Strong Leasing Velocity Points to a Positive Office Market

Research & Forecast Report > MINNEAPOLIS-ST. PAUL Office Q1 2018 Strong Leasing Velocity Points to a Positive Office Market Vacancy and Absorption Trends The first quarter of 2018 brought a total multi-tenant absorption of 126,838 square feet, which brings the total vacancy rate to 14.7%. This is the second quarter in a row with a positive absorption figure of over 100,000 square feet, a sustained growth pattern that has not happened since 2015 due to a number of corporate consolidations and new single-tenant construction. The two quarters of modest, positive absorption has stabilized the vacancy rate at 14.7%, which is close to the historical market average of 14.5%. Once again, the West/Northwest had the lowest vacancy rate of our six submarkets, a trend that has occurred for eight of the last ten quarters. The 12.3% vacancy for West/ Northwest is over 2% lower than the metro average. The St. Paul CBD has the highest vacancy rate in the metro, with 16.5% vacant. Q1 Market Indicators VACANCY NET ABSORPTION RENTAL RATE Relative to prior period MSP Office Submarket Map 610 94 35W The Minneapolis CBD submarket had the most absorption, with the West/Northwest having the second highest absorption figures. In addition to absorption, these two markets continue to set the highest rents in urban and suburban markets, with Minneapolis CBD receiving Class A rates of an average of $19.23 and the West/Northwest Class A average of $18.41. WEST/ NORTHWEST 494 169 394 694 MINNEAPOLIS CBD 100 35E 51 36 ST. PAUL CBD 94 694 The largest change in vacancy in Q1 was US Bank, occupying the entire 280,000-square-foot Excelsior Crossings building in the Southwest, one of three buildings on the campus. The building previously was a single-tenant building, and will remain as such, so it will not be counted in our multi-tenant statistics. 62 SOUTHWEST 35W 494 55 35E AIRPORT / SOUTH OF THE RIVER ST. PAUL SUBURBAN 10 There were several significant leases signed this quarter that have yet to take occupancy. The transaction volume was clearly centered around the Southwest and Minneapolis CBD, where all 12 of the largest leases signed happened in one of these submarkets. We expect to see strong positive absorption

Vacancy and Absorption Trends (con't.) numbers in these submarkets for the rest of the year because of these completed transactions. The largest lease transaction was RBC who announced that they will be part of a new construction project in the Minneapolis CBD for roughly 310,000 square feet. Jostens and Dairy Queen both signed new leases in the Southwest for 58,000 and 50,000 square feet, respectively. Office construction has been very restrained since the recession, especially with multi-tenant buildings. In recent months however, we have a number of new office projects break ground. The largest project under construction is a 410,000-square-foot build-tosuit for Prime Therapeutics in the St. Paul Suburban submarket. However, the city of Minneapolis remains the largest hub for new construction, with 500,000 square feet under construction in the Minneapolis CBD and another 270,000 square feet of multi-tenant space under construction in Minneapolis proper. The largest sale was Capella Tower, a 52-story Class A tower in the Minneapolis CBD the final sales price was $255 million ($183 per square foot). The next two largest sales both happened in Minneapolis as well, with 250 Marquette Plaza selling in the CBD for $88.4 million, and Broadway Ridge, a three building complex, just outside of the CBD selling for $49 million. Vacancy 15.5% 15.0% 14.5% 14.0$ 13.5% 13.0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2014 2015 2016 2017 2018 Absorption 500,000 300,000 100,000 0 (100,000) (300,000) (500,000) (700,000) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2014 2015 2016 2017 2018 Inventory by Submarket Total Average Rental Rates $14.50 $14.00 Minneapolis CBD Southwest West/Northwest St. Paul Suburban Airport/South of the River St. Paul CBD $13.50 $13.00 $12.50 $12.00 $11.50 $11.00 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2014 2015 2016 2017 2018 Sales Activity PROPERTY ADDRESS CITY BUYER SELLER PRICE SF $/SF Capella Tower 201 S 6th Street Minneapolis SRI Eleven Minneapolis 225 Minneapolis 225 Holdings $255,000,000 1,391,761 $183.22 Marquette Plaza 250 Marquette Avenue Minneapolis KBS Real Estate FRM Associates $88,400,000 522,656 $169.14 3001 Broadway Street NE 3433 Broadway Street NE 1300 Godward Street 3001 Broadway Street NE 3433 Broadway Street NE 1300 Godward Street Minneapolis Tria Orthopedic Center 8000-8100 Northland Drive Bloomington Altus Properties The Chicago Trust Company Suntide Commercial Realty $49,000,000 551,349 $88.87 United Properties $35,250,000 112,038 $314.63 2601 88th Street West 2601 88th Street West Bloomington Green Door Capital LSREF4 Rebound $26,250,000 278,532 $94.24 330 S 2nd Avenue 330 S 2nd Avenue Minneapolis Spaulding & Slye GPT Properties $20,000,000 177,274 $112.82 310 Smith Avenue North 310 Smith Avenue North Saint Paul HSRE-MN Ritchie IRET Properties $16,500,000 48,211 $342.25 Sons of Norway 1455 Lake Street West Minneapolis MN Lake Street Apartments Sons of Norway $15,500,000 63,654 $243.50

