It’s been a long, slow climb back from the recession for commercial real estate. But many developers are now bullish on projects that had been on the endangered species list for many years: new office buildings.
At the outset of 2016, five new office projects—totaling roughly 2.1 million square feet of new space—have just been finished or are nearing completion. Across the metro, there are several additional proposals for new office projects on the drawing board. Commercial real estate veterans say that it’s the busiest time for new office construction since the late 1990s.
The T3 project in the North Loop of downtown Minneapolis is the strongest signal for the improving fortunes of the local office market. (T3 stands for “timber, transit and technology.”) Houston-based Hines, a global real estate developer and owner with a significant presence in the Twin Cities, broke ground on the project in July 2015. Hines charged ahead on a spec basis, with no leases in hand. T3, set to open this coming fall, is being touted as a building that fits the trend toward collaborative, open office layouts.
The emerging North Loop neighborhood has become ground zero for many up-and-coming companies. The surrounding area is rich with apartments, restaurants, transit and entertainment options. That can be a draw for workers who want to be close to such amenities. But office space, largely found in converted brick and timber buildings in the North Loop, has become increasingly tough to find as the neighborhood’s popularity has grown.
In his read of the market, Bob Pfefferle, a director with the Minneapolis office of Hines, says that there are now “limited large blocks of space” available in the North Loop. Pfefferle says that given the “boutique” scale of the T3 building—221,500 square feet—that it was a reasonable risk to build on spec, and that interest from prospective tenants has been “robust.”
New building = higher rents
Most market watchers say that if a spec office building can work, it can succeed in this, Minneapolis’ hippest new neighborhood. At the same time, competing developers and brokers are watching T3 closely. How T3 fares will be a bellwether for the local office market in 2016. One key question: Will tenants pay higher rents to be in a new building?
Hines is quoting net rental rates of $22 per square foot for T3. That’s a notable premium from rental rates in older buildings. At the end of June 2015, Bloomington-based Cushman & Wakefield/NorthMarq reported the average net rent for Class A space in downtown Minneapolis at $17.63 per square foot.
“I think the rates that these new buildings require is still at the very high end of what people are willing to pay,” says Mike Salmen, managing principal with the Minneapolis office of Houston-based Transwestern. “I’m not sure there’s an answer yet.”
Veteran office broker Jim Damiani, senior vice president with the local office of Colliers International, says that tenants are making more efficient use of space. That may mean that they can afford steeper rents if they are leasing less overall space. He adds that it’s increasingly important for companies to find spaces that can help attract and retain employees.
“There are a fair