Office market still in the tank despite glimmers of hope
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Illustration: Annelise Capossela/Axios
There are good signs for downtown Minneapolis as workers flow back into offices, but the real estate situation is as messy as ever.
Why it matters: Residential property taxpayers were hit with hefty increases this year in part due to an erosion of office tower values, so much so that the City Council is exploring adding an income tax to help pay for municipal services.
- Despite some positive metrics in new leasing reports, a rebound in those values — and therefore property tax revenues — is unlikely to happen anytime soon.
Driving the news: Several commercial real estate brokerages reported this month that the Twin Cities metro posted its first positive quarterly absorption number in years. Absorption is a key metric in the industry and when it's positive it means there's strong demand for space.
- "It looks like the market is slowly starting to turn around," said Sam Newberg, research director for JLL Minneapolis, which reported 178,900 square feet of positive absorption in the last quarter.
Reality check: With 20 million square feet of vacant space in the Twin Cities metro — including more than nine million in downtown Minneapolis — it would take nearly 30 years to fill up all the empty offices at the rate JLL reported.
- Plus, the vacancy rate is likely to rise again later this year when the 960,000-square-foot Ameriprise tower in downtown is added to the market after its single tenant, Ameriprise Financial, consolidates its workers to another downtown property.
State of play: Things are dicey. As commercial real estate firm Newmark points out in its report, office landlords are facing mounting financial pressure. Some lack capital to pay for buildouts for new tenants and others are unable to refinance their properties.
- Many landlords have handed the keys to their building to their lender, or have had their keys taken from them.
- This is also happening in the suburbs and in downtown St. Paul, where the office vacancy rate has risen to an eye-opening 36%, well above the metro level of 20%-25%, according to Newmark.
- Newmark predicts that vacancy rates will continue to rise through 2028, though it notes that office-to-residential conversions could offset some of this.
What we're watching: If all of these companies calling their workers back into the office will realize they don't have enough space.
- JLL Minneapolis-St. Paul Managing Director Brent Robertson said he's already seeing tenants move from small spaces they leased on short-term deals during the pandemic into bigger spaces.
- But Newmark says more tenants are still downsizing than upsizing.