The Parking Problem: More Users in Smaller Spaces Means Many Building Owners are in Tight Spots

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1 Q OFFICE MINNEAPOLIS-ST. PAUL OFFICE MARKET REPORT The Parking Problem: More Users in Smaller Spaces Means Many Building Owners are in Tight Spots SF Absorbed Percent Vacant MARKET INDICATORS Q VACANCY NET ABSORPTION RENTAL RATE VACANCY 25% 20% 16.8% 17.2% 16.7% 16.1% 15.6% 15.2% 14.9% 14.2% 14.6% 15% 10% 5% Q1 NET ABSORPTION 2,000,000 1,500, , ,934 1,000, , , , , ,000 0 (500,000) (312,099) (159,628) (1,000,000) (1,500,000) (2,000,000) (1,661,963) Q1 VACANCY AND ABSORPTION TRENDS Vacancy in the -St. Paul office market increased during the First Quarter of 2015 to 14.6 percent, up from 14.3 percent at Quarter Four. Absorption for Quarter One was a negative 159,628 square feet. Overall, vacancy is lowest in the West submarket at 10.7 percent, compared to 18.7 percent in the St. Paul CBD, where vacancy is the highest. Vacancy among Class A properties in the West submarket is low at 7.0 percent. MARKET TRENDS The major trend that we ve seen continue in the office market is companies desire for efficient, collaborative space, shrinking their overall real estate footprints and reducing the average square feet per employee. Since more people are working in less space, this is causing a problem with parking. Parking ramps in buildings are full, even when the building itself is only 85 percent leased. This has caused landlords to be more cognizant of their tenant mix. For example, a call center in a building will include a large employee count, which will in turn require high parking needs. Some landlords are turning office buildings into apartments, an appealing option to them due to the lower parking needs and the growing desire by Millennials to live closer to work. Some landlords and tenants are considering renovating existing office space to better align with the popular open floor plan. While this enables tenants to achieve higher employee ratios, it also results in higher costs due increased architectural fees above and beyond the tenant improvement and new furniture costs.

2 Q1 ABSORPTION Q1 VACANCY SF Absorbed 200, ,000 0 (100,000) (200,000) 43,125 Airport/South of the River (175,899) CBD 18,497 Southwest (77,128) St. Paul CBD 15,564 St. Paul Suburban (12,782) West 18,995 Northwest % Vacant % Airport/South of the River 14.0% 15.5% CBD Southwest 18.6% St. Paul CBD 14.5% St. Paul Suburban 10.9% West 17.8% Northwest INVESTMENT The last two years have seen a multitude of trophy properties sold. While another wave of trophy properties will likely be sold, the Class B market is now heating up for investors. Liquidity has been added to the Class B market, especially if the property can be leased or improved upon. There is speculation that other Class B buildings will be up for sale soon, especially along the 394 corridor, which is now seen as a core market. One of the Class B complexes found along this corridor is the Parkdales, which was recently sold and the new owners have plans for significant investment in the property. Some portion of the complex will most likely become apartments, and the rest will be renovated and leased at a rate of approximately $18 per square foot, which compares to the overall average rental rate of $13.41 for Class B properties in the West submarket. Cap rates have continued to decrease, including those at suburban properties, which didn t go as low as premiere properties in the CBD. We are beginning to see signs that they are bottoming out. As interest rates tick upward, rental rates would need to increase significantly for cap rates to continue to go down. DEVELOPMENT The Offices at Mall of America are scheduled to be completed in the third quarter of 2015, and are offering potential tenants a unique mix of amenities, including significant parking, shopping, and restaurant options. Along with these amenities comes a high price tag, however, with current rental rates set at $24 net. The sales approach with this building is focused on price per employee versus price per square feet, since they offer flexible floor plans which accommodate larger employee numbers in smaller spaces. Hines is planning a speculative development project in the North Loop neighborhood of the CBD. Hines is planning on matching the centuries-old properties typical to this neighborhood and combining vintage architecture with modern amenities such as open floor plates. There are a number of corporate build-to-suit projects also under construction including Downtown East, a 1.16-million-square-foot property being built for Wells Fargo s headquarters. Also in the CBD, Be the Match and Xcel Energy have space under construction. In the Southwest suburban market, UnitedHealth Group has over 850,000 square feet of space under construction at a corporate campus in Eden Prairie. Ryan companies recently purchased the Kinney & Lange Building at 312 Third Street South. Located in the Downtown East area, the building is near the new Vikings stadium and Wells Fargo office development, which Ryan is heavily involved in. Ryan plans to demolish the building and build new office space in this up-and-coming location. FORECAST The continued densification of employees in office space throughout the entire market, along with a lack of tenants seeking 25,000-50,000-square-foot space will most likely slow absorption rates, though smaller users will continue to remain active. The Class B market will see more activity, especially with regard to sales and renovations. The 394 corridor will continue to become a core market, with France Avenue following closely behind it. There s a lack of space for larger tenants in the France Avenue area, making it prime for becoming a tightening, core market.

