Dotted with construction cranes, Minneapolis’ skyline tells the story of economic growth the likes of which hasn’t been seen in almost a decade. Record-shattering investments in office space and in employee satisfaction speak to the confidence companies have in the accelerating Twin Cities market.
This renewed corporate confidence is buoyed by the lowest unemployment rate of any U.S. metro area with a population greater than 700,000, and is evident by the increasing number of long-term lease commitments (seven-plus years) to the Twin Cities market.
The office sector began picking up — first with local investors and now with national investors — soon after the opening of a new baseball stadium for the Minnesota Twins in 2010, which kick-started a rash of high-end, urban multifamily developments.
The current multifamily boom in the Twin Cities is expected to bring nearly 10,000 units to the residential market in the coming years. Increasingly, people want to live, work and play downtown. Multifamily, retail and office developers are ramping up the quantity and quality of supply. An additional sign of growth is the $1 billion currently being invested in a new football stadium for the Minnesota Vikings.
Renovation Ramps Up
Class C office buildings accounted for all of the positive absorption (115,000 square feet) in the office market in the first quarter of 2014, dropping the overall vacancy rate to 16 percent, the lowest total vacancy rate since the end of 2007. The local unemployment rate fell to 4.58 percent, down from 5.2 percent in the first quarter of last year, and nearly half of the 8.19 percent rate in May 2009.
The 64,000 job vacancies reported in the fourth quarter of 2013 — the most openings since 2005 — signals that firms are in growth mode and confident about the economy. The tightening job market has led companies to upgrade or renovate office space to attract new employees.
Two prime examples of Class C buildings that have seen positive movement are the 510 Marquette and Ford Center buildings. 510 Marquette, located downtown, had been vacant for nearly 10 years when The Excelsior Group purchased it for $3 million and then sold it to Swervo Development for $6 million.
Swervo Development made major renovations in order to market space in the building.
During the past nine months, 510 Marquette has moved from 100 percent vacant to almost 100 percent leased. Two Fortune 500 subsidiaries, Campbell Mithun and Weber Shandwick, have leased space in the building. The Ford Center is located across from the Twins stadium and a newly completed light rail transit station in the North Loop historic warehouse district. The building had long suffered from a high vacancy rate and low credit tenants until United Properties purchased the building, invested in high-end renovations and took advantage of the improving environment to market the asset. Now the building is considered Class B+ and has a low vacancy rate with strong credit tenants.
The North Loop is the hot office market in the Twin Cities, with a number of large construction and redevelopment projects in the works. Developers are taking advantage of tax incentives for historic buildings and renovating the buildings to attract millennial workers and strong creditworthy companies interested in working in creative and modern office environments.
The Tractorworks building, which housed a tractor manufacturer in the early 20th century, was redeveloped for office use in the 1960s and renovated in the 2000s. This year, Goldman Sachs paid $55 million for the property, twice what it sold for in 2008.
Since 2012, Minneapolis has seen almost 40 percent of its skyline bought and sold. What’s more, the properties are trading hands at record prices, but are a testament to the attractiveness of the market for outside investors.
New Set of Investors
Major metros like Chicago, New York and San Francisco have always enjoyed strong interest from REITs and hedge funds. With a lower cap rate and a low supply of office inventory in those markets, these national players have turned to secondary markets. The Twin Cities, with its low unemployment rate, diverse economy and local Fortune 500 companies, has become an emerging market for commercial real estate, particularly in the realm of office assets.
With the uptick of investment in the Twin Cities office market, companies are leasing more space than ever and even getting into the construction game. Twin Cities’ office users have committed to more than 3 million square feet of build-to-suit space in the local market, all of which is under construction or in the planning stage, with delivery for most developments slated for 2016.
These build-to-suit projects include: United Health Group, 1.5 million square feet; Wells Fargo, 1 million square feet; Be the Match, 250,000 square feet; Xcel, 220,000 square feet; and Code 42, 185,000 square feet.
The Twin Cities’ economy is balanced in terms of growth, technology investments, people and real estate for the long term. Companies will continue to look for new or renovated office space that provides the best overall real estate value and that attracts the employees they need to hire, and retain, through 2014 and beyond.
— By Brian Woosley, Managing Director, Principal, Cassidy Turley. This article originally appeared in the June 2014 issue of Heartland Real Estate Business magazine.