MINNEAPOLIS—The office markets in secondary cities were overlooked during the first years of the recovery as investors instead hunted for deals in core markets like New York and San Francisco. But the Twin Cities began popping up on the radars of many in 2013, and its vibrant economy made 2014 a record-setting year.
“There has been a lot of momentum building lately,” Tyler Allen, research analyst in DTZ's Minneapolis office, tells GlobeSt.com, primarily due to the extraordinarily low unemployment rate, currently 3.3% according to the Bureau of Labor Statistics, the lowest of any large metro region in the US. “That ends up affecting real estate.”
DTZ released its 2014 Annual Twin Cities Market Report yesterday, noting net absorption of nearly 1.5-million square-feet for the year, up from 682,095-square-feet in 2013. The metro area office market now has a 14.6% vacancy rate, down from 16.2% last year and the lowest in more than six years, and developers have 1.185-million-square-feet under construction, the most since 2007.
“Average asking rents within the Twin Cities office market are nearly 10% higher than one year ago, and office investment sales are seeing historic activity,” said Allen adds. Furthermore, buyers have started looking beyond the CBD, a focus for investors in 2013, and paying record prices for suburban properties.
“The thing that has been astonishing for us is the investment market,” he says. Record highs were recorded for overall sales price, suburban price per-square-foot and downtown price per-square-foot. “Those are the three most important check boxes and we hit them all in one year.”
MetLife and Allstate, for example, recently acquired Normandale Lake Office Park, a 1.7-million-square-foot, five-tower complex in suburban Bloomington from Sam Zell's Equity Group Investments for a little bit more than $368 million, about $100 million more than Chicago-based Equity paid for it in 2012 and the most ever for a Twin Cities office property.
The purchase was just one of the many big recent sales in the Twin Cities. Florida-based Beacon Investment Properties LLC bought the CBD's 55-story IDS Center in 2013 for $253 million, for example, and in 2014 KBS REIT II, Inc. sold suburban Minnetonka's 601 Tower at Carlson Center to Artis REIT for $75 million. The latter was the highest recorded price per-square-foot for a suburban property.
Allen refers to the areas around Normandale and the Carlson Center as “hot-spots,” and says each is filled with not just offices but retail, hotels and other uses. “The mixed-use environments are a little bit different than what you think of as ordinary suburban office complexes.”
In addition, all sit near highways and have excellent visibility. Just one mile away some buildings may have high vacancy rates and much lower rents, but in the hot-spots asking rents are similar to those in the CBD. And the hot-spots are spread throughout the region. In fact, of the six submarkets, most have nearly the same vacancy rate. “There is not one submarket that is outperforming the others.”
“Clearly a lot of people are zeroing in on the region,” Allen adds. Attracting so many investors from around the nation and even from overseas is somewhat new for the Twin Cities, “but it's proven to be a safe bet and the cost-of-entry is lower than in Chicago or San Francisco. There are just a lot of firms that want Minnesota in their portfolio.”
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Brian J. Rogal
Brian J. Rogal is a Chicago-based freelance writer with years of experience as an investigative reporter and editor, most notably at The Chicago Reporter, where he concentrated on housing issues. He also has written extensively on alternative energy and the payments card industry for national trade publications.
