Office market multi-tenant vacancy continues to increase; CBD landlords upgrade offerings to attract tenants

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1 Research & Forecast Report MINNEAPOLIS-ST. PAUL OFFICE Quarter Office market multi-tenant vacancy continues to increase; CBD landlords upgrade offerings to attract tenants Vacancy and absorption trends The vacancy rate in the Minneapolis-St. Paul office market is 15.3 percent, up from 14.5 percent in the fourth quarter of Negative absorption totaled 356,794 square feet. At Normandale Lake Office Park in Bloomington, Weber Shandwick vacated 44,941 square feet, SiteImprove moved out of 22,733 square feet and Oracle vacated 21,590 square feet at the 8000 Tower while Varde left 20,130 square feet at the 8500 Tower. In the CBD, additional negative absorption resulted due to both Bassford Remele leaving 24,886 square feet and Peterson Habicht vacating 24,347 square feet at 33 South 6th. On the positive absorption side, Cray moved into 89,481 square feet at newly-constructed The in Bloomington in the Airport submarket, Van Wagenen leased 46,946 square feet at Superior Office Center in Eden Prairie and Bassford Remele moved from one Minneapolis CBD location to another, vacating 33 South 6th and moving into 38,750 square feet at Fifth Street Towers. In the heart of the CBD, redevelopment is occurring at existing office spaces. The Baker Center, 121 South 8th (former TCF Building) and Fifth Street Towers, in addition to the now-closed former Macy s all have plans for renovations that will appeal to amenity-conscious tenants. Landlords at these properties are investing significant dollars in amenities such as roof top decks, fitness centers, bike hubs and conference facilities. At the Baker Center, a four-building complex, marketing for the building includes a 49,000 square foot fully built and furnished speculative suite. Addditionally, at Fifth Street Towers there are plans for a fullservice bar and restaurant on the skyway level, the first of its kind. Market Indicators Relative to prior period Q Percent Vacant VACANCY NET ABSORPTION RENTAL RATE Vacancy 20% 15% 10% 5% % 2007 Net Absorption SF Absorbed 2,000,000 1,000,000 0 (1,000,000) (2,000,000) 17.2% 16.8% 16.7% 16.1% 14.9% 15.6% 14.2% 13.7% , ,779 (1,661,963) (312,099) 585, % , ,841 1,025, , % 2017 Q1 (421,378) (356,794) Q1 SUBSCRIBE TO OUR BLOG

2 Q1 Vacancy Percent Vacant % Airport/South of the River 18.5% Minneapolis CBD 14.7% Southwest 11.7% St. Paul CBD 14.1% St. Paul Suburban 10.8% West 16.8% Northwest MARKET ACTIVITY St. Paul CBD > Real Estate Equities, a St. Paul based company, is in the process of acquiring the former headquarters of the St. Paul Pioneer Press at 345 Cedar in St. Paul. The property has been vacant since the Pioneer Press moved to 10 River Park Plaza in late The Stencil Group bought the property in 2015 and planned to redevelop it into apartments. These plans stalled and now Real Estate Equities is proposing 143 units of workforce housing at the 162,000 square foot building. Q1 Absorption SF Absorbed 200, ,000 0 (1,199) (35,597) (47,380) (100,000) (99,433) (118,696) (139,509) (200,000) Airport/South of the River Minneapolis CBD Southwest St. Paul CBD St. Paul Suburban Vacancy and absorption trends (con t.) West 13,826 Northwest > In St. Paul, the former West Publishing headquarters is being razed in a project that involves the deconstruction of more than 700,000 square feet of space built into the river bluffs. Cardon Development Group is planning to redevelop the site with a proposal for housing, a hotel, event center, retail space and 400,000 square feet of office space. > Ecolab will soon vacate its corporate headquarters at 370 Wabasha Street in the St. Paul CBD consolidating offices in modern space at 385 Washington Street (formerly the Travelers Building). Ecolab is leading the effort to solicit proposals for the redevelopment of the property and currently has a letter of intent to buy the building and would sell it to the entity it chooses based on the viability of their proposal. In the hot North Loop neighborhood, construction activity is ramping up. Rental rates are at a premium in this in-demand location. Hines T3 building was completed during the fourth quarter, with signed leases from Amazon, Zipnosis and Industrious. Additional construction occurring in the North Loop includes: > The former Macy s building in the St. Paul CBD, renamed Treasure Island Center announced that the Minnesota Housing Finance Agency will lease 61,000 square feet. The rooftop of the property will include a NHL-sized ice rink for the Minnesota Wild. TRIA Orthopaedic Center will open a clinic and be the corporate sponsor for the practice facility. > Schafer Richardson has a 90,000 square foot office property under construction at 700 North 5th Street. > United Properties is planning to begin construction this summer on a 193,000 square foot, 10-story office building at 729 Washington Avenue North. The developer is planning another North Loop office building near Target Field Station, a 240,000 square foot 10-story building. > Swervo Development and CPM are planning a 230,000 square foot office building at 419 Washington Avenue North, on a site that is a parking lot next to the existing Internet Exchange Building. Landlords in the North Loop may find it challenging to continue to push rental rates higher as they compete with newly-renovated core-cbd properties, where parking is not as scarce and there are more walkable amenities. Office investment activity is down after peaking in December of 2015, though there is still a significant amount of capital available. Investors are on the lookout for properties where value can be added by investment and then subsequent repositioning of the property in the market. The challenge is in finding an owner ready to sell at a price that allows for an upside after capital improvements are made. Treasure Island Center The former Macy s building in St. Paul will be called Treasure Island Center and include a rooftop ice rink for the Minnesot Wild sponsored by TRIA. The Minnesota Housing Finance Agency will lease 61,000 square feet. 2 Minneapolis-St. Paul Research & Forecast Report Quarter 1 Office Colliers International

