Target is continuing to consume more space in the Nicollet Mall area. Vendors not only want to locate near their client?s headquarters at the south end of the mall, but Target also requires some of its vendors locate nearby so they are more accessible for meetings. (Staff photo: Bill Klotz)
Landlords battered by the real estate recession are beginning to see a flicker of hope with rising occupancies in premier office buildings.
Even so, tenants are still in control of the Twin Cities office market. There is still an ample supply of office space with vacancies topping 16.5 percent across the Twin Cities, according to Colliers International. Yet for a select group of coveted addresses, the pendulum is starting to swing back in the landlords? favor. Concessions are disappearing and rents are beginning to rise.
?I think momentum has improved slightly,? says Michael J. Salmen, a partner at Transwestern in Minneapolis, but not to a point where it has changed from a tenant?s market to a landlord?s market.
Some small pockets within the market have turned the corner and are leaning more toward a landlord?s market, he adds. Most notable, that short list includes Class A space along Nicollet Mall in downtown Minneapolis. Space also is filling up among top A properties along the Interstate 394 corridor and Interstate 494 near France Avenue.
It is no surprise that best-in-class A space is leading the office market recovery. Office tenants typically adopt a ?flight to quality? mentality as discounted rents make Class A space more affordable. In some cases, that activity has been at the expense of older A properties, as well as B and C buildings. That is evident in the numbers with Class A vacancies of 13.2 percent that are well below the 18.1 percent vacancy in B space and 20.5 percent vacancy in C space, according to Colliers International?s third-quarter office report for the Twin Cities market.
Nicollet Mall in vogue
Nicollet Mall is the ?Main and Main? of downtown Minneapolis, and Class A buildings located along the avenue, particularly upper floor offices, are in high demand. Tenants are drawn as much to the central location of these buildings as they are to the image and perks of locating in newer Class A buildings that offer amenities ranging from polished marble floors to live music in the IDS Center?s Crystal Court
The ?Target effect? is another key driver in the demand for space along this prime avenue. Vendors not only want to locate near their client?s headquarters at the south end of Nicollet Mall, but Target also requires some of its vendors locate nearby so they are more accessible to meetings with purchasing agents and other personnel.
Target itself is continuing to consume more space in the coveted area. The company has expanded its presence at the former Retek on the Mall building. Earlier this spring, the company agreed to lease 100 percent of the office space in the building or 449,233 rentable square feet. ?That has made the Class A market on or near Nicollet Mall very tight,? says Salmen.
Overall, the Class A vacancy rate in the Minneapolis central business district represents the lowest in the metro at 11.5 percent. Several buildings along Nicollet Mall, such as US Bancorp Center, Wells Fargo Center and IDS Center are reporting vacancies (excluding sublease space) at less than 10 percent.
Tenants looking for space on Nicollet Mall above the 25th floor will find almost no vacant space, says Jim Damiani, a senior vice president, office brokerage at Colliers International in Minnetonka. ?It really depends on the location and the building,? he says.
Landlords that own those prime office buildings are certainly in a good position to ask for higher rents.
?I would say that landlords, particularly new landlords, will attempt to push rents up,? says Russ Nelson, president and a principal at Nelson Tietz & Hoye in Minneapolis. Yet it still remains to be seen how successful those efforts will be, he adds. The reality is that there is still an ample supply empty space among Class A buildings downtown in properties such as Plaza Seven and Fifth Street Towers.
Currently, net rental rates on Class A buildings in the Minneapolis CBD run the gamut from about $13 per square foot net to upward of $23 per square foot.
In St. Paul?s CBD, net rental rates of $12.38 were quoted for Class A space in the third-quarter Colliers report. While the vacancy rate for Class A space in St. Paul?s CBD is 11.6 percent, downtown is dominated by more than twice as much Class B space, which has a vacancy rate of 24.8 percent.
Across the broader Twin Cities office market, rents are still discounted on average about 15 to 20 percent compared with pre-recession levels. Tenants are still finding discounted rents and concessions with one month of free rent for each year of the lease term as the norm. In contrast, rents for those premium Class A buildings that are enjoying higher occupancies have seen rents that are either at or near pre-recession levels.
As a result, that high demand niche is beginning to see rent concessions being reduced and asking rents that are on the rise. Asking net rental rates have increased as much as $4 to $5 per square foot in some buildings, notes Salmen. Some of the premium buildings are still offering free rent deals, but by the end of 2013 those concessions will likely be gone.
Suburban hot spots
Although it is not as significant as the scenario on Nicollet Mall, space also is disappearing in the newer, well-located A properties in the suburbs. The Interstate 394 market is starting to tighten up, especially for users looking for more than 50,000 square feet.
?There are not a lot of large blocks of space out on the 394 corridor, and I think that is going to spur some build-to-suit activity,? says Damiani.
Buildings such as Crescent Ridge, Money Gram Tower, the Colonnade and the 601 Tower at Carlson Center are all reporting vacancies at 10 percent or below.
Despite Class A vacancies that remain at 14.1 percent in the southwest metro, some landlords are enjoying healthy occupancies. Norman Pointe II, which was built in 2007, is 100 percent occupied, as is the 234,000-square-foot One Southwest Crossing in Eden Prairie. Normandale Lakes in Bloomington also continues to see good occupancy levels, particularly at its 8400 and 8500 Towers, where occupancies are above 90 percent.
The southwest still has plenty of choices for companies that don?t have their hearts set on a prime address or a sweeping view from the upper floors of the 8500 Tower. Minnesota Center, for example, has ample space available.
Major employers such as UnitedHealth Group may see its appetite for leased space diminish as it continues to focus on build-to-suit projects. The company built a 350,000-square-foot office building at 9703 Data Park Drive on its Minnetonka campus this year and has started building structures for a potential 1.5-million-square-foot office campus in Eden Prairie. That not only takes a key tenant out of the market, but it also will likely result in more leased space returning to the market as the company continues to consolidate into its new space.
Although the strong demand for well-located Class A buildings is good news for some property owners, the broader office market is still grappling with a significant amount of excess space.
?In my mind, it is still a tenant?s market out there, even though things are tightening in certain buildings,? says Damiani.
This entry was posted on Thursday, December 27th, 2012 at 7:30 am and is filed under Real Estate, Top Story. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.
Source: http://finance-commerce.com/2012/12/landlords-market-ahead-office-space-disappearing-in-a-buildings/
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