Minneapolis Mid-Year Market Update
What’s Happening in the Minneapolis Office Market
A year and a half has passed since the onset of the COVID-19 pandemic, which brought commercial real estate - and life - to an abrupt halt. Businesses quickly scrambled to adapt to remote work, sending employees to plug-in from home offices and kitchen tables, while also sending the commercial real estate office market into a frenzy of questions. Will the downtown office buildings survive when tenants no longer use or need the office space? Will employers keep employees at home in order to cut costs after many companies have successfully navigated the remote work model? What does the future look like in office space in the central business districts of American cities? Thankfully, the Minneapolis market is providing a glimmer of hope to both landlords and those hoping to see downtowns everywhere return to the vibrant hubs they once were.
The Minneapolis Downtown CBD
There is no doubt that Downtown Minneapolis has experienced a variety of challenges since March 2020. Safety concerns over an increase in crime, social unrest, and a pandemic that emptied the streets and office buildings towering over the cityscape all have people wondering if the city will ever return to normal. Although no one knows the exact answer, there is evidence that things may be trending in a positive direction. Earlier this year, major employers, such as Target, US Bank, and Thrivent had asked employees to return to the office later this fall. After a rise in COVID-19 cases largely attributed to the delta variant, several of these companies pushed back their office return date into October and beyond. Nevertheless, many businesses did return to the office after Labor Day.
Over the past 12 to 18 months, lease rates in Downtown Minneapolis have declined by approximately 13-17%, as landlords try to attract the limited pool of tenants currently in the market. While this may seem like a small decrease based on the lack of activity in the leasing market, landlords have opted for other forms of concessions to attract tenants to their office buildings. Flexible lease terms, termination rights, and an increase in free rent continue to be the new trends as landlords battle to keep existing tenants from exiting to the suburbs and sign new tenants, too.
In March, Target Corporate announced that they will be leaving one of their major Minneapolis office towers. Although the announcement created quite the stir and panic for some landlords and others hoping to see the CBD return to its normal bustling self, the nearly 1 million square feet of space now up for sublease at 33 South 6th has added an additional opportunity for prospective tenants. With 10 years left on the lease term, this offers tenants an opportunity for economical space in the heart of downtown Minneapolis.
The Dayton’s Project, located at the corner of 8th and Nicollet, is a critical project for the success of downtown going forward. This 1.2 million square foot space is the largest redevelopment project in downtown Minneapolis. Work on the project began in 2018 with the goal of transforming the iconic property (a former Dayton’s and Macy’s department store) into a first-class destination for office and retail space. The Dayton’s Project will be comprised of roughly 750,000 square feet of office space and 250,000 square feet of retail space that will be anchored by a food hall, which is set to open in Fall 2021. By mid-year 2021, the only office tenant to secure a lease is Ernst & Young, who plan to take up 30,000 SF. Reports that other leases are nearing completion continue to draw interest and put all eyes on this exciting new amenity-rich opportunity.
RBC Gateway is also drawing traction in the Minneapolis CBD as the first new office tower to hit downtown in 20 years. Slated to open in early 2022, the 37-story class A mixed-use tower will be a game-changer for the north end of Nicollet Mall. RBC Gateway features 531,000 SF of office space that will be home to the US headquarters of RBC Wealth Management, Minnesota’s first Four Seasons Hotel, and 33 luxury condos. Currently, the office portion of the new building is over 90% pre-leased, a promising outlook for a district with so many unknowns.
The Minneapolis North Loop
To the west of all the hustle and bustle of the Minneapolis CBD is the North Loop, which has proven to be one of the strongest submarkets in the Twin Cities. Despite all the challenges and questions the past year has brought, the North Loop has continued to thrive and has provided a strong sense of normalcy than the CBD. Activity has remained strong within a variety of real estate verticals, including multi-family, retail and restaurants, and office leasing.
The North Loop has seen a shift recently in the types of companies that are choosing to call this neighborhood home. The area used to be largely occupied by startup businesses and a variety of tech companies; however, as of late, we are starting to see more professional service firms and satellite offices for Fortune 500 companies moving in. One popular office is The Nordic building, the newest office development project in the area. Recently, it was announced that the 195,000 square foot property is now fully leased.
Just as tenants are being drawn to the North Loop, investors are proving to be bullish in the submarket, as well. A three-building portfolio comprised of over 340,000 square feet of office space was acquired by Crestlight Capital and Monarch Capital earlier this year. The portfolio was comprised of the TWO41 Building, the Internet Exchange Building, and the Western Container Building, located in the center of the North Loop corridor. The popular and historic Colonial Warehouse building also traded hands, being acquired by Asana Partners for nearly $35.4 million. These acquisitions prove that investors continue to have confidence in the future of this submarket.
Despite the many questions and unknowns, recent activity in both the North Loop and Minneapolis CBD is showing signs that the Minneapolis office market is trending in an upward direction. New projects are being leased up at market rates, and economical sublease space, though higher than before, is creating excellent opportunities for new tenants. Despite most companies successfully navigating remote work since the onset of the pandemic, most businesses have expressed plans to continue to bring employees to a central office space. Although the future is never certain, all signs are pointing in a positive direction for both the Minneapolis CBD and the North Loop. It may take time, but time will tell for sure.
If you have questions about office leasing in Minneapolis, another Twin Cities submarket, or you would like to talk to us about any other commercial real estate topic, please reach out to a Rokos broker today!
Rokos Advisors is an award-winning Minneapolis – St. Paul based commercial real estate/tenant representation firm specializing in helping businesses find the perfect office or industrial space for their company.