Strong Economy, Low Unemployment Drive Twin Cities Office Market Success
Our Twin Cities office market remains strong as the population of millennials and empty nesters continues to migrate to first- and second-ring areas, bringing revitalization and new investment into the city’s commerce and infrastructure. With vacancies remaining exceptionally low and fewer developments on the horizon, rents have shown consistent growth.
We are seeing fewer new buildings under construction for single-tenant users. Most are geared toward multi-tenant, mixed-use concepts.
Newly renovated buildings with many amenities are performing well in attracting and keeping tenants. With the metro’s unemployment right around 3 percent and employers with jobs to fill, tenants have the leverage. Offering modern and high-tech communal spaces with multiple amenities is key. Tenants and buyers are leveraging this trend, therefore spaces with the allure of contemporary and updated finishes are highly desired.
It is imperative that landlords and owners renovate and update their buildings in order to stay relevant in today’s market. Many tenants are simply moving from one space to another nearby because it has been updated and improved upon. That is one of the bigger challenges — improvements that keep the space relevant.
Employers often offset higher rent costs by embracing space efficiency and flexible workspace strategies for all levels of their employees. Since many employees spend more than 50 percent of their work hours off-site, the flexible system enables the company to have a smaller footprint. We may see rents in 4- and 5-star buildings start to plateau over the next few years, while demand for creative floor plan space will remain strong, enabling rent growth to continue in that sector.
Corporations are emphasizing smaller floor plans rather than sprawling offices spread out over multiple floors. However, as data is coming in regarding the efficiency of virtual offices, this trend may shift. Additionally, we are hearing from medium- to smaller-size companies that there is a growing concern that employees find open workspace environments very distracting and feel they are less efficient, having minimal privacy.
Market vital signs
The Twin Cities vacancy rate has consistently been below the U.S. average and this trend remained intact at mid-year. The market vacancy rate at the end of June was just 7.2 percent. While office demand cooled in the first half of 2019, it did not cause a large spike in the vacancy rate, which remained below the market’s historical average.
With few speculative office projects under construction, the risk of a large market-wide, supply-driven rise in vacancy is minimal.
With the strong office asset transactional volume of the last several years continuing into this year, it doesn’t appear that the market is slowing. Cap rates have been fairly stable over the last few years. Overall, the solid cap rates combined with a healthy and diverse economic base gives security to the office sales sector in the Twin Cities.
Because we have one of the strongest economies and lowest unemployment rates, our market continues to be one of the best in the nation. We have the largest concentration of Fortune 500 employers. Sites that were once industrial are now mixed-use and multifamily housing. Businesses and retail are adding new life to the downtown areas as well as suburban areas revitalizing commerce.
All of these factors give us a generally positive outlook for the office sector in the Twin City metro area as companies continue to hire with expected higher productivity and profit.
— By Andy Manthei, Director; Dave Finigan, Director; and Jen Mains, Managing Team Leader, Keller Williams Commercial Midwest. This article originally appeared in the September 2019 issue of Heartland Real Estate Business magazine.