Office real estate market finally catches up

While it's been pretty apparent from all the positive news in the last 18 months that Minnesota's economy is well into recovery mode, the pokey Twin Cities office market is finally beginning to reflect that momentum.

Cassidy Turley's second-quarter Office Market Snapshot shows that the local office market — notorious for trailing larger economic trends due to the long lead times needed by companies securing office space — is finally catching up with the metro area's robust economic growth and low unemployment rate.

The commercial real estate firm's research pegged the metrowide office vacancy rate at 15.7 percent, marking the first time since 2007 that it has fallen below 16 percent. ­Meanwhile, the office market recorded 385,000 square feet of net "absorption" between April and June, measuring the increase in the total amount of leased office space compared to the first quarter.

The absorption numbers are the second-highest in any single quarter since the onset of the recession. This likely represents an explosion of pent-up demand after a long, extraordinarily cold winter and spring, but it also shows a "settling in" of confidence among metro employers, Cassidy Turley Vice President Mark Stevens said.

With unemployment at only 4 percent — the lowest level of any metropolitan area in the nation of at least 1 million people — it was only a matter of time before the office vacancy numbers starting reflecting that reality, Stevens said.

"You're hearing more and more confidence coming from the tenants," he said. "They're looking at spending the ­capital that they've been sitting on for quite a while."

Even though the office market has been rebounding for the past 12 months, "it hasn't been showing in the numbers because a lot of firms are redesigning their existing space, sometimes called 'right sizing,' where they're actually downsizing their square footage," Stevens said. "But they're signing long-term deals and putting in big money well beyond the tenant improvements that landlords will give them."

One of the biggest factors in Minnesota's sterling levels of job growth and low unemployment has been the influx of young professionals into the core of the state's largest city. They demand a different kind of office, emphasizing collaborative, open floor plans and easy access to mass transit. Building owners are moving quickly to satisfy that demand with the expensive conversions of such long-suffering properties as TractorWorks, the Loose Wiles Building and 510 Marquette into hip office space.

Cassidy Turley research analyst Tyler Allen, who wrote the second-quarter Snapshot report, said the 14-story 510 Marquette may be the poster child for the phenomenon.

"This is a building that won't be finished being renovated until next year, and it's already 100 percent spoken for," he said. "It really demonstrates how, when owners are spending money to renovate centrally located older properties into the kind of open-floorplate spaces the millennials are looking for, they're being snapped up."

Veteran Minneapolis developer Ned Abdul of Swervo Development Corp. bought the historic building, the original home of the Minneapolis Federal Reserve Bank, last year for less than $7 million and is in the midst of performing extensive upgrades. Its location next to the Nicollet Mall light-rail stop has helped land two major tenants — the Campbell Mithun ad agency in December and the Weber Shandwick public relations firm in May.

Luring such gold-plated Minnesota "legacy" companies into older downtown multi­tenant office space is a key indicator of the cachet associated with interesting rehab jobs, Allen said.