3 SIGNIFICANT SALE AND LEASE ACTIVITY SALES BUILDING ADDRESS CITY BUYER SELLER SUBMARKET PRICE PRICE PSF SIZE Fifth Street Towers 100 S 5th St PIMCO Minnetonka Medical Center 6405 France Medical Building Dell Professional Building Savage Medical Building Crystal Medical Center Helene Houle Medical Center Minnesota Eye Consultants The Parkdales Former Ameriprise Operations Center Hwy 7 Minnetonka 6405 France Ave S 7770 Dell Rd Chanhassen 6350 W 143rd St Savage 5700 Bottineau Blvd 1155 E County Rd E Wayzata Blvd 5401 Gamble Dr 1001 North 3rd Ave South Arden Hills St. Louis Park St. Louis Park Excelsior Group JV Goldman Sachs DCI Technology Holdings Invesco RE JV Zeller Realty Corp CBD $154,000,000 $151 1,019,816 The Davis Group West $26,000,000 $409 63,500 The Davis Group Southwest $14,190,000 $203 70,000 The Davis Group Southwest $6,410,000 $315 20,357 The Davis Group Southwest $12,800,000 $361 35,485 The Davis Group Northwest $14,782,000 $329 44,865 The Davis Group St. Paul Suburban $18,422,000 $325 56,700 The Davis Group West $10,882,000 $370 29,400 LNR Partners OBO ML-CFC West $40,000,000 $72 559,336 KanAm Grund CBD $22,400,000 $41 541,000 Alliance Bank Center 525 5th St NW Saint Paul Kelly Brothers Ltd Security National St. Paul CBD $8,200,000 $39 212,000 Olympic Place Wedgwood Commerce Center 1300 Corporate Center Curve 317 South 2nd Avenue Kinney & Lange Building 2800 County Road 42 West 212 2nd Street Southeast 7825 Washington Ave S 6900 Wedgwood Rd N 1300 Corporate Center Curve Eden Prairie Maple Grove Eagan Altus Properties Onward Investors Mark E Davis Aetna Life Insurance Co Cornerstone RE Advisers Universal Cooperatives Inc Southwest $7,750,000 $70 110,000 Northwest $6,800,000 $62 109,920 Airport/South of River $4,750,000 $88 53, S 2nd Ave TPI Hospitality NHH Properties CBD $4,200,000 $59 71, rd St S Ryan Companies 2800 County Rd 42 W 212 2nd St SE Skywalk Properties LLC CBD $4,030,000 $56 72,204 Burnsville Velasco 2800 LLC Mike Whalen Southwest $2,850,000 $132 21,600 Twin Cities Properties Group LLC St Anthony Main Phase II LLP/Sam Larry LLC CBD $2,600,000 $58 45,000

