Office trends in Twin Cities: Tighter spaces, more owned by tenants

Companies are always trying to do more with less, and new data shows those efforts playing out in Twin C­ities office real estate.

As the overall economy improves, businesses are showing confidence by signing longer leases and spending more to improve their offices. But the spaces they are occupying won't look the same as they once did.

Cushman & Wakefield/NorthMarq's biannual Compass Report, which will be released Monday, found that many companies are downsizing their square footage, but not necessarily their head count. Meanwhile, other companies are looking to own their own property rather than rent, which will skew the occupancy rates in coming years.

"Hopefully as the economy ­continues to improve, we continue having this positive absorption. But what's different this time around is it's not as robust as the last time the market improved, companies are more guarded and are looking at things differently," said John McCarthy, executive director of brokerage services at Cushman & Wakefield/NorthMarq.

The report found the office vacancy rate in the Twin Cities was 16.6 percent in the second half of 2014, the lowest since 2008. Western suburbs reported the lowest vacancy rate in the metro area, at 10.6 percent. Downtown Minneapolis was 15.9 percent, the Southwest suburbs 16.2 percent and downtown St. Paul 23.3 percent.

Muddling the data, or at least the conclusions that can be drawn from the numbers, is a rethinking of floor plans and the amount of space each employee needs.

"It is a unique place in time in the way space is being used. Often times, this is seen in efficient space and creative space. In that way, it is a big sea change," said Russ Nelson, president of NTH real estate and project management.

For example, Minneapolis advertising agency Mithun left a namesake tower for a different downtown Minneapolis location where it occupies about half the space with the same number of people, Nelson said. "That's what I call organic shrinkage," he said. "It wasn't head-lopping, but they are using their space differently."

Meanwhile, such firms as Wells Fargo, Xcel Energy and CenterPoint Energy are building their own offices and, in the coming year, will create a 1.5 million-square-foot hole in the office market as a result.

UnitedHealth Group Inc. also continues to pull out of rented space in the southwestern ­suburbs as it moves into new campuses it built. The company alone could vacate as much as 1.7 million square-feet of multitenant space, according to Compass.

As a result of such big moves, McCarthy said, commercial real estate data in the Twin Cities could appear "misleading" over the next year or two. "You have to take a step back and see that nothing has really changed overall from a market economy perspective; there's just a transfer in type of ownership," he said.

Buildings that are being left behind — like Baker Center, Northstar Center and the TCF Bank Building in downtown Minneapolis — will have to consider renovations to attract new tenants, Nelson said. "It is a chess game," he said. "Those buildings will have to figure out how to reposition themselves."

Repositioning is industry parlance for remodeling and facility updates, which McCarthy said is more challenging for landlords to do when buildings are occupied.

One of the most visible repositioning efforts in the Twin Cities at the moment is Edina's Pentagon Park on 77th Street near Hwy. 100. It was built in 1968 and was the first major suburban office center in the metro area. Its main tower was torn down in December as part of a renovation by Hillcrest Development that includes retrofitting some of its other ­buildings.

"A lot of the time when these big buildings take a big hit with a large tenant leaving, that's when they make these investments," McCarthy said. "And at the end of the day, the market has an improved asset that is not as expensive as some of the newer buildings. But it lives another day."

Kristen Leigh Painter • 612-673-4767