The "For Rent" signs that peppered downtown Minneapolis office buildings in 1992 when the vacancy rate shot up to over 22 percent are rare these days.
According to the annual Office Market Report published recently by the Griffin Cos., the Twin Cities office market has improved more rapidly than expected. The overall vacancy rate dropped from 16.4 percent in 1993 to 13.3 percent at the end of first quarter 1994.
But the most dramatic improvements have occurred in Class A space in Minneapolis' central business district, where the vacancy rate dropped to 6 percent in June 1994 from 13.2 percent in June 1993, according to the Minnesota Real Estate Journal.
The decline in Class A vacancy rates is mostly due to suburban businesses that are moving to downtown because rents are lower or because the location will better serve their business, says Robert Dunbar, Griffin Cos. president.
This drop in vacancies has given rise to speculation that construction of a new office tower may be near—an inconceivable occurrence two years ago when it was estimated that downtown had a 12- to 15-year supply of space. But Dunbar says, "Rates haven't reached a point where it's economically feasible," adding that lenders are much more cautious about real estate lending now than they were 10 years ago.
Angie Pederson, research director for the Minnesota Real Estate Journal, says, "When the vacancy rate goes down to 5 percent, we'll see a new building pop up."
Pederson says that 1.1 million feet of downtown Minneapolis office space was absorbed last year—mostly due to some big companies moving into downtown. That activity has led to a scarcity in large blocks of space, forcing some current tenants into scattered spaces as they expand their operations.
Because of the increased demand, businesses that rented space at low rents, and were enticed with lease concessions, may see higher rents and no perks when their lease renewals come around. It is estimated that downtown property values have dropped about 30 percent since 1989, partly as a result of the concessions that filled the space but lowered the profits of most office rental space downtown. One local property management firm, with about 2 million square feet of space in downtown Minneapolis, has announced that it will raise rents 10 percent to 25 percent on new long-term leases and will no longer approve such concession packages as free rent, extra parking or cuts in the cost of tenant improvements.
"The next year or two are going to be exciting in the business," Dunbar says.
—Kathy Cobb
