MARKET INSIGHT

Office vacancy rate continues to rise, with bright spot in the West submarket

By: Nancy Powell, Vice President – Real Estate Advisory

Low unemployment rates can often align with a strong office market, but the Twin Cities office market continues to experience negative office absorption despite the strong employment numbers according to MNCAR/REDI’s Q3 market data. In Q2, the Twin Cities overall unemployment rate dropped to 2.6% while growth in “typical” office jobs decreased during the same period.

Office vacancies are rising, with overall market vacancy coming in at 18.3% and multi-tenant office properties at 22.6%. The bright spot continues to be the West market, showing a positive absorption of 31,300 square feet in Q2.

All eyes are on the Federal Reserve’s September report– as many owners are suffering from the combination of increasing vacancy rates, high interest rates and a labor shortage.  A rate cut would be a welcome reprieve. Despite the high vacancy rates, it isn’t generally a slam dunk for tenants, as owners are maintaining rental rates to preserve their investment value.

Q3-2024 Minneapolis-St. Paul Office Market Summary

ECONOMIC OVERVIEW:

According to the Bureau of Labor Statistics (BLS), the unemployment rate for the Mpls-St Paul metropolitan statistical area (MSA) increased 70 basis points to 3.9% for August 2024 from 3.2% for August 2023. The unemployment rate for the US was at 4.1% in September 2024 increasing 30 basis points from last year. State of Minnesota unemployment rate was 3.3%. The Mpls-St Paul MSA saw an decrease in job growth while office decreased in job growth in professional, financial and information with 21,800 during the same period.

MPLS-ST. PAUL AREA EMPLOYMENT STATS:

MARKET OVERVIEW:

The Mpls-St Paul office market consists of 127.0 msf of space in seven metro counties. This region posted (768,500) sf of negative absorption for Q3 2024 and showed an overall vacancy rate of 19.2% for all properties. This quarter showed (1.3) msf of direct negative absorption and subleases accounted for 602,000 sf positive absorption. This was the result of sublease vacancy of 725,000 sf changing to direct vacancy this quarter. Multi-tenant only properties posted 23.9% vacancy with (476,400) sf negative absorption. During Q3 2024 there were eight construction projects throughout the market totaling 1.5 msf.

MARKET HIGHLIGHTS:

During Q3 2024, the market experienced over 1.3 msf of leasing activity in 341 transactions. The Mpls Northloop market had the most direct positive absorption of 85,000 sf led by KPMG leasing 56,000 sf as they vacated 51,400 sf in Mpls Core market. The Southwest market posted the most in negative absorption of  (198,700) sf due to CH Robbinson vacating 153,000 sf. Sixty eight properties with 2.6 msf sold for $154.9 million this quarter.

MARKET MAP:

Q3 2024 Office Market Report is created by Minnesota Commercial Real Estate Association. For more information, you can reach them at: www.mncar.org

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