Minneapolis Office Market
Quarterly net absorption was negative 131,128 SF after negative 2 MSF in 2023. Negative annual absorption has continued since 2020 led by ongoing corporate downsizing. Large corporate users reduced occupancy levels, including UnitedHealth Group, Best Buy, Target, BlueCross BlueShield of Minnesota, Thomson Reuters, US Bank and Prime Therapeutics. Amidst significant declines in office space utilization, the Minneapolis market continues to see employment declines in sectors depending on office spaces. Information, financial activities and professional and business services have experienced ongoing declines. According to CRED iQ, Minneapolis has the highest commercial property loan distress rate among large metropolitan areas. A few very large loans (IDS Center, Mall of America) push the rate significantly higher than other metro areas. Minneapolis-St. Paul’s current overall distressed rate is 51.5%.
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The vacancy rate increased slightly to 5.0% compared to 4.9% in 4Q23. Absorption was also steady at 932,078 SF mirroring the 1,083,439 SF recorded in 4Q23. Asking rents increased to $8.61, up from $8.52 in 4Q23. Rates surged by 11.7% in 2023, building on 2022’s growth rate of 9.2%. Asking rates for both new construction and second-generation space will continue to increase. Absorption began to decelerate in the last half of the year, with 1Q24 absorption of just under 1 MSF and 2023 absorption of 4.2 MSF, compared to 6.0 MSF in 2022. There is currently over 3.7 MSF under construction including the 557,000 SF FedEx Ground Distribution Center in Rosemount. Construction is decelerating, and outside of buildings currently under construction, there are minimal speculative deliveries planned for 2024 and few new buildings are expected to be completed in 2024, except for occasional build to suit projects. Growing sublease availabilities and substantial speculative development in recent quarters are expanding choices for tenants. Despite some slowdown in leasing activity, demand remains steady and coupled with limited speculative deliveries, vacancy hikes will be constrained. Landlords are confident and optimistic, especially those anticipating longer hold periods. Tenants anticipating a shift from a landlord’s market to a tenant’s market will be disappointed.
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