Much like the opening line in A Tale of Two Cities, these are the "Best of Times" and the "Worst of Times" for the Twin Cities Office Market.   Your perception of what time this is relates directly to whether you are a user or an investor of real estate.

On November 18, the Twin Cities Chapter of NAIOP (National Association of Industrial and Office Parks) held its annual Office Update.   While the panel of speakers tried to remain upbeat, the fact is that the Twin Cities Office Market remained stagnate throughout 2010.  Vacancy rates approached historical highs, demand remained low, and absorption was almost non-existent while rental rates and property values continue to drop.   The panel offered the audience a glimmer of hope as expansions in healthcare, education and the federal government helped to stabilize occupancy levels in 2010.  Nevertheless, in many ways, these are the "Worst of Times" for investors.

While the above facts may be devastating to landlords, now could be the "Best of Times" for Tenants and users looking to buy property.  Average quoted net rents dropped $1.57 PSF or 12% during the last year.  Effective or true rates are even lower.  Likewise, real estate values have fallen by 30% or more, allowing users to purchase buildings for less than replacement cost.   As a result, rental rates and sale prices are now at virtually the same level as they were two decades ago. 

Much like the economy, the recovery of the office market has been slow.  This past year saw an anemic 162,000 square feet (SF) of positive absorption with almost 14M SF of vacancy in a universe of 76M SF.  While this was a monumental improvement over last year's results (negative absorption of over 1.4M SF), the vacancy rate only dropped .5% to 18.2%.  More importantly, average annual absorption over the last decade was only 289,000 SF.  This equates to a 48-year supply of office space based on the current vacancy of 13.8M SF.  Even if 2009's horrific performance is removed from the equation, we still find average absorption at 433,000 SF per year - leaving a 32-year supply of office space. 

A significant change has been occuring in the way our society works, particularly in Corporate America.  Gone are the days of private offices for all but Senior Executives.  Greater efficiency in the form of smaller workstations with shared meeting areas (hotelling) have reduced work space needs for many companies by 10%-20%.  Likewise, shadow space, or space occupied but not used, is routinely estimated to currently exceed 10% for users of all types.  Even with modest job growth of just 2% annually it will take five years or more before this space is absorbed and demand increases. 

The bottom line is that until the economy picks up and in particular starts to produce meaningful job growth, the office market will continue its poor performance.  Until that time, rental rates will continue to remain flat and owners will have a difficult time filling vacancies.  Most experts agree that this may continue for another 18 to 24 months.  

Notable Transactions

Gaughan Companies Sells Retail Investment

Julie Nash Smith and John Chirhart represented the seller of Apollo Crossings, a 15,000 SF multi-tenant retail center located at I-35W and Lake Drive in Lino Lakes.  The building sold for $1.635M after six months on the market.  The project is 100% leased and features the Red Oak Steak and Wine restaurant, Anytime Fitness, OSI Physical Therapy and Precision Tune.  The buyer was represented by Integrated Real Estate Services.