4 SIGNIFICANT SALE AND LEASE ACTIVITY LEASES TENANT BUILDING ADDRESS CITY SUBMARKET SIZE (SF) Hired Northland Corporate Center 7225 N Northland Dr Brooklyn Park Northwest 30,000 Vanco Northland Plaza 3800 American Blvd W Bloomington Southwest 29,451 US Bank US Bank Plaza Office South Tower 220 S 6th St CBD 25,628 Lazard Middle Market IDS Center 80 S 8th St CBD 23,304 Wold Architects First National Bank Building 332 Minnesota St CBD 23,180 GSA US Bank Financial Center 1550 E American Blvd Bloomington Southwest 19,729 RCRI 5353 Wayzata Blvd 5353 Wayzata Blvd Saint Louis Park West 19,559 Brooklyn Center School District Shingle Creek Plaza 5910 Shingle Creek Pkwy Brooklyn Center Northwest 18,552 Central Pediatrics Commerce Hill Medical Building Tamarack Rd and Woodbury Dr Woodbury St. Paul Suburban 17,000 Bluestem Brands Crosstown Centre Crosstown Cir Eden Prairie Southwest 16,614 Wenck Associates Inc Valley Square Corporate Center 7500 Olson Memorial Hwy Golden Valley West 16,583 The Jacobson Law Office 180 5th St E 180 5th St E Saint Paul St. Paul CBD 15,000 Little & Company 100 Washington Square 100 Washington Ave CBD 14,000 Regus Grandview Square 5201 Eden Ave Edina Southwest 12,829 Perkins + Will IDS Center 80 S 8th St CBD 11,832 EMC Insurance One Southwest Crossing Viking Dr Eden Prairie Southwest 11,576 Milliman Health Normandale 8500 Tower 8500 Normandale Lake Blvd Bloomington Southwest 11,500 North Memorial Oakdale Medical Building East 3366 Oakdale Ave Robbinsdale Northwest 10,996 Ciresi Law Firm Capella Tower 225 S 6th St CBD 10,802 SunOpta One Corporate Center IV 7301 Ohms Ln Edina Southwest 10,664 Health Partners 180 5th St E 180 5th St E Saint Paul St. Paul CBD 9,174

5 Market Statistics SUBMARKET TOTAL SF DIRECT VACANT SF % VACANT DIRECT SUBLEASE VACANT SF % VACANT W/SUBLEASE ASKING RATE 2014 ABSORPTION Q ABSORPTION AIRPORT/SOUTH OF THE RIVER A 1,713, , % % $ ,430 15,299 B 3,570, , % 61, % $ ,843 13,079 C 1,273, , % 4, % $10.11 (37,289) 14,747 Totals: 6,557, , % 65, % $ ,984 43,125 MINNEAPOLIS CBD A 13,041,205 1,716, % 222, % $17.25 (38,684) (268,321) B 10,797,768 1,669, % 171, % $ ,893 85,017 C 3,698, , % % $ ,916 7,405 Totals: 27,537,758 3,846, % 394, % $ ,125 (175,899) SOUTHWEST A 9,473,521 1,210, % 125, % $ ,784 11,210 B 6,090,057 1,231, % 199, % $13.64 (258,917) (19,905) C 926, , % % $ ,117 27,192 Totals: 16,490,253 2,550, % 324, % $13.37 (165,016) 18,497 ST. PAUL CBD A 2,128, , % 45, % $12.78 (81,623) (26,476) B 4,779,720 1,055, % 9, % $ ,882 (63,654) C 831,936 37, % 0 4.6% $ ,454 13,002 Totals: 7,740,323 1,439, % 54, % $11.27 (55,287) (77,128) ST. PAUL SUBURBAN A 2,895, , % 65, % $14.30 (9,468) 36,739 B 6,294, , % 77, % $ ,208 1,685 C 2,165, , % % $10.39 (20,337) (22,860) Totals: 11,355,562 1,642, % 142, % $ ,403 15,564 WEST/NORTHWEST A 5,279, , % 51, % $ ,510 (17,230) B 5,858,225 1,004, % 84, % $ ,638 27,552 C 2,077, , % 0 7.4% $ ,733 5,891 Totals: 13,215,224 1,720, % 135, % $ ,881 16,213 WEST A 4,038, , % 51, % $ ,378 (26,435) B 3,962, , % 84, % $13.41 (4,675) 4,801 C 761,893 52, % 0 6.9% $ ,443 8,852 Totals: 8,762, , % 135, % $ ,146 (12,782) NORTHWEST A 1,241, , % % $ ,132 9,205 B 1,738, , % % $ ,313 12,751 C 1,315, , % 0 7.7% $ ,290 (2,961) Totals: 4,295, , % % $ ,735 18,995 TOTAL ALL MARKETS A 34,532,004 4,552, % 509, % $ ,949 (248,779) B 37,390,925 6,337, % 603, % $ ,547 43,774 C 10,973,802 1,195, % 4, % $ ,594 45,377 Totals: 82,896,731 12,085, % 1,117, % $ ,090 (159,628)

