Q4 2016 Office Insight:
Expect Churn in Class B CBD office inventory in 2017
An uncertain future for newly vacant Class B office in the Minneapolis CBD
The last two quarters of 2016 saw significant negative absorption due to Wells Fargo and Xcel Energy vacating numerous leased locations for their new build-to-suit (BTS) single-tenant buildings. Considering that the residential vacancy in the CBD is now significantly below the office vacancy rate, expect to see conversion of older Class B space into multifamily development. Northstar East will likely be the first apartment or condo conversion as soon as its sale is finalized. The future of the Macy’s block will also be determined in 2017. The historic 914,000-square-foot building is currently for sale and the majority of its floors have sat vacant in recent decades. Without substantial capital improvements, mediocre Class B space will languish in a market that has a vacancy rate of 21.7 percent. As such, the former TCF Bank is undergoing a major renovation to be repurposed into 130,0000 square feet of creative multi-tenant office.
Foreign capital helps to set record office sales this year
In the final quarter of 2016, Shorenstein Properties sold 33 South Sixth Street to Chinese investor HNA Group for $315 million. This is a marked increase from its last sale in 2012 for $205 million. The sale price is also the highest ever paid for a Minneapolis building. The opportunity for additional foreign direct investment (FDI) will escalate as Asian and European firms seek real estate in growing, stable markets. Chinese firms looking for U.S. properties typically make three stops: Los Angeles, San Francisco and New York, but Midwest markets like Minneapolis are increasingly attracting a larger share of that FDI.
Tech and creative tenants were the first to sign at new buildings in 2016
If you want to predict who will be the first to prelease a building that is under construction or renovation, look to the tech and creative types. Cray Supercomputing will become the first tenant at Offices@ MOA when it relocates 350 employees in early 2017 from its namesake tower in the St. Paul CBD. The digital shipping logistics company, Coyote Logistics, signed at Swervo’s newly redeveloped Nate’s Clothing building this year. Ryan began construction on the spec Millwright Building, where the construction firm will be its own anchor tenant. And in Q3, marketing firm Clear Night Group preleased the Maytag Building, currently under renovation in the North Loop.