May 11, 2022 - Real Estate

Twin Cities companies are dumping office space fast

Illustration of an office chair neon sign with the word vacancy flashing next to it
Illustration: Sarah Grillo/Axios

Be the Match opened a state-of-the-art corporate headquarters next to Target Field seven years ago — a seven-story building with 240,000 square feet, enough room for 900 employees.

  • Now the bone marrow transplant matching nonprofit is trying to sublease the top two floors of the building in hopes of shedding about 30% of its office space.

Why it matters: Companies across the Twin Cities are making similar decisions as they adopt hybrid work models, driving vacancy rates to levels not seen in decades, or ever.

  • Office towers pay huge property tax bills, and rising vacancies diminish their value, which places more of the property tax burden on homeowners and apartment buildings.

By the numbers: The amount of sublease space on the market in the past two years has more than doubled to 2.6 million square feet, according to Cushman & Wakefield data.

  • That has driven the vacancy rate for the Twin Cities from 18% to 25% in the past two years, and the downtown Minneapolis rate has reached 30%.

Zoom in: Target is trying to sublease 850,000 square feet it vacated in downtown's City Center tower.

  • Suburban companies like Prime Therapeutics and Pearson, meanwhile, have also listed some of their space for sublease.

What they're saying: Real estate broker Eddie Rymer of Jones Lang LaSalle said it's a great time for tenants to look for space because subleases have lower asking rates and landlords are offering better deals.

  • "It's just undercutting the market," he said of the sublease space.

What to watch: Things could get worse for landlords before they get better as more companies have expiring leases and will have the option to downsize their office footprint.

  • Voya Financial last week announced it's moving within downtown Minneapolis, but downsizing from a 148,000-square-foot space to 37,000 square feet, according to Minneapolis/St. Paul Business Journal.
  • "The vacancy rates are going to continue to go up as leases expire and (companies) try to get by with less space," Jim Damiani, executive managing director at commercial real estate firm Newmark, told Axios. "We're going to have to have conversions to hotels and apartments and condos before it kind of stabilizes."

Yes, but: Companies could find in a year or two that the hybrid model isn't working. That's why Damiani advises his clients to get flexibility in their new leases so that they can expand if they need to call in more workers from home.

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