6 Market Statistics (EXPANDED MARKET) SUBMARKET TOTAL SF DIRECT VACANT SF % VACANT DIRECT SUBLEASE VACANT SF % VACANT W/SUBLEASE ASKING RATE 2014 ABSORPTION Q ABSORPTION AIRPORT/SOUTH OF THE RIVER A 2,368, , % 0 8.6% $ ,622 15,655 B 6,462, , % 61, % $ ,179 (32,862) C 2,937, , % 4, % $10.37 (37,557) 37,047 Totals: 11,767,692 1,703, % 65, % $ ,244 19,840 MINNEAPOLIS CBD A 13,805,787 1,719, % 222, % $17.25 (40,397) (268,321) B 13,944,964 1,690, % 171, % $ ,786 96,180 C 5,622, , % 0 8.3% $ ,916 4,805 Totals: 33,372,876 3,873, % 394, % $ ,305 (167,336) SOUTHWEST A 12,821,141 1,528, % 185, % $ ,188 11,210 B 8,675,473 1,384, % 200, % $11.88 (211,214) (38,233) C 3,105, , % 0 7.9% $11.00 (41,737) 81,010 Totals: 24,602,023 3,156, % 385, % $ ,237 53,987 ST PAUL CBD A 2,773, , % 45, % $14.56 (78,673) (27,009) B 5,717,264 1,055, % 9, % $ ,882 (63,654) C 3,002,535 61, % 0 2.0% $ ,454 17,658 Totals: 11,493,759 1,467, % 54, % $11.54 (52,337) (73,005) ST. PAUL SUBURBAN A 4,206,783 1,012, % 65, % $14.16 (3,157) 45,077 B 10,421,523 1,015, % 84, % $ , C 7,354, , % 0 4.2% $9.17 (25,595) (18,188) Totals: 21,982,869 2,334, % 149, % $ ,953 27,472 WEST/NORTHWEST A 8,381, , % 51, % $ , ,970 B 9,374,337 1,233, % 224, % $ ,774 19,760 C 5,166, , % 0 3.4% $ ,444 8,556 Totals: 22,922,243 2,034, % 275, % $ , ,286 TOTAL ALL MARKETS A 44,357,137 5,440, % 569, % $ ,337 (116,418) B 54,595,721 7,360, % 751, % $ ,112 (18,226) C 27,188,604 1,767, % 4, % $ , ,888 Totals: 126,141,462 14,569, % 1,325, % $ ,339,374 (3,756) 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.

7 MARKET REPORT Q OFFICE MINNEAPOLIS-ST. PAUL

8 MARKET REPORT Q OFFICE MINNEAPOLIS-ST. PAUL 502 offices in 67 countries US $2.3 billion in annual revenue 16,300 professionals and staff 1.7 billion* square feet under management $97 billion USD in total transaction value * Square footage includes office, industrial and retail property under management. Residential property is excluded from this total. All statistics are for St. Paul 4350 Baker Road, Suite 400 Minnetonka, MN DIRECT Accelerating success.