Twin Cities Office Market: Slow Recovery Gets Slower

A new commercial real estate report cited “lethargic” demand for office space in the Twin Cities.

Twin Cities Office Market: Slow Recovery Gets Slower

While there are myriad economic indicators, pundits, and forecasts available, you can gauge the general health of the economy by asking one question: Are companies leasing more office space?

The answer, according to the latest local market statistics from Bloomington-based Cushman & Wakefield/NorthMarq, is no.

In its latest survey, C&W/NorthMarq, a commercial real estate services company, reported “lethargic” demand for office space in the Twin Cities.

C&W/NorthMarq reported just 3,776 square feet of positive absorption in the entire Twin Cities office market in the second quarter—essentially a flat line. Absorption measures the change in occupied space between reporting periods. In other words, office tenants in the Twin Cities were only leasing about 3,800 more square feet of office space at the end of June than they were at the end of March.

The numbers reflect a steep drop from the 345,780 square feet of positive absorption during the first quarter. As demand for space slows, C&W/NorthMarq is cutting its forecast for the year from a projected 1.3 million square feet of absorption to 675,000 square feet. If that revised projection holds, it would translate to 30 percent less space than the 967,000 square feet of absorption posted in 2012.

Dan Gleason, an executive director with C&W/NorthMarq, said that back in January, commercial real estate brokers were feeling more optimistic about the outlook for the year.

“Our slow recovery . . . has just gotten slower,” Gleason said. “Whether that’s temporary or not, we’ll just have to wait and see.”

The bottom line? Companies are not adding enough jobs, which drives demand for office space.

“We’re just not seeing the jobs being added,” Gleason said.

C&W/NorthMarq reported the overall metro office vacancy rate at 17.5 percent at the end of the second quarter, down from 18 percent a year ago. The semi-annual survey tracks 71.7 million square feet of multitenant office space across the Twin Cities. There is currently 12.5 million square feet of vacant office space across the metro.

Another surprise in the numbers: Downtown Minneapolis posted 104,272 square feet of negative absorption during the first six months of the year as tenants shed space. The office vacancy rate in downtown Minneapolis is 16.8 percent.

Although vacancy remains much higher in downtown St. Paul (23.6 percent), the capital city saw 37,314 square feet of positive absorption during the first six months of the year.

But overall, companies are continuing a trend of using less space per employee. That means that even companies that haven’t trimmed jobs don’t require as much office space as they once needed.

“Even though it feels like businesses are doing better . . . they’re not taking as much space,” said Brent Erickson, a senior director with C&W/NorthMarq who focuses on downtown Minneapolis. “They’re trying to be more efficient. They’re trying to be more collaborative.”

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