have right now. In our 2015 report, this neighborhood had an office vacancy rate in the area of 7.1 percent, which is a little less than half of what the office vacancy rate is for the overall metro area. It is a fairly small market, but it is a hot one right now.
Three key industries: The three major industries that have accounted for most of the leasing activity in 2015 in the office market are healthcare, which has accounted for about 26 percent of the leased office space, legal at 22 percent and accounting and business services at 21 percent. When you add those three industries up, those sectors account for 69 percent of the leasing activity last year in the office market.
Waking up in St. Paul: The St. Paul CBD office market has historically been pretty sleepy in the past. There is a lot of government space over there. But nonetheless, it is an important market. It had an absorption of 220,000 square feet last year. In the previous 10 years, the cumulative absorption in the office market here was a negative 25,000 square feet. St. Paul’s office market is starting to come alive. That’s good news for the overall office market in this region.
A resilient market: We have a diverse business market here. We have a lot of different types of companies in our market. When we get hit by the whims of the economy, we are not hit as hard as some other markets. Because of our diversification, we tend to see a quicker and deeper recovery. That is accounting for this nice growth in the office market that we are seeing. Today, Minneapolis has become pretty attractive to the tech sector, which is good to see. So that bodes well for the future.