3 Minneapolis CBD > In addition to renovations occurring in the CBD at the Baker Center, 121 South 8th, Fifth Street Towers and the former Macy s, a 12-block portion of Nicollet Mall that runs through the CBD is under renovation, adding more green space and pedestrianfriendly access. Properties will be charged for costs associated with the renovation according to their proximity to the Mall for the $50 million project. > The 302,000 square foot International Market Square in Minneapolis is for sale. Geneva Exchange LLC has owned the property, which includes studios, galleries and corporate offices, since Suburban > Prime Therapeutics continues to move forward with plans for its new headquarters after narrowing down its metro-wide search to an Eagan site. There will be two buildings built in phases, first a 236,000 square foot property completed in fall 2018 followed by a 173,000 square foot building scheduled to be completed in fall of The location is at Boulder Lakes Business Park near Interstate 494 and Dodd Road. They would move workers from offices in Eagan, Mendota Heights and Edina while maintaining a presence in Bloomington at Normandale Lake Office Park. > Maven Real Estate Partners is under contract to buy Rand Tower in the Minneapolis CBD. The 142,000 square foot building was built in 1929 and is designated as a nationally historic building. Maven plans to renovate the property into a co-working and incubator space. > RBC Wealth Management is looking into either renewing or moving out of RBC Plaza and is looking at 300,000 square foot options both in the CBD and suburban areas. Rendering of Prime Therapeutics planned headquarters at Boulder Lakes Business Park in Eagan > Brookdale Corporate Center I & II in Brooklyn Center sold for $14.3 million. Sovereign Capital bought the properties from Steward Capital Partners for only $3 million more than what Steward paid for the properties 17 years ago. While the properties had been updated in 2014, a vacancy rate of 23 percent and slow activity in the northwest area of the metro tempered the price. 700 North 5th St Schafer Richardson began construction in the North Loop on a 90,000 square foot property at 700 North 5th Street > Additional suburban office sales include the sale of three buildings in the Rosedale Corporate Plaza at 2665, 2675 and 2685 Long Lake Road in Roseville for $18.9 million. Essjay MSPN bought the properties, totaling 163,209 square feet, from Lone Star Funds. > In Eden Prairie, Crosstown Corporate Center sold for $8.175 million. Altus Property Investments bought the 60,000 square foot building from TA Realty. The price paid is less than the $10.56 million TA bought it for in April of 2008, when the vacancy was 5 percent compared to a 25 percent vacancy rate at the time of sale. > Suntide Commercial Realty is planning to convert a warehouse at the intersection of I-94 and Highway 280 in St. Paul into multitenant office space. They are marketing the 170,000 square foot property as the Case Building and would begin renovations after signing an anchor tenant. Minneapolis-St. Paul Research & Forecast Report Quarter 1 Office Colliers International 3

