Twin Cities office vacancies rise to 19.9% in fourth quarter

COVID-19 and the economic downturn continued to throttle Minnesota and the U.S. office market during the fourth quarter as vacancies and sublease offerings soared.

U.S. office vacancy rates during the final months of 2020 were the highest in 18 years, with those affected most including Midtown Manhattan, San Francisco, Boston and Seattle.

Office vacancies in Minneapolis and St. Paul jumped to 19.9% of the 78.5 million square feet across the metro area. That is up from 17.9% one year ago.

The findings, released last week by the real estate service firm Cushman & Wakefield, show that Twin Cities office vacancy rates exceeded the nation's. U.S. vacancies jumped to 15.5% during October, November and December. A year ago, the national rate was 12.9%.

The trend of excess office space was exacerbated by a pandemic that banished millions of downtown employees from their offices so they could work remotely from home. But vacancy rates were also affected by a host of new building projects that were completed in the middle of the pandemic.

"As demand for space was falling, the volume of new supply continued to increase," said Cushman & Wakefield Principal Economist Ken McCarthy in his report. He noted that finished fourth-quarter construction added 13 million new square feet of office space across the country. It was the most for the entire year.

"This increase, along with the decline in absorption, led to a surge in vacancy across the nation," he said.

Local commercial real estate experts such as Transwestern, JLL, Ryan Cos. and CBRE have reported that some business clients are asking for breaks on rent and/or exploring renting less space in the future, once current leases expire.

In the meantime, some are offering patches of their existing offices to others to sublet. But trends show there aren't many takers.

"As 2020 unfolded, we saw a sharp increase in the amount of sublease space available in the office market. ... [It is] the highest share since the dot-com bust from the 2001 to 2003," McCarthy said.

Sublease space on the market doubled to 111.9 million square feet in one year, making up 13.4% of all available space. That's up from 9.1% one year ago.

Office-related employment numbers plunged by 1.2 million jobs nationally since February 2020, Cushman & Wakefield reported.

"We expect the recovery in the U.S. to continue through 2021, with strength backloaded in the second half of the year. Vacancy is likely to rise further as the impact of job losses continues to be felt and the remote-work dynamic works its way through the office sector," the report said.

Jim Durda, Ryan Cos.' general manager of the Minneapolis-based City Center on Nicollet Avenue, acknowledged that local office demand has changed with COVID.

"But let six months go by, when we all have vaccinations" and we will see where we are, Durda said. "There is [a] debate about what is this going to be like post COVID? I think, in time, people will be back to a bit of a more robust schedule and that more people will want to be downtown. There is a lot to be said for showing up."

A separate report from real estate services firm CBRE found that Minneapolis-St. Paul office vacancy rates rose to nearly 19% in the fourth quarter as demand for Class B and C offices declined.

CBRE also found that office investment activity in the Twin Cities was "minimal" given that offices "remained closed" and buyers were extremely "selective."

The law firm will move its headquarters to the RBC Plaza in 2023. However, the space will be about 6,000 fewer square feet than its current space inside the U.S. Bank Plaza building.