The Twin Cities of Minneapolis and St. Paul are experiencing an apartment construction boom, and are adding an additional light rail line. The unemployment rate is at a nationwide low of 2.7%. There is new office building construction, although primarily limited to single-user corporate occupants such as United Health Care and Prime Therapeutics. In the industrial property markets, the construction boom continues with a combination of build-to-suit properties for corporate users and speculative developments across the metro area. Overall, business is good and companies are hiring.
Challenges facing the Twin Cities are high competition to attract and retain employees, the relatively high costs of housing, and a high tax environment. But despite these challenges, companies continue to choose to locate in Minnesota given the high quality of life and educated workforce. This unique recipe continues to produce success across industries ranging from financial services to medical manufacturing.
Businesses are making space decisions based on their workforce and employee productivity, and are choosing nicer, newer, and more functional space. This trend is expected to continue in 2019, and the unemployment rate is expected to stay at very low levels.
Office Market Summary
The office markets have been relatively flat in 2018 with an overall vacancy rate of 17.5%. Many companies have relocated from the suburban markets to downtown Minneapolis to maintain and attract new employees. Suburban office buildings are holding their own, with many landlords renovating common areas and adding amenities, such as training rooms, fitness centers, and bicycle storage. Other than a few Class A suburban office buildings, the suburban office market continues to be less expensive overall from a total occupancy cost perspective when compared with the two central business districts. The cost difference is primarily due to downtown parking and higher property taxes.
The West Suburban / I-394 corridor submarket finally has some space available after a very strong seven-year run of a landlord’s market with minimal vacant space available across product classes. One example is Carlson Companies who is leasing several floors at their Class A world headquarters building. Nearby in Hopkins, space vacated by Cargill at the LEED Gold, Class A Excelsior Crossings complex also has almost an entire building available for lease. Finally, Syngenta is relocating 200 employees from Crest Ridge Office Center and will be leasing space from WeWork at the new Mosaic East office development in the Uptown neighborhood just outside of downtown Minneapolis, leaving behind 116,000 square feet of Class A office space. WeWork leased 100,000 square feet of the Mosaic East tower to provide co-working space options to corporate tenants.
Target sold its west office campus to Opus and it will soon be a multi-tenant office building. Opus has leased over 100,000 square feet to Tactile Medical. There is additional land on-site to add more office space, but Opus may develop a combination of apartments and retail to create a mixed-use development.
Minneapolis CBD 19%
West 12%
Southwest 16%
Northwest 14%
Southeast 15%
St. Paul CBD 20%
Northeast 16%
This year businesses remain focused on using their space in the most efficient manner to increase both collaboration and employee productivity. Most of the job growth and office space absorption in the Twin Cities will continue to be from Minnesota-based companies that are enjoying sustained growth. Several planned office buildings are merely an anchor tenant away from starting construction, and we expect a couple new projects will start this summer.
Industrial Market Summary
Speculative construction continues as the industrial market continues to see strong demand for warehouse, distribution, and manufacturing space. The Twin Cities has seen strong positive absorption of industrial space over the past several years ranging from two to three million square feet. An additional two million square feet of new industrial space is under construction, with many more projects planned. Clear ceiling heights are typically a minimum of 24 feet, with many projects going higher at 28 to 32 feet.
While new construction is a viable alternative for tenants in the 15,000 + square foot range, smaller businesses continue to struggle to find space to lease in historically tight markets. Tight markets are due to growth within the industrial sectors, functional obsolescence, and redevelopment of industrial parks into retail and residential projects in the core areas and the first and second ring suburbs. Dog day care businesses, cross fit gyms, and brewers are new users of smaller industrial spaces - causing increased competition for smaller office / warehouse spaces.
Overall Vacancy Rate 8%
Southwest 6%
Southeast 6%
Northwest 11%
Northeast 8%
The owner-occupant purchase and sale market is very tight, with sale prices increasing. This is especially true for industrial buildings ranging from 5,000 to 20,000 square feet, where there is demand combined with a lack of supply on the market. Properties in this size range receive multiple offers when they come to the market.
There are some larger industrial buildings for sale ranging from 60,000 to 150,000 square feet for larger users that want to own instead of lease. Generally, the price points for these properties range from $50 to $65/SF, but can be higher depending on the building quality, age, and level of interior improvements.
As 2019 continues, industrial space demand will remain steady and rental rates will increase slightly compared with 2018. Increasing costs of steel and concrete will put some pressure on new speculative developments and build-to-suit activities. The resurgence of urban living will cause the total supply of industrial space near the city core areas to decrease in the coming years, forcing industrial space users to move farther out into the second and third ring suburbs, where supply is already limited.
Looking Forward
The Twin Cities are well positioned for continued business growth given the wide variety of industries and the robust corporate environment. Moderate space absorption is anticipated in the office markets with some new office developments, but mostly will be contained within the existing built environment. Industrial space demand is expected to continue at moderate to high levels with some speculative development occurring in certain popular submarkets along with corporate build-to-suit activities. For more information about the market or available space opportunities in the Twin Cities, please contact your local ITRA Global office.
Article submitted by Wayne Teig / ITRA Global Minneapolis-St. Paul, Minnesota USA