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5 Spotlight Trend: Bringing Nature into the Workplace The trend of bringing nature into the workplace has been a popular trend in the Twin Cities. Not only are we seeing open, bright, collaborative and shared communal spaces, but we re also seeing elements of nature existing internally as well as externally. Most companies are focused on productivity, and attraction and retention of their workforce. Creating offices with natural elements assists in creating a space that employees enjoy coming to and working in every day. Companies in search of new office space are looking for larger exterior windows that promote light penetration deeper into the building core and prefer views of trees in lieu of parked cars. At the request of tenants, building owners are providing exterior balconies or patios and rooftop gardens as a part of their amenity package. Tenants are requesting their architect to utilize more natural finishes such as wood and stone and those design teams are answering with more organic finishes as well as curved walls and links connecting their design elements. We are seeing full walls made of plants, as well as an increase in landscape and nature photography used for the artwork. Overall, the industry has become more conscious of how commercial buildings impact the environment and the value of sustainable design. Five years ago, it was all about LEED Certification, but now the focus is more human-centric with the introduction of the WELL Building Standard. The LEED rating system was devised by the United States Green Building Council to evaluate the environmental performance of a building and encourage sustainable design. A WELL Building is the world s first building standard focused exclusively on human health and wellness. It marries design and construction with evidence-based research and how the development of a building can promote human health. LEED is still important, and often times the design elements that focus on nature not only raise the WELL score, but the LEED score, too. Many of these design elements, which are frequently requested by tenants, promote the concept of biophilia. Biophilia, also being referred to as Biophilic Design, focuses on the connection between humans and nature and the impact on the overall well-being of the inhabitants. It suggests that humans possess an innate tendency to seek connections with nature and other forms of life. These connections are created in a work environment that is open and easy to move through, but is also balanced with closed collaborative or private spaces with protection from interruption. This layout mimics the natural landscape of open fields and enclosed wooded areas that animals live in around us. Design teams also incorporate cultural elements into the workplace in order to promote a company s brand. These designs link people to cultural traditions, which is another form of Biophilic Design. This type of architecture does not have to come with a heavy price tag. By choosing the right building and assembling the right team of professionals early on, the cost of bringing nature into your workplace will be drastically reduced and most often does not cost anymore then the standard. As the shift and focus of the built environment continues to be shaped more around the people who occupy these spaces, rather than the walls themselves, we ll continue to see and hear tenant requests for nature in the workplace. Karen Harris-Barron Director of Project Management Services Karen.Harris-Barron@colliers.com Minneapolis-St. Paul Research & Forecast Report Quarter 1 Office Colliers International 5

6 NEW TO OUR REPORT Micro Market Analysis Minneapolis CBD The Minneapolis CBD has distinct neighborhoods, from the trendy North Loop, to the skyscrapers in the core, to the neighborly feel of the Northeast. Each of these neighborhoods warrants a closer look. Beginning Q4 2016, we began tracking these distinct markets to better understand the dynamics of the CBD. Submarket Core Building SF Direct Vacant SF % Vacant Direct Vacant SF % Vacant W/ Q Absorpotion A 13,041,205 1,677, % 69, % (102,038) B 7,593,305 2,164, % 16, % (40,457) C 733, , % % (3,343) Totals: 21,368,136 4,202, % 86, % (145,838) East A 172, , % % 0 B 631,341 10, % 0 1.6% 2,164 C 510, , % % 0 Totals: 1,314, , % % 2,164 Northeast A 180, , % % 15,249 B 1,811, , % % 9,732 C 85, % 0 0.0% 0 Totals: 2,077, , % % 24,981 North Loop A 958, , % 1, % 23,108 B 1,414, , % % (42,037) C 262, % 0 0.0% 0 Totals: 2,635, , % 1, % (18,929) Warehouse A 220,897 93, % % 0 B 1,430, , % % (28,123) C 555,773 12, % 0 2.2% 51,091 Totals: 2,207, , % % 22,968 6 Minneapolis-St. Paul Research & Forecast Report Quarter 1 Office Colliers International

