Office vacancies across the Twin Cities metro are hovering at healthy levels, thanks to a recent lull in office construction. But a burst of new projects downtown Minneapolis in the coming year are sure to put a dent in the market, according to a new report from Marcus & Millichap, which tracks single- and multitenant office projects in the seven-county metro.
"There are pockets where new development is on the horizon and that might cause some concern," said Jon Ruzicka, regional manager for Marcus & Millichap.
Ruzicka said that so far this year 800,000 square feet of office space is expected to come online. That's the lowest level since 2013 and far below 2018 when 1.8 million square feet were delivered. By the end of the year, the average office vacancy rate is expected to fall slightly to 10.7%.
At that rate, rents are expected to increase at a more modest pace than last year when rents increased 8.4%. Ruzicka expects rents this year to increase 3.3% to $23.13 per square foot.
Ruzicka is specifically concerned about the central business district in downtown Minneapolis where the vacancy rate is 13.3% and the bulk of the new office construction is happening. Construction is nearing completion on the Nordic, a 195,300-square-foot building on Washington Avenue where the Ovative Group and WeWork have already signed on.
The vacancy rate downtown will also be significantly affected when the 1.2 million-square-foot Dayton's redevelopment opens in 2020. The market will take another hit in 2021 when tenants start moving into the 37-floor RBC Gateway tower. Already, RBC Wealth Management has committed to about 520,000 square feet in the building.
The commercial market is especially tight in Carver County, where the average office vacancy rate fell to 3.5% in March.
"Thus far absorption has been fine given that we're seeing muted construction," said Ruzicka. "But absorption could be an issue in the future."