March 28, 2019
This article originally appeared in the March 2019 issue of Heartland Real Estate Business magazine.
Stakes are rising in the war for talent, and employers are using amenity-rich real estate to win the hearts and minds of the brightest young recruits. Determined to outflank the competition, companies are increasingly focused on occupying buildings with the best available on-site features, proximity to nearby amenities, and the elusive “cool” factor.
To heed the call for better offerings, landlords in Minneapolis have begun to offer unconventional amenities including golf simulators and nap pods. As owners of traditional Class B and C buildings undertake renovations and amenity package upgrades to compete with Class A properties, lines between building classes are starting to blur.
Tenants will likely start taking a more cautious approach to real estate, reflecting an increase in business uncertainty and projections for slower growth. This mindset will decrease appetites for relocations, prompting more renewals in 2019.
Despite this trend, there will be a healthy number of relocations for those tenants that have not yet right-sized by employing modern furniture systems, single-sized offices, more natural light and more collaborative space. Within tenants’ spaces, private offices will grow increasingly scarce, and those that remain will move to the interior to provide more light, greater flexibility and better communication among workers in the larger, perimeter spaces.
On-site coworking or flexible workspace is rapidly becoming a requirement to allow businesses to easily adapt to workforce changes. Not surprisingly, last year experienced significant growth in the coworking sector with no indications of a slowdown. WeWork doubled down on its new location in Uptown, expanding its presence from 46,000 square feet to just over 100,000 square feet. Lifetime Work signed a lease for its first coworking location in Minneapolis for approximately 27,000 square feet at 1600 Tower at West End, and larger coworking groups Industrious and Spaces are also rumored to be seeking space in the market.
Amenity packages at suburban office buildings are catching up to those offered downtown, a shift that will help keep many businesses in the suburbs and slow the migration to central business districts. The pent-up demand that previously existed for tenants to relocate downtown has mostly passed and should come closer to historical averages in the second half of the year.
Geographically, the suburbs in the northwest and west continue to be the strongest office markets with vacancy rates of 12.9 and 8.4 percent, respectively, and net rents in the high teens to low $20s. The hottest suburban market is the 394 market, more specifically the West End micro-market with its six-minute commute to downtown Minneapolis and Shops at the West End retail.
The major repositioning of West End Office Park resulted in approximately 120,000 square feet of new leasing at West End Center with tenants paying low $20 net rates — a 200 percent increase from quoted rates prior to the renovation. Only one floor remains available in the previously 75 percent vacant building. The former Target West building, acquired by Opus Group in the fourth quarter of 2018, has approximately 280,0000 square feet of new tenants due to the promised renovation of the complex.
Several notable sales transactions occurred in the suburbs, further highlighting the demand in those submarkets. The Towers at West End, collectively 82 percent leased, sold to Accesso for approximately $232 per square foot. Minnesota Center in Bloomington sold to Altus for $142 per square foot. In the East metro area, Artis acquired Prime Therapeutics’ first phase of offices for $56.9 million, or $252 per square foot, and the buyer plans to purchase the second phase.
Even with a potential economic downturn looming overhead, companies are still recruiting. Property owners will continue investing in upgrades that differentiate their buildings and will increasingly offer unique and experiential amenities.
— By Brian Fogelberg, Managing Director, Occupier Services, Minneapolis, Minnesota.