Twin Cities Office Leasing Overview Colliers MSP experts weigh-in on submarket trends. Nate Karrick Senior Associate Colliers MSP 952 897 7722 nate.karrick@colliers.com 94 610 The 394 Corridor remains strong amid rising rates and diminishing concessions. Landlords willing to invest in common area upgrades and improving the tenant experience are seeing the highest levels of occupancy. While a slow migration to the CBD continues, office space along the 394 Corridor will remain in high demand due to its amenity rich product, central location and free employee parking. 494 WEST/NORTHWEST 169 394 COORIDOR 394 Kevin O'Neill Senior Vice President Colliers MSP 952 897 7724 kevin.oneill@colliers.com 100 62 There is a continued flight to quality in the Southwest market. Tenants are looking for full amenity packages and contemporary space. Landlords are responding by upgrading common areas and adding amenities when possible. The buildings that have recently reinvested in their common areas are producing the most absorption. 494 COORIDOR SOUTHWEST INVESTMENT PERSPECTIVE: "Creative and suburban office spaces, particularly in amenity-rich areas, are the most sought-after property types. With a number of consolidations and renovations bringing over 2 million square feet of new multi-tenant space to the Minneapolis CBD, Class B office building investors (fungible office space) are feverishly improving the property to provide amenities with fresh aesthetics in order to avoid competing on price alone. Bob Pounds Senior Vice President 952 897 7753 bob.pounds@colliers.com Parking still matters. The coolest space in the market still needs to have parking options to be competitive."

35W Mike Doyle CCIM Vice President Colliers MSP 952 837 3076 mike.doyle@colliers.com 694 MINNEAPOLIS CBD 51 35E 36 ST. PAUL SUBURBAN 694 Minneapolis CBD rents have been trending up consistently due to construction cost and owners investing significant capital into their buildings. We expect this to continue for the foreseeable future because tenants are willing to pay more for quality office space. 94 35W 35E ST. PAUL CBD Eric Rapp SIOR Senior Vice President Colliers MSP 952 837 3060 eric.rapp@colliers.com 494 AIRPORT / SOUTH OF THE RIVER 10 Two large users vacated the St. Paul CBD over the past year, while two others downsized, causing significant negative absorption. Leasing activity is moderate, with most new leases signed at buildings with attractive amenity packages. TENANT PERSPECTIVE: "With unemployment at record lows and a high demand for tech savvy talent, employers/tenants are focused on recruitment and retention. Tom Hoffman Senior Vice President 952 897 7758 tom.hoffman@colliers.com Landlords who put resources into their buildings' shared amenities and 'workplace communities' are rising to the top of the preferred list on a tenant's office search."

Submarket Star Renovated space in Minneapolis CBD is hitting the market, adding options A major trend piece over the last several years has been the number of renovations happening in the Minneapolis CBD. The lines between Class A and Class B space has blurred, with the addition of Class A amenities in older buildings. Many of these projects have finished recently, and the demand for this new and refreshed space is now leading the submarket. The Fifth Street Towers is an example of a building that underwent major renovations as the two buildings were struggling with major vacancy issues. The buildings in Q1 had a combined 125,000 square feet of new leases. The desire for new space and a major refresh, without living through renovations, seems to be a main driver for RBC, who announced this quarter that they would anchor a new office construction by United Properties. This deal equates to around 310,000 square feet. The North Loop, which has two large office developments under construction right now, continues to be a destination for tenants desiring the brick and timber urban-creative feel, with both TractorWorks and the Colwell Building securing new leases. The Minneapolis CBD continues to outpace other submarkets in total transaction volume. The submarket is significantly outpacing other submarkets in multi-tenant construction, due to the continued demand. Future Outlook SQUARE FEET Construction Completions 1,800,000 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 Looking Ahead 2013 2014 2015 2016 2017 2018 Completed Expected Completion 2018 VACANCY NET ABSORPTION RENTAL RATE > Annual office construction completions expected to be second highest since 2007. > Minneapolis CBD will lead submarkets in absorption as deals signed will occupy later in the year. > Rates will rise in key micro-markets with supply constraint of very in-demand properties. Lease Activity TENANT PROPERTY ADDRESS CITY LEASED SF SUBMARKET TYPE RBC Wealth Gateway Tower Nicollet Mall and 3rd Street Minneapolis 310,000 MPLS CBD New Jostens Minnesota Center 7760 France Avenue South Edina 58,157 Southwest New Dairy Queen Normandale 8000 Tower 8331 Norman Center Drive Bloomington 50,000 Southwest New Amplifon Fifth Street Towers 150 S 5th Street Minneapolis 50,000 MPLS CBD New US Bank US Bankcorp Center 800 Nicollet Mall Minneapolis 50,000 MPLS CBD Expansion Messerli and Kramer Fifth Street Towers 100 S 5th Street Minneapolis 37,255 MPLS CBD Renewal Hartford Fire Insurance Co. Norman Pointe II 5600 American Boulevard Bloomington 33,100 Southwest Renewal GlobalTranz Capella Tower 201-225 S 6th Street Minneapolis 23,408 MPLS CBD New Marquette Hotel IDS Center 80 S 8th Street Minneapolis 23,179 MPLS CBD Renewal Patterson Thuente IDS Center 80 S 8th Street Minneapolis 22,000 MPLS CBD Renewal