7 Micro Market Analysis NEW TO OUR REPORT 394/494 Corcoran Corridors Maple Grove 55 Medina New Hope Brooklyn Park 100 Brooklyn Center 2 Mississippi River 47 Spring Lake Park 65 Columbia Heights 35W New Brighton 10 Shoreview Arden Hills 694 North Oaks Vadnais Heights 96 White Dellwood Bear Lake 61 Gem Lake 244 Mahtom Orono Shorewood 41 Greenwood 101 Wayzata Woodland Deephaven Chanhassen Plymouth 5 Eden Prairie 394 CORRIDOR Minnetonka Golden Valley St Louis Park Hopkins 100 West Bloomington 55 50th & France Edina 494 CORRIDOR 494 Uptown Bloomington Minneapolis CBD St Anthony 55 Minneapolis -Saint Paul International Airport Minnesota Valley National Wildlife Refuge 77 9 Roseville Falcon Heights Mendota Heights Summit- University The 394 and 494 Corridors are also Micro Markets that are worthy of additional tracking. Payne-Phalen They are hubs of office space that have different St Paul dynamics and market trends. Mississippi National River and Recreation Area South St Paul Inver Grove Heights North St Paul 120 Maplewood Newport Oakdale Woodbur Cottag Chaska Submarket Shakopee 494 Corridor Building SF Savage Direct Vacant SF 35W 13 Burnsville % Vacant Direct 35E Vacant SF Lebanon Hills Regional Park % Vacant W/ 52 Q1 Absorption A 8,593,472 1,394, % 2, % (117,562) B 5,375, , % 46, % 32,153 C 509,080 62, % 1, % (1,554) Totals: 14,478,455 2,297, % 51, % (86,963) 394 Corridor A 4,176, , % 24, % (47,168) B 2,511, , % 32, % (50,753) C 238,123 12, % 0 5.3% (2,376) Totals: 6,925, , % 57, % (100,297) 55 Spring Lake Minneapolis-St. Paul Research & Forecast Report Quarter 1 Office Colliers International 7

8 Significant Lease and Sales Activity Lease Activity TENANT PROPERTY ADDRESS CITY SF SUBMARKET Amazon T3 "323 Washington Ave" Minneapolis 103,083 Mpls CBD MHFA Treasure Island Center 411 Cedar St Saint Paul 55,700 St Paul CBD CAE Spectrum Commerce Center 1000 Blue Gentian Rd Eagan 51,181 Southeast Fairview 2100 NE Summer St 2100 NE Summer St Minneapolis 38,880 Mpls CBD MobileSoft Canadian Pacific Plaza 120 s 6th St Minneapolis 31,590 Mpls CBD Amazon Wells Fargo Center 90 S 7th St Minneapolis 25,669 Mpls CBD ADM 121 S 8th St 121 S 8th St Minneapolis 23,609 Mpls CBD Eaton Cooper Power Systems Atria Corporate Center 3033 Campus Dr Plymouth 20,330 Northwest Spok Inc Continental Minnetonka Yellow Circle Dr Minnetonka 17,160 Southwest Nexus Solutions Sycamore Commons 6865 Sycamore Ln Maple Grove 16,926 Northwest Barton, Walter & Krier Sycamore Commons 6865 Sycamore Ln Maple Grove 16,926 Northwest Magenic Technologies Expansion 1600 Tower at West End 1600 Utica Ave Saint Louis Park 16,866 West Keller Williams/Partners Title Tamarack Hills 635 Bielenberg Woodbury 13,251 Southeast Unimax 121 S 8th St 121 S 8th St Minneapolis 12,921 Mpls CBD CBX Renaissance Square 520 Nicollet Mall Minneapolis 11,500 Mpls CBD ResCare EBT Office Center 6120 Earle Brown Dr Brooklyn Center 10,276 Northwest Looney Bin Wabasha Center 411 Cedar St Saint Paul 10,000 St Paul CBD T3 Zipnosis moved into 16,000 square feet at recently-completed T3 in the CBD s North Loop Neighborhood. Amazon will move into 103,083 square feet on the top two floors of the first of its kind all-wooden office building. 8 Minneapolis-St. Paul Research & Forecast Report Quarter 1 Office Colliers International

