Twin Cities office vacancy stabilizing, Colliers report says

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Office vacancy rates have begun to plateau, signaling the market is beginning to stabilize in the post-pandemic landscape, according to a 2024 first-quarter report released by Colliers this week.

The vacancy rate for the Twin Cities metro sits at 13.8%, according to the report. The third and fourth quarters of 2023 had vacancy rates of 13.8% and 13.6%, respectively.

The net absorption for the first quarter was at negative 212,000 square feet, although the report points to Cargill’s vacating of its 260,000-square-foot office along the Interstate 394 corridor. Without this, the area would have seen 47,000 square feet of positive net absorption, the report says.

As a result of increased competition from a higher-than-pre-pandemic vacancy rate, rent has begun to stagnate, according to the report. Class A and B office rents are down year-over-year. The report says it’s “unclear” if the stabilized vacancy will bring rents up.

“We’re seeing a number of different metrics indicate some stabilization occurring,” Colliers research analyst Jesse Tollison said. “Vacancy is not ticking up at the rate it was over the past couple of years, We’re seeing indications of positive absorption and positive demand. We’re seeing subleases taper off as well. We’ve seen two quarters of consistent sublease drop off.”

The report puts vacancies in the Minneapolis central business district and St. Paul central business district at 21.0% and 12.3%, respectively. Tollison said the trend of stabilization is one seen in Minneapolis too.

“We’re seeing that same kind of dynamic occur in the CBD as well as in the overall metro — signs indicating stabilization,” Tollison said. “Positive absorption means that while vacancy may remain elevated, demand exists, and we’ll be knocking that vacancy down over time.”

The potential of stabilization makes Adam Duininck, the president of the Minneapolis Downtown Council, cautiously optimistic about the future. He said it can help give a clearer understanding of what the post-pandemic landscape looks like if the trend holds.

“The glass half full reading is that it’s good to know where we’re at, and I think, in terms of real estate interest, a lot of property and building owners are telling me that they’re finally getting a little bit more active interest in calls,” Duininck said in an interview Thursday. “But then the glass half empty, more pessimistic reading — we still don’t really know where we’re at valuations-wise, and that’s just a little unsettling.”

One policy Duininck advocated, saying it would help downtowns, is the Conversion of Underutilized Buildings Tax Credit. Modeled after the Historic Structure Rehabilitation Tax Credit, the tax credit would help stimulate the repurposing of buildings with vacancy of 50% or higher for at least five years. Two bills are being debated in the Legislature on the tax credit, House File 5191 and Senate File 5194.

“What it does at a time when there’s an excess amount of real estate that is in need of that kind of support and there’s challenges around the resources and interest rates to make these deals happen — the conversion credit could help be the bridge that makes projects pencil out or not,” Duininck said.

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