Downtown Minneapolis’ Class A office market, which has been on a roll with decreasing vacancies and strengthening rents, may be coming back to earth in 2013, a new forecast shows.
The CBRE 2013 Minneapolis-St. Paul Market Outlook, published last week, took a cautious tone in assessing whether the market for top-shelf office space in the city’s core will continue to be the top performer.
Since 2009, the numbers for Class A downtown office space always delivered good news when the overall Twin Cities office market was languishing. But the sector’s positive momentum in “absorption” — the amount of space rented compared to the amount of space becoming vacant — was broken in the fourth quarter of last year for the first time in 3½ years.
That is signaling a coming year in which the gains for Class A space seem likely to be limited to the “best of the best” spaces on the upper floors of downtown office towers.
“Within the Class A submarket, the story will be ‘a tale of two cities,’ ” CBRE Senior Vice President Mark McCary wrote in the assessment. “Above the 30th floor, rents are up, concessions are down and vacancies are in the low single digits.”
Well-heeled, image-conscious tenants with the most to spend are still likely to continue to snap up those lofty spaces as they become available.
But below the 20th floors of those downtown towers, it’s a different story. There, vacancies are much higher at 16.5 percent — a full 150 basis points over the 2011 figures — which will keep downward pressure on rental rates as landlords respond by continuing to grant concessions on rents and improvements, McCary wrote.
Employers remain cautious about signing pricey, long-term Class A leases despite the Twin Cities’ relatively low unemployment rate of 5.6 percent. Some, especially law firms, are even being enticed out of the Class A market altogether and heading into the long-suffering Class B sector, where rents are cheaper and choices much more plentiful, a phenomenon known as “reverse migration.”
Indeed, the downtown Class B and C sectors showed positive absorption in 2012 for the first time in seven years, the survey indicated.
CBRE First Vice President Richard Keller said in an interview that this represents a new trend in which office tenants who took advantage of bargains on Class A space five years ago when the economy was tanking are now opting for less costly digs as landlords seek higher rents in the recovery.
Also, he noted, recent news that some companies are rethinking their telecommuting policies and bringing people back into the office will be a market driver for Class B landlords.
“Oftentimes, the companies that have implemented work-at-home policies are the kinds that are more appropriate for Class B offices to begin with,” he said. “This trend of bringing people back into the office is going to bode well for that sector.”
Don Jacobson is a St. Paul freelance writer.