Continued: Office market continues to shrink in downtown St. Paul

St. Paul's downtown office market continues to shrink, and the trend isn't likely to be reversed anytime soon.

A report released today by St. Paul's Building Owners and Managers Association (BOMA) said that as of Aug. 1 downtown had about 175,000 square feet less than a year earlier. That's a decline of about 1 percent. In 2007 the amount of office space fell by more than 418,000 square feet, or 2.4 percent.

So far the decrease in space has been due to conversions of older office buildings to other uses, such as housing. But the latest BOMA report also removed one building at 360 Cedar St. from the office inventory, noting that the property's future is uncertain because of the Central Corridor light-rail project.

Meanwhile, St. Paul's the most immediate chance of significantly boosting its office market appears to be waning.

Opus Northwest has been unable to attract an anchor tenant for a proposed $200 million project that was to include up to 500,000 square feet of office space, a hotel and condominiums on a prime riverfront site. Opus bought the site from Ramsey County last year but came close to canceling its development in April. In May, the Ramsey County Board agreed to give Opus six more months to secure one.

Tim Murnane, Opus senior vice president, said last week it is "very unlikely" an anchor will be found before the agreement expires Nov. 13. "It's great site," Murnane said. "But it's impossible to start without an anchor."

Murnane declined to say whether Opus will ask for more time to find a tenant or walk away from the project. He said he doesn't see any immediate improvement in the market conditions that are stalling developments like the riverfront project.

Although tight credit markets and the weak economy have put a lid on developments nationwide, St. Paul has long struggled with attracting and retaining office tenants. One reason could be a relatively small amount of top-tier Class A space. Figures compiled by Colliers Turley Martin Tucker show downtown St. Paul with just 1.6 million square feet of Class A space. That compares with 13.2 million square in downtown Minneapolis. While St. Paul has seen some new government buildings go up, it's been about nine years since St. Paul sprouted a new office tower.

The Opus project has called for an office building with floors that would measure about 28,000 square feet each, the kind of space many large employers want so that they can avoid spreading operations out over multiple floors. The only building in St. Paul that offers that kind of space is Lawson Commons.

John Mannillo, who heads the Downtown Building Owners Association -- a separate organization from BOMA -- said the conversion of some smaller, older office buildings to housing has been a positive trend because it has brought more residents downtown. But he concedes that a dearth of top-tier office space in itself could be discouraging some businesses from moving downtown.

"There are some businesses that are looking for a more vibrant downtown with more of a critical mass [of office buildings]," Manillo said.

The BOMA report said the vacancy rate for downtown "competitive space" -- that not taken up by government use or building owners -- stood at 19.6 percent. That's a drop from 21.7 percent last year, but the main reason is the dwindling space, which has nudged the overall vacancy rate down to 10 percent compared with 11 percent last year.

The BOMA figures offer a healthier picture than those compiled by area commercial real estate firms, such as the Twin Cities office of Colliers Turley Martin Tucker. In a recent report it said downtown St. Paul's vacancy rate at the end of the third quarter was 24.5 percent, compared with 17 percent for the Twin Cities overall.

The BOMA figures include 51,000 square feet that had been leased by the Republican National Committee at 180 E. 5th St., just a few blocks from the party's national convention site at the Xcel Energy Center. That space was vacated shortly after the convention last month and has not been re-leased, according to BOMA President Matt Anfang.

Anfang said it's too soon to tell whether hosting the convention will result in any businesses moving to St. Paul.

"By having all those visitors we have laid the groundwork," he said. "People who wouldn't have previously recognized St. Paul will now."

The BOMA numbers also exclude more than 100,000 square feet that is soon to be vacated by Educational Credit Markets Corp., which is moving from downtown to space in the Imation corporate campus in Oakdale. But they also exclude a smaller recent boost to the market -- the leasing of about 20,000 square feet in Galtier Plaza by Nacel International School.

Susan Feyder • 612-673-1723