A team of commercial real estate soothsayers peered into the future of the 2016 office market this week, and what they saw will comfort those who are positioned in the North Loop and other downtown hot spots.
The panel, speaking in Golden Valley Tuesday at a meeting of the Minneapolis Building Owners and Managers Association, concluded that a series of demographic, economic and business trends are reinforcing recent market realities favoring downtown office locales over suburban ones.
However, they added, a critical test of just how strong the North Loop office market really is will happen this year with the September opening of Hines Interests' new T3 building, which is being built on spec and will seek premium rents.
Moderated by Russ Nelson, president of NTH Inc., the BOMA panel of CBRE First Vice President Brian Helmken, Jones Lang LaSalle senior associate Ann Rinde and United Properties development chief Bill Katter each ventured some predictions about the coming year.
They generally agreed that the current "up cycle" in downtown rents, new development and building sales will continue but may be reaching a peak. The woes of suburban office markets with their stubbornly high vacancy rates will likely worsen, they said.
Helmken, who specializes in the Interstate 494 and I-394 office markets for CBRE, said that's partly because the power of the millennial generation is only strengthening as time goes by. They are demanding flexible, open workplaces and transit-friendliness, which isn't easy for suburban offices.
"The suburbs," Helmken said, "aren't getting their share of whatever job growth we've had."
Instead, that office market growth is likely to continue to go downtown in 2016, especially to the North Loop and Warehouse District. Rinde said her research showed an impressively low vacancy rate of 12.5 percent in the submarket, and 14.3 percent in downtown generally.
"Despite what seemed like a lot of market activity in 2015, there was only 165,000 square feet of absorption, which shows that while new tenants are coming in, a lot of existing tenants are downsizing their spaces," she said. "Some, like Wells Fargo and Xcel Energy, are leaving multitenant buildings and are building new headquarters. That may affect absorption numbers, but the important thing is they're staying downtown."
The panelists said all eyes are on the T3 project and whether it can attract tenants at the kinds of prices that are usually reserved for Class A office towers. Hines began construction recently without a single tenant lined up — a bold move seen as testing the real desirability of the North Loop.
United Properties' Katter said for the first time in decades, it's more desirable for developers to build new offices downtown than along the suburban I-494 and 394 corridors. An office project his company is proposing near Target Field — once known as Target Field Station Center but since re-christened 565 NoLo — has about a 50-50 chance of proceeding this year, he said, depending on what kind of response T3 gets.
"We haven't started our project yet because we're not convinced tenants will pay net rents of $22 [per square foot] or more, so we're in a position of watching Hines to see if they can set the market for us," he said. "It'll be interesting. I think it's critical that they sign their first lease here in the next six months. It's important to show the market needed the space and will price it at the required rents."
Rinde, whose firm is handling the leasing for T3, responded with a friendly challenge, saying, "Within six months? You're on!"
She said she was confident the project will attract takers, especially in the North Loop's "sweet spot" range of 10,000- to 15,000-square feet.
"It's a cool project," she said. "We haven't had a lease signed yet, but judging from the interest and the conversation around it, it's a good indicator that activity is strong in the North Loop and everyone is pretty optimistic about having healthy leasing activity before the September opening."
Don Jacobson is a freelance writer in St. Paul. He is the former editor of the Minneapolis/St. Paul Real Estate Journal.