9 Sales Activity PROPERTY NAME ADDRESS CITY BUYER SELLLER PRICE PRICE PSF SF Rosedale Corporate Plaza 2685 Long Lake Rd Roseville Essjay MSPN Lone Star Funds $18,900,000 $ ,000 Woodwinds Birch Center 1875 Woodwinds Dr Woodbury HealthEast Investors RE Trust $14,780,936 $185 80,021 Crosstown Campus Red Circle Dr Minnetonka Crosstown Corporate Center One Paramount Plaza 4050 Olson Memorial Highway 6385 Old Shady Oak Rd 7801 E Bush Lake Rd 4050 Olson Memorial Hwy River Valley Church of Apple Valley Excelsior Group $5,140,000 $86 60,078 Eden Prairie Altus Properties TA Realty $8,175,000 $137 59,847 Minneapolis Golden Valley Carpathian Capital Mortenson Development Larry Schoenecker; BI Worldwide Ted Glasrud Associates $3,829,900 $74 52,000 $8,340,000 $163 51, St Johns Boulevard 1600 St Johns Blvd Saint Paul HealthEast Investors RE Trust $5,920,000 $171 34,592 Two Paramount Plaza 7831 E Bush Lake Rd Minneapolis Carpathian Capital Larry Schoenecker; BI Worldwide $1,850,000 $69 27,000 Kohlrusch Building 250 Fuller St Shakopee Trident Development Anchor Bank (MN) $1,000,000 $40 24,936 Rosedale Corporate Plaza Three buildings at Rosedale Corporate Center Plaza in Roseville sold for $18.9 million. Fair Isaac Corp. is the main tenant in the complex. Minneapolis-St. Paul Research & Forecast Report Quarter 1 Office Colliers International 9

10 Market Statistics Submarket Airport/South of the River Total SF Direct Vacant SF % Vacant Direct Vacant SF % Vacant W/ Asking Rate Q Absorption YTD Absorption A 1,883, , % % $ ,495 84,495 B 4,271, , % 11, % $11.86 (39,319) (39,319) C 1,273, , % 6, % $9.20 (9,579) (9,579) Totals: 7,428,850 1,032, % 17, % $ ,597 35,597 Minneapolis CBD A 14,573,435 2,310, % 71, % $18.21 (63,681) (63,681) B 12,988,172 2,674, % 16, % $14.91 (82,663) (82,663) C 2,216, , % % $ ,648 27,648 Totals: 29,777,836 5,511, % 87, % $15.52 (118,696) (118,696) Southwest A 9,211,074 1,429, % 2, % $15.80 (127,804) (127,804) B 6,236, , % 57, % $ ,181 31,181 C 870,251 92, % 1, % $8.83 (2,810) (2,810) Totals: 16,317,453 2,405, % 61, % $14.02 (99,433) (99,433) St. Paul CBD A 2,128, , % % $14.01 (4,310) (4,310) B 4,515, , % 155, % $10.94 (3,672) (3,672) C 639,936 31, % 0 4.9% $8.00 6,783 6,783 Totals: 7,283, , % 155, % $12.04 (1,199) (1,199) St. Paul Suburban A 2,172, , % 16, % $ ,403 23,403 B 6,139, , % 33, % $11.76 (35,181) (35,181) C 1,912, , % 2, % $11.13 (35,602) (35,602) Totals: 10,224,789 1,441, % 51, % $12.64 (47,380) (47,380) West/Northwest A 5,099, , % 36, % $18.53 (25,140) (25,140) B 6,196, , % 36, % $13.54 (108,687) (108,687) C 2,057, , % % $9.49 8,144 8,144 Totals: 13,353,237 1,703, % 73, % $14.73 (125,683) (125,683) West A 4,038, , % 36, % $20.25 (30,193) (30,193) B 4,055, , % 23, % $14.20 (114,178) (114,178) C 790,192 44, % % $9.94 4,862 4,862 Totals: 8,884, , % 60, % $15.81 (139,509) (139,509) Northwest A 1,028, , % % $ ,053 5,053 B 2,140, , % 12, % $ ,491 5,491 C 1,267, , % % $8.42 3,282 3,282 Totals: 4,435, , % 12, % $ ,826 13,826 Total All Markets A 35,068,894 5,124, % 127, % $16.32 (113,037) (113,037) B 40,347,171 6,649, % 310, % $13.00 (238,341) (238,341) C 8,969,703 1,169, % 10, % $10.25 (5,416) (5,416) Totals: 84,385,768 12,943, % 448, % $13.91 (356,794) (356,794) The above table is summarized data on multi-tenant office buildings greater than 20,000 square feet. Not included are single-tenant, owner-occupied, medical or government buildings. 10 Minneapolis-St. Paul Research & Forecast Report Quarter 1 Office Colliers International

