Downtown St. Paul’s multitenant office buildings have their lowest vacancies in 15 years — a figure that’s driven more by the conversion of some buildings to residential units than by an uptick in space demands among companies.
An office market report released Monday by the Greater St. Paul Building Owners and Managers Association (BOMA) found an occupancy rate of 82.3 percent for all competitively leased downtown buildings. That level has not been seen since 2001.
As the capital city, St. Paul tracks three distinct office space categories: government, owner-occupied and competitive. It’s the third and largest category — accounting for nearly half of all office space in downtown St. Paul — that reveals the most about changes to downtown’s vitality.
The good news of low vacancies, however, is tempered by the fact that many of the hard-to-lease buildings have been converted to residential properties, meaning St. Paul gained in occupancy rates primarily through attrition.
“A couple buildings have flipped over to residential, so that pulls them out of the marketplace,” said Joe Spartz, president of St. Paul’s BOMA.
This led to a loss of 260,000 square feet of total office space, most of which is due to the conversion of Sibley Square and Liberty Square to residential.
“We have to go through this phase before we can get to where we want to go,” Spartz said.
The prevailing philosophy holds that by shedding the market’s dead weight properties — those that are outdated and unlikely candidates for renovation — an office supply shortage will eventually occur, increasing the need for new office construction.
“Eventually the vacancy will reach a tipping point … and we will need to expand,” Spartz said.
That may happen, but it will take a long time for the process to play out, said Herb Tousley, director of real estate programs at the University of St. Thomas.
“There’s a lot going on down there, and some of those buildings were just never going to be office space again,” Tousley said. “At some point, you will get a critical mass of people living there that will bring in more retail … but new construction won’t come until things really tighten.”
There are a number of office-to-residential conversions under development or in the pipeline, including Custom House and the St. Paul Pioneer Press building. The Opus group is also working on two new residential projects on W. 7th Street. These projects will add 550 new rental units to downtown St. Paul.
In the past five years, St. Paul’s downtown population has grown 70 percent from more than 4,800 to more than 8,200.