By Jesse Tollison, Transwestern
When analyzing the Minneapolis-St. Paul (MSP) metro area, urbanicity plays a deep role in understanding the opportunities for making a significant impact and profit in the commercial real estate markets. This is not a story unique to Minnesota’s largest metropolitan area, where roughly half of the state’s inhabitants live, but MSP serves as an illuminating case study as to how widely opportunity can vary between urban and suburban markets.
Indeed, many areas across the country exhibit stark differences between their urban and suburban commercial real estate markets, but those differences cannot be uniformly applied to each metro. The qualitative and quantitative analysis of local minutiae lends tremendous insight when evaluating opportunities.
Developers, investors, tenants, brokers and every other player in the commercial real estate world are paying close attention to the diverging urban and suburban trends as they assess the market for opportunities. In such a fragmented market, decision-makers are using more data than ever to inform their strategies. High-level views aren’t enough to benchmark a property’s performance, and it’s important to understand the localized trends when evaluating an opportunity.
Industrial history
As the historical industrial hub of Minnesota, the Twin Cities’ urban core has many industrial properties designed to support large manufacturing companies’ operations. This market is defined by older, densely packed warehouse product with large portions of office build-out, which elevates industrial rents in the urban core. The average asking rate is $10.80 per square foot triple net, which is $1.67 higher than the overall market.
Over time, this historic hub has changed shape into a legacy center, and demand has shifted toward smaller industrial tenants. The average industrial property in the core was built between 1980 and 1990, and large users in the core have been slowly moving to suburban new construction. The urban core’s vacancy rate at the end of 2025 was 4.5 percent, slightly higher than the suburban average of 4.3 percent.
In recent years, industrial development has moved farther out of MSP. Large users, particularly third-party logistics and distribution, have cared less about immediate proximity to the Twin Cities, and developers have focused on lower land basis for their projects. With overall market vacancy averaging 3.7 percent over the past five years, supply has been constrained, and new construction projects have been the most predominant options on the market.
In that same period, construction costs rose, and so did industrial asking rates across the suburbs, averaging 8.2 percent each year. Some of these asking rates were not achieved as suburban demand stabilized and refocused on key corridors. The northwest suburban market continued to experience intense rate growth of 15.6 percent in 2025, and softer pockets emerged in the southwest and east markets.
Retail supply dynamics
The retail market exhibits a clear oversupply in the core and undersupply in the suburbs. Closing 2025, retail buildings in Minneapolis and St. Paul averaged 4.4 percent vacancy, but this number spikes to over 10 percent when we include the first- and second-floor inventory in office and residential properties.
Meanwhile, the suburban retail vacancy is extremely low at 3.6 percent. Tenant demand in the urban core is characterized by local groups. This demand works well for small residential neighborhoods; however, institutional owners of high-value properties prefer national credit tenants, who, in turn, prefer the suburbs.
Zoning requirements in Minneapolis and St. Paul mandating first-floor retail in most multifamily projects are misaligned with demand trends and concentrate urban vacancy in the first- and second-story retail of the central business district (CBD). Measures are being taken to address these vacancy issues. The Vibrant Storefronts Initiative offers rent subsidies to local creatives who want to open shops downtown, but this solution can’t solve every vacancy, and oversupply in the market continues to grow.
Opportunity looks good for tenants who want to grow their downtown presence, but for the existing vacancy to rebound and a healthy retail market to return, the market needs more employees to return to office. Otherwise, the retail market faces a long path to recover demand from the growing base of downtown residents.
On the other hand, strong credit tenants are vying for space in the suburbs, and supply is tighter than ever. The struggle in the suburbs is building enough new supply. The vacancy that does exist sits in junior box spaces and freestanding buildings, and demand in the market trends smaller than those footprints. Developers aren’t breaking ground on speculative construction, and the construction pipeline consists primarily of small pad site developments with preleasing in place. As such, suburban owners are well positioned to push rates. Additionally, they’re getting aggressive on other deal terms, including above-market annual escalations and little-to-no tenant improvement allowances.
Inconsistent office rebound
Like most Midwest markets, MSP’s office recovery from the chaos of the COVID-19 pandemic has been slow and inconsistent. The market finally started showing signs of stabilization in 2025, but the positive indicators vary substantially between the urban and suburban markets.
In the suburbs, multi-tenant demand rebounded and vacancy rates stabilized at a new normal between 14 to 18 percent. In fact, some neighborhoods exhibit such strong demand as to kick off a new development cycle. A few small speculative multi-tenant office projects broke ground in 2025 and are signing leases at record-high net lease rates north of $40 per square foot.
Most of this multi-tenant suburban inventory exists in the southwest and west metro, and the suburbs are also home to large single-tenant corporate offices where uncertainty looms. Many of these sites are vacant, awaiting their corporate owners’ decisions on their fate. Those sites that have sold have gone to three types of buyers: new owner-occupiers, who offer the best prices but are few and far between in the market; developers, who focus on land value in order to redevelop the sites; and community groups who are looking for a deal on property to convert to schools, churches, community centers and more.
Redevelopment is on the horizon for downtown properties in both Minneapolis and St. Paul. The St. Paul Downtown Development Corp. has purchased properties with the implied intent to redevelop or convert to housing.
Meanwhile, Minneapolis office sales have focused on reaping in-place rent while the market settles, but the downtown capital markets face more difficulty than the leasing market, which puts long-term owners and new competitive buyers in a good place to weather the storm.
With leasing demand on the rise and the sublease market dissipating, the glut of supply is stabilizing, and tenants are aggregating in the core CBD. Leasing activity downtown grew an average of 32 percent each year since 2021, and subleases have fallen from a peak of 3.6 million square feet in 2023 to 3 million square feet at the end of 2025.
Falling office values, combined with increasing demand, have created an interesting dynamic in Class A properties where owners are pushing net rates and improving net operating income, while falling office values are lowering the tax burden that landlords pass on to tenants, creating a win-win for owners and tenants.
Jesse Tollison is a research manager with Transwestern. This article originally appeared in the March 2026 issue of Heartland Real Estate Business magazine.