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Cash is flowing in the greater Twin Cities real estate market in spite of slow, but positive, year-over-year absorption rates. Investment action was significant in the third quarter of this year. New multifamily housing projects are booming, private student housing developments serving the University of Minnesota continue to grow, and corporate build-to-suit projects add to the inventory in a down economy.
The Twin Cities office market has remained stable with modest absorption through the past three years based upon existing inventory. And although there is significant construction in other product types, there is little significant multi-tenant office construction at present.
ECONOMIC BACKDROP
The 5.7 percent unemployment rate in the Twin Cities stood well below the national jobless rate of 7.8 percent in September. In fact, the unemployment rate for the state of Minnesota was 5.8 percent, again much better than the national average. The Twin Cities does not depend on any single industry and is home to a variety of Fortune 500 headquarters such as Ameriprise Financial, Best Buy, Ecolab, General Mills, Target, 3M, St. Jude Medical, Medtronic and UnitedHealth Group.
The variety of services and industries helped buffer the local economy during the Great Recession, although the downturn adversely affected the housing markets, unemployment, and family income in the region.
There is moderate optimism in the business community that things are now getting better. That improved outlook mirrors the uptick in consumer confidence nationally. According to the Minnesota Department of Employment and Economic Development, job vacancies are at the highest point since 2007, with 62,000 job vacancies statewide and 34,000 in the Twin Cities. Companies such as UnitedHealth Group and Target continue to report positive financial results and there is a general perception that economic conditions are improving, however slowly.
This optimism is reflected in the office leasing market. According to Cassidy Turley, the third quarter office vacancy rate stood at 17.4 percent. That is down from 17.7 percent during the previous quarter. The Minneapolis CBD vacancy rate is 14.7 percent compared with 22.4 percent for St. Paul.
ABSORPTION ACCELERATES
There is consistent, positive absorption in the market, which is a reflection of several major renewals and a variety of smaller deals. In Minneapolis, Faegre Baker Daniels, a leading law firm, renewed its 240,000-sqaure-foot lease at 90 South 7th Street. Several smaller transactions in the 20,000-square-foot range predominated both in terms of renewals and new space. The St. Paul CBD saw little activity this quarter.
At the same time, the Southwest submarket was active. In addition to its new 72-acre campus in Eden Prairie now under construction with a future capacity of 1.5 million square feet of office space, United Health Group leased 148,000 square feet at 12700 Whitewater Drive.
Jones Lang LaSalle reports that Prime Therapeutics renewed 155,000 square feet at 8400 Lake Boulevard and US Bank took 100,000 square feet at 7601 Penn Avenue South. Tata Consultancy Services also leased 50,000 square feet in 8300 Normandale.
Tria, an orthopedic center, expanded into the adjacent Northland Corporate Center for a 30,000-square-foot physical therapy clinic.
Finally, there is a substantial corporate campus that just came on the market. Supervalu Inc. is selling its 73-acre, 183,000-square-foot headquarters building and relocating its offices to another building it owns in Eden Prairie.
Because there is little speculative office development, larger space users may find options will be limited in the next few years, especially in Class A, in the Minneapolis CBD. There are few modern spaces more than 50,000 square feet in the market, so expansion options will be limited.
WHO’S INVESTING?
The Twin Cities has seen its share of investment activity during the third quarter. Hines Global REIT acquired the upscale Galleria for $127 million. The Galleria is a premium retail fixture in Edina in the Southwest submarket. Sam Zell’s Equity Group Investments purchased the 1.7 million-square-foot, five-building Normandale Office Park campus for $265 million from TIAA-CREF.
In the CBD, United Properties purchased 701 N. Washington Ave., a 126,252-square-foot former headquarters for HGA Architects, from the Sherman Group for an undisclosed amount. And, in the works, the Star Tribune has reported that San Francisco’s Shorenstein Properties has agreed to purchase City Center and 33 South Sixth for approximately $207 million from Brookfield Properties. A 52-story office tower, 33 South Sixth, is 95 percent leased to Target, which occupies 800,000 square feet. City Center is an underutilized retail crossroads for the downtown skyway system.
According to the Minneapolis-St. Paul Business Journal, Inland American has put the iconic Phillip Johnson-designed IDS Center back on the market after purchasing the 51-story tower for $277 million in 2006.
— Clint Baer is managing partner of Mohr Partners Minneapolis. Mohr is one of the largest U.S.-owned tenant-based representatives in the country.