11 Market Statistics (Expanded Market) Submarket Total SF Direct Vacant SF % Vacant Direct Vacant SF % Vacant W/ Asking Rate Q Absorption YTD Absorption Airport/South of the River A 2,538, , % % $ ,961 91,961 B 7,367, , % 11, % $11.82 (26,627) (26,627) C 2,620, , % 6, % $9.20 (10,433) (10,433) Totals: 12,526,555 1,162, % 17, % $ ,901 54,901 Minneapolis CBD A 16,689,095 2,310, % 71, % $18.21 (63,681) (63,681) B 15,535,789 2,718, % 16, % $14.89 (104,763) (104,763) C 3,902, , % % $ ,748 47,748 Totals: 36,127,524 5,538, % 87, % $15.49 (120,696) (120,696) Southwest A 13,167,045 1,718, % 2, % $16.05 (126,268) (126,268) B 9,675,523 1,115, % 277, % $12.42 (13,953) (13,953) C 3,121, , % 1, % $ ,438 14,438 Totals: 25,964,440 2,987, % 281, % $13.99 (125,783) (125,783) St. Paul CBD A 2,773, , % - 8.4% $14.01 (4,310) (4,310) B 5,433, , % 155, % $10.94 (3,672) (3,672) C 2,810,535 54, % - 1.9% $8.00 6,783 6,783 Totals: 11,018, , % 155, % $12.04 (1,199) (1,199) St. Paul Suburban A 3,024, , % 16, % $ ,210 22,210 B 10,581,979 1,088, % 37, % $12.08 (65,925) (65,925) C 6,546, , % 2, % $9.40 (33,148) (33,148) Totals: 20,152,993 1,722, % 55, % $12.44 (76,863) (76,863) West/Northwest A 9,301, , % 36, % $17.39 (21,955) (21,955) B 10,043,550 1,475, % 36, % $13.61 (480,391) (480,391) C 5,339, , % % $10.40 (328,020) (328,020) Totals: 24,684,362 2,666, % 73, % $14.40 (830,366) (830,366) Total All Markets A 47,494,607 5,592, % 127, % $16.05 (102,043) (102,043) B 58,638,522 7,712, % 534, % $13.01 (695,331) (695,331) C 24,341,184 1,644, % 10, % $10.48 (302,632) (302,632) Totals: 130,474,313 14,949, % 672, % $13.77 (1,100,006) (1,100,006) The above table is summarized data on multi- and single-tenant office buildings greater than 10,000 square feet. Owner-occupied properties are also included. Not included are government or medical buildings. Minneapolis-St. Paul Research & Forecast Report Quarter 1 Office Colliers International 11

12 403 offices in 68 countries on 6 continents United States: 153 Canada: 29 Latin America: 24 Asia Pacific: 86 EMEA: 111 BROKERAGE SERVICES CONTACT: William M. Wardwell SIOR Executive Vice President Brokerage Minneapolis-St. Paul bill.wardwell@colliers.com Colliers International Minneapolis-St. Paul 4350 Baker Road, Suite 400 Minnetonka, MN $2.6 billion in annual revenue SUBSCRIBE TO OUR BLOG 2 billion square feet under management 16,000 professionals and staff Copyright 2017 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.