Market Statistics SUBMARKET # BLDGS BUILDING SF DIRECT AVAILABLE SF DIRECT VACANT SF % DIRECT VACANT W/ SUBLEASE VACANT SF % VACANT W/ SUB" AVERAGE RATE AVERAGE OPERATING ABSORPTION YTD ABSORPTION Airport/South of the River A 21 1,883,357 412,446 220,871 11.73% 220,871 11.73% $16.02 $11.11-47,240-47,240 B 62 4,271,786 746,326 712,559 16.68% 712,559 16.68% $12.42 $8.98 4,903 4,903 C 29 1,273,707 137,697 132,400 10.39% 137,200 10.77% $9.14 $9.50-151 -151 Totals: 112 7,428,850 1,296,469 1,065,830 14.35% 1,070,630 14.41% $12.78 $9.62-42,488-42,488 Minneapolis CBD A 25 14,564,435 2,024,725 1,953,896 13.42% 1,964,500 13.49% $19.23 $14.17 25,078 25,078 B 90 12,988,172 2,735,911 2,488,853 19.16% 2,552,337 19.65% $15.79 $9.61 2,518 2,518 C 29 2,216,229 227,988 267,382 12.06% 267,382 12.06% $13.68 $8.66 60,476 60,476 Totals: 144 29,768,836 4,988,624 4,710,131 15.82% 4,784,219 16.07% $16.33 $10.77 88,072 88,072 Southwest A 61 9,211,074 1,553,515 1,308,987 14.21% 1,308,987 14.21% $16.69 $12.69 25,122 25,122 B 90 6,176,050 1,296,653 942,318 15.26% 942,318 15.26% $12.83 $10.37-588 -588 C 22 870,251 119,783 76,592 8.8% 79,592 9.15% $9.11 $7.84 1,912 1,912 Totals: 173 16,257,375 2,969,951 2,327,897 14.32% 2,330,897 14.34% $14.65 $11.35 26,446 26,446 St. Paul CBD A 7 2,491,750 516,287 299,503 12.02% 299,503 12.02% $12.31 $12.26-43,288-43,288 B 26 4,515,000 836,627 875,777 19.4% 875,777 19.4% $11.21 $10.06 36,225 36,225 C 12 639,936 88,719 84,044 13.13% 84,044 13.13% $15.17 $6.00 0 0 Totals: 45 7,646,686 1,441,633 1,259,324 16.47% 1,259,324 16.47% $12.24 $10.43-7,063-7,063 St. Paul Suburban A 36 2,199,057 443,769 396,811 18.04% 396,811 18.04% $14.37 $10.88 734 734 B 100 6,286,769 728,245 865,777 13.77% 865,777 13.77% $12.13 $9.07 0 0 C 34 1,912,372 376,684 180,986 9.46% 180,986 9.46% $11.31 $7.67 0 0 Totals: 170 10,398,198 1,548,698 1,443,574 13.88% 1,443,574 13.88% $12.98 $9.43 734 734 West/Northwest A 42 5,099,479 775,997 522,457 10.25% 522,457 10.25% $18.41 $13.33 76,073 76,073 B 95 6,196,550 1,511,145 982,978 15.86% 986,832 15.93% $14.36 $10.31-17,349-17,349 C 41 2,057,208 171,830 139,739 6.79% 139,739 6.79% $9.92 $7.42 2,413 2,413 Totals: 178 13,353,237 2,458,972 1,645,174 12.32% 1,649,028 12.35% $15.16 $10.88 61,137 61,137 Total All Markets A 192 35,449,152 5,726,739 4,702,525 13.27% 4,713,129 13.3% $16.73 $12.63 36,479 36,479 B 463 40,434,327 7,854,907 6,868,262 16.99% 6,935,600 17.15% $13.66 $9.76 25,709 25,709 C 167 8,969,703 1,122,701 881,143 9.82% 888,943 9.91% $11.17 $8.23 64,650 64,650 Totals: 822 84,853,182 14,704,347 12,451,930 14.67% 12,537,672 14.78% $14.49 $10.54 126,838 126,838 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.

413 offices in 69 countries on 6 continents United States: 145 Canada: 28 Latin America: 23 Asia Pacific: 39 EMEA: 131 For further information please contact: Tyler Allen Senior Research Analyst 952 897 7706 tyler.allen@colliers.com $2.7 billion in annual revenue 2 billion square feet under management 5,400 professionals and staff Colliers International Minneapolis-St. Paul 4350 Baker Road, Suite 400 Minnetonka, MN 55343 colliers.com/msp SUBSCRIBE TO OUR BLOG