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It's a tenants' market in commercial real estate

  • Article by: SUSAN FEYDER
  • Star Tribune
  • December 26, 2012 - 11:01 AM

Lindsey Charlton's Burnsville insurance agency just moved across the street when it relocated this fall. But in some respects, the new office is a world away from the old one.

"I love the tall ceilings and large windows that make everything so bright," said Charlton, whose American Family Insurance agency now is in Grande Market Square, one of Burnsville's newest office properties.

Her first-floor office fronts Burnsville Parkway and has a sharp black-and-white awning promoting her business. It's a big change from the cramped interior of her former office tucked inside Parkway Place, a 1970s-era property.

Charlton said she was surprised at how much good office space was available when she scouted the market and how eager landlords were to land new tenants.

"If you're willing to walk away from a deal, they're willing to give you what you want to get you to say yes," she said.

Businesses like Charlton's are the winners in the suburban office market, where demand for space has risen -- but only marginally -- since the depths of the recession.

The southwest metro area, the largest suburban office market, has seen its vacancy rate dip in 2012 to 17.2 percent from 17.7 percent in 2011, according to preliminary figures from commercial real estate firm Cushman & Wakefield/NorthMarq. Newer top-tier office buildings have the lowest vacancy rates throughout the Twin Cities, an indicator that businesses such as Charlton's are benefitting from a tenants' market and trading up.

Several big chunks of space -- the former offices of Delta Air Lines and Blue Cross and Blue Shield in Eagan, Alliant Techsystems Inc. in Eden Prairie, State Farm Insurance in Woodbury -- sit on the market. Area commercial real estate experts say some of these large properties could wind up being redeveloped for other uses, like the former Lockheed Martin office complex in Eagan now slated for a lifestyle shopping center. Chanhassen is considering rezoning an office site to allow construction of an apartment project.

Seven buildings in Edina's Pentagon Park were sold earlier this year to Minneapolis-based Hillcrest Development, which plans to redevelop the properties, said managing partner Scott Tankenoff. The 1960s-era office park had tumbled into foreclosure in 2010.

Hillcrest has renovated two buildings for office use. Tankenoff said no decision have been made yet on the future of the others. "Our minds are open," he said.

Other large blocks of office space have come on the suburban market as a result of companies' cost-cutting efforts.

Best Buy is getting ready to sublease about 200,000 square feet of its corporate campus in Richfield. Supervalu Inc. plans to vacate more than 150,000 square feet of offices in Chanhassen in 2013.

Little wonder there's been no appreciable development of multi-tenant office buildings in the suburbs since 2009, when the last of the buildings under construction before the economic downturn were completed.

Up against downtown rebound

A couple of new office projects have been proposed for downtown Minneapolis. One is a "build-to-suit" for a single user, Xcel Energy Inc. The other is being pitched for a site in the North Loop across from Target Field, already a hot area for apartment and retail development.

"Downtown has rebounded faster," said Mark Stevens, an associate vice president at the commercial real estate firm Cassidy Turley. He said large corporate tenants downtown such as Target Corp. help drive the market, not just because of their own space needs but because many other smaller office users want to cluster near them.

But Stevens and other commercial brokers say there are signs the office market is beginning to get healthier, especially in the south and southwest metro areas.

"You're starting to see companies renewing [leases] for longer terms like five years," he said. "For the past three years, people were asking for one-year, even six-month renewals because they were so uncertain about the future," he said.

Stevens said landlords still are giving tenants breaks on rent and remodeling expenses, but not to the same degree as a few years ago.

More trading up

Colliers International reduced rents this summer at Grande Market Square after it was hired by the Burnsville building's lenders, which had taken back the property. Since then it has added Charlton's insurance business and signed a lease with Rochester-based Norsvin USA. The swine genetics company will move into its space early next year, said Steve Shepherd, a Colliers leasing agent.

Like Charlton, High Jump Software traded up to newer space at Bloomington's Normandale Lake Office Park. The new sixth-floor office in the LEED-certified building is a better fit for the company's high-tech image than its former home in a single-story industrial building in Eden Prairie, said Chief Financial Officer Matt Ouska.

High Jump was able to negotiate seven months of free rent, enabling it to move to its new office before its lease expired in Eden Prairie, Ouska said. "They got very aggressive around securing us as a tenant," he said.

Susan Feyder • 952-746-3282

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