Minneapolis Companies Face Challenges as Rents Increase

Market Insights
September 13, 2016

Keith DeCoster

Keith DeCoster

Director of U.S. Real Estate Analytics

Minneapolis continues to experience growth, particularly in its health care, manufacturing and biosciences industries. Nearly 40% of the Twin Cities’ workforce is employed in so-called STEM (science, technology, education and math) occupations, a very high percentage relative to the national average and a level that is on par with cities such as Boston.

Companies struggling to find highly-skilled and educated employees have taken note that the Minneapolis region’s talented labor pool remains a draw for many high-tech businesses. Although some tech companies have seen their expansion plans stymied by weak IPO markets, other remain in expansion mode. Some have turned to secondary and tertiary metro areas with skilled workforces such as Minneapolis to find tech talent.

While e-commerce/logistics giants like Amazon have the steady cash flow to support major expansion in multiple markets, most companies in Minneapolis remain focused on minimizing out-of-pocket expenditures and controlling fixed operating costs such as lease expenses. Rather than spreading out, many traditional space users continue to densify. Law firms and banks are often shedding space as they become more efficient. In the largest lease of the quarter, Stinson Leonard Street leased 105,000 square feet at 50 South Sixth Street, reducing its occupancy by about 35,000 from its prior location.

Even as some companies strive to control costs, a growing number of tenants are embracing the capacity for new or modernized workspace to boost productivity, assist in recruiting and reinforce company culture. Justifying the expenditure of moving can be difficult, but more efficiently-configured space in a newer building often allows companies to reduce the size of their lease, offsetting some of the costs in the long-term.

Savvy Minneapolis landlords are catering to these tenant motivations by offering space with open and flexible layouts. Landlords are also realizing that they need to address space and amenity deficiencies in order to retain tenants and attract companies from other buildings. Adding shared amenities such as wired conference rooms and seating areas, event spaces, gyms and other multi-functional collaborative areas can help tenants reduce the amount of space they have to occupy and in turn reduce the overall cost of their lease. The most aggressive landlords are building out space for tenants or offering generous concession packages to offset the cost of relocation and increasing build-out costs.

A few landlords are letting some tenants out of their lease early so they can modernize and upgrade as much of their asset as possible. Big blocks of space with the amenities and configuration that tenants currently prefer have a growing value in Downtown Minneapolis.

New construction won’t remedy this tight market either, unfortunately. Much of the region’s limited development pipeline has been pre-leased. One building that has not yet pre-leased much of its space is the 224,000-square-foot T3 building at 323 Washington Avenue North, scheduled to be completed in October 2016. There are some new projects about to get underway, however. In the North Loop, for example, 616 N. Fifth Street, a former industrial building, is slated to be redeveloped into a new 200,000-square foot office property. A 10-story building at 419 Washington Avenue North has been proposed as well.

These buildings are pushing the ceiling for asking rents to higher levels. Companies relocating from much higher-cost markets may have less difficulty accepting these elevated rents; firms that have been based in the Twin Cities for a long time may have to look in more peripheral locations if they want to avoid the rising rents.

Keith DeCoster

Keith DeCoster

Keith oversees the production of local and national market materials. Keith also collaborates with his colleagues across the U.S. and Europe, specializing in reports and insights that highlight the impact of economic trends and market fundamentals on tenants.