Q3 2016 Office Insight:
BTS Developments Usher in Negative Absorption Rates
Xcel Energy and Wells Fargo employees relocate to new digs
This quarter saw unprecedented levels of negative absorption due to some new
build-to-suit (BTS), single-tenant buildings. Opus delivered Xcel Energy’s headquarters at 401 Nicollet Mall last quarter and Q3 saw the consolidation of employees formerly spread across multiple buildings. Wells Fargo has also begun moving 5,000 employees into the company’s new 1.1 million square feet of owner-occupied office towers. The first round of relocations is largely coming from the Minneapolis CBD, but expect future negative absorption across the metro as Wells Fargo fills out its $300 million twin towers in Downtown East. What remains to be seen is the future of the Class B Baker Center (comprising Investors, Roanoke Buildings, Baker and the 730 Building), which will soon have nearly half a million vacant square feet in Wells Fargo’s wake. Fortunately, RSP Architects has begun a $20 million renovation of the Baker Center, to be completed by January 2017.
Rent goes up in the CBD; Class B rent goes down in the suburbs
The most popular suburban submarkets are seeing their Class A rent increase and Class B rental rates decrease. Demand is outstripping supply among Class A properties and landlords are negotiating higher rents. Among Class B inventory, the most attractive buildings and suites are being quickly absorbed, so what remains are the less desirable and therefore lower-cost options. The Minneapolis CBD is also coping with escalating gross rental rates; between 2015 and 2016, average taxes per square foot, per year jumped from $5.32 to $6.07—a significant 14.0 percent increase. At least the increase is due to healthy and growing office property values, while the property tax rate remains relatively stable. Pass-through expenses are further pushed upwards by building owners investing in renovations to remain competitive, resulting in greater operating expenses.
2016 office sales slow in Q3 but transaction value per square foot spikes
Although the third quarter of 2016 only saw four transactions for office buildings at least 50,000 square feet in size, the average price per square foot increased 82 percent quarter-over-quarter. This is largely due to the sale of Ameriprise Financial Center, which sold for $200 million to Florida-based Morning Calm Management at the end of August. The transaction is the largest deal of the year, surpassing the $82 million sale of PwC Plaza (formerly known as Plaza Seven) back in June.