Office market shows demand for new space

While the official numbers aren't in yet, the level of Twin Cities office market activity in the first quarter has left industry players upbeat and hopeful that a corner has been turned.

The second half of 2010 saw essentially flat vacancy numbers and modest positive "absorption" -- or more office space being leased than vacated -- leaving real estate executives holding their breath that, should it continue into 2011, a bottom had been reached following the recessionary free-falls of 2009.

Now an authoritative look at first-quarter office market deal flow issued by Minneapolis-based Northmarq Commercial Real Estate Service seems to indicate that demand for new space, which started percolating late last year, has continued into the new year.

It has prompted optimism that seems less guarded than before.

The firm noted some 1.15 million square feet of office space was either leased or purchased in the first quarter. It's still unknown how much came vacant during the period, so no absorption numbers are yet available. But the level of activity is encouraging, said Bill Rothstein, a Northmarq senior vice president.

"There's been a significant increase in the number of companies out there looking for office space in the first quarter," he said. "Some of it is lateral movement, companies going from building to building. But there is also some pent-up demand that we're now seeing coming into the market." Metrowide the vacancy rate had hit 20 percent, the worst since 1991.

Atop the list of office market activity in the first quarter was the purchase last month of Lockheed Martin's 623,000-square-foot facility in Eagan by CSM Equities. CSM aims to redevelop much of the site, possibly with retail, restaurants and an expanded data center. Terms of the deal weren't disclosed, but brokers estimated it was in the range of $10 million to $15 million.

The rest of the major activity cited by Northmarq involved leases signed by major companies. For the most part, industry insiders saw the deals as a solid sign that employers are feeling better about the future and are willing to make long-term investments on the belief that a recovery is sustainable.

Rothstein said one of the deals -- Rasmussen College's lease for 66,000 square feet at Two Marketpointe in Bloomington -- was especially significant for the office market.

"They were moving from office warehouse space into the office universe," he noted, meaning the move will result in pure positive absorption for the sector.

Another deal that boded well, especially for the West Metro submarket, was the move by Wells Fargo Home Mortgage to lease 75,000 square feet at the 435 Metropoint building in St. Louis Park -- a move in which more than 400 employees will be transferred there from the former Honeywell headquarters in south Minneapolis.

"That was a significant development and represents real growth in our market," Rothstein said.

• Ecolab Inc. renewing its 158,000-square-foot lease for its Ecolab University Center in downtown St. Paul.

• Microsoft leasing 35,000 square feet at the Centennial Lakes Office Park in Edina, bringing the software firm's total there to 52,000 square feet.

• Travel Leaders relocating from Eden Prairie into a 25,000-square-foot lease at the Atria Corporate Center in Plymouth.

• Health insurer UCare Minnesota taking 25,000 square feet at 2100 Summer St. in Northeast Minneapolis in a move to expand its existing headquarters at 500 Stinson Blvd.

• The information technology staffing firm Analysts International Corp. taking 20,000 square feet at 7700 France Av. S. in Edina.

"If it's a medical or health care-related employer, the market is pretty warm right now, more so than other parts of the economy," he said. "They've got the funding, and financially are on solid ground, so they're very well-positioned as tenants."

He added that builders who have been able to weather the recession and bring new office space to the market in the past few years are also in very enviable positions.

"There's not a lot of new or unique office space available now, and any of it that is -- if it's of good quality and in good locations -- is rising above 'commodity' status," Tankenoff said.

Even though official numbers aren't out yet, the office market felt like it continued to pick up momentum in the first quarter, agreed Brent Karkula, a first vice president specializing in office leasing for CB Richard Ellis.

"I think it felt pretty good," he said. "It feels like there's more activity, that there's more people moving around and evaluating different space options."

"There seems to be less fear on the parts of tenants that they're never going to come out of the recession. People are starting to explore their options, and I think 2011 is going to turn out to be a good year."