By Cushman & Wakefield Research
2018 was another active year for the office sector in the Twin Cities, with our January 2019 Compass Report tracking more than 600,000 square feet (sf) of absorption across all office submarkets and sub-types for the year.
As we’ve reported, certain pockets are especially active, with well-amenitized buildings with character and in walkable neighborhoods doing the best on average. But what more can the biggest leases from the year teach us trends and dynamics at play in the market?
To answer that question, we isolated the 60 largest office leases signed in 2018. Here’s what we noticed:
- Minneapolis is still the king
You’ve no doubt read about the resurgence of the Minneapolis CBD as an office destination, and 2018 bore that out. Out of 60 leases totaling just over 3 million square feet (msf), 21 transactions totaling 1.23 msf, or about 40 percent of them, occurred in the Minneapolis CBD. That’s a little more than you’d expect from the CBD’s 30 percent share of all office space in the market, although not dramatically so. No other market pulled more than 11 percent of transactions, with St. Paul and Bloomington both right about at that mark. In terms of submarkets, the Southwest made up 25.1 percent of transactions, with the West submarket next at 11.8 percent, much of that at the West End.
- Class A is where the action is
We’ve stopped talking about the “flight to quality” in the office world, but that still seems to be a clear trend. 77 percent of the top 60 leases – about 2.34 msf – were signed at Class A buildings in 2018. That’s remarkable in part because less than half of the 74 msf of office space we’re tracking is Class A. But clearly, those buildings continued to prove they had the most attractive value proposition to top tenants. Meanwhile, Class C was a non-factor among the largest tenants, landing only 1.4 percent of the biggest deals signed on the year. Re-positioning those Class C buildings could be a good opportunity for investors.
- The suburbs are still plenty busy
Despite the fact that Minneapolis saw the largest share of the top leases last year (see above), the suburbs continue to see plenty of interest. In fact, 52 percent of the top 60 leases ended up outside the CBDs of Minneapolis and St. Paul. The suburbs make up about 70 percent of our tracked universe, so the CBDs have a size disadvantage, but the disparity shows that the suburbs remain in play for more than half of the largest tenants searching. In particular, the Southwest and West submarkets combined for 27 leases totaling 1.1 msf of the top deals.
- The grass seems to be greener on the other side of the fence – for most tenants
We’ve reported before that lease terms are getting longer, and landlords are making more money available for tenant improvements, meaning tenants have less frequent opportunities to move from building to building. Perhaps in 2018, tenants looked to take advantage of those opportunities. Any number of factors could be affecting their decisions, but a majority of our 60 largest deals – about 64 percent – resulted in relocations. 45 of the 60 largest leases involved a tenant changing buildings, while just 15 were either a lease renewal or an expansion within the same building.
- Certain industries moved the needle
Changes in the economy can benefit certain types of businesses. If our 2018 leases are any indication, a select few are in good position for the future. The top three industries we measured – business services, manufacturing, and financial services – accounted for a total of 46.5 percent of the top leases in 2018. (Note that manufacturing covers everything from medical device makers to Jostens and 3M, and includes primarily back office space.) Other leaders included high tech companies and insurance, came up just shy of 10 percent each.
Interested in learning more about the Minneapolis-St. Paul office market? Check out our list of office brokers here.