2015.09.02 EDC Packet - Laserfiche WebLink

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MARKET REPORT 1 02 2015 1 OFFICE I MINNEAPOLIS -ST. PAUL TENANT ACTIVITY (CON'T.) One noticeable trend in the office market is the increase in lease terms, with a typical five-year lease being replaced by seven- or ten-year terms. Two possible factors for these longer terms include tenants and landlords who don't want to incur transaction costs again, and the high costs of tenant improvements require longer lease terms to cover them. New workplace innovation designs are costly, so longer lease terms are needed to recapture up -front costs. INVESTMENT SALES The investment sales market is seeing signs of growth and strengthened activity as well. Now that buyers' and sellers' expectations are more aligned after the recession, we anticipate a large uptick in sales, especially among Class B properties and suburban office properties. In fact, we anticipate nearly 60 percent of the suburban office market will be for sale within the coming years. Investors are realizing that returns are leveling off, and are willing to take a lesser return and are lowering their expectations as they discover that rates of return are similar all around the globe. Cap rates are bottoming out, so owners who purchased properties at low rates are finding it to be a great time to sell. However, this activity will most likely end quickly, especially if there are any signs of a market downturn, or if the sale was made without good underwriting and cap rates were based on unsustainable rental rates. FUTURE TRENDS Activity in the coming quarters will include Normandale Lake losing a couple of its larger tenants, such as Weber Shandwick and Varde Partners, to the Minneapolis CBD. Sales activity in the Southwest is picking up, with the owner of the 92 -percent -leased Northland Plaza selling a 70 percent ownership stake to Sterling Real Estate Trust, and IRET's entire portfolio on the market with a buyer selected. Swervo Development sold 510 Marquette as a part of a three -building package, which included the Colwell Building and 300 1st Avenue North for $87.5 million. Now that owners are able to achieve optimal pricing for their assets, activity will most likely continue to increase, and many higher -quality Class A buildings will continue to trade hands. In the future, we predict the Minneapolis -St. Paul market to be seen by national investors and companies as a vibrant, urban area, and anticipate more out-of-town investors and tenants taking up residence here. We also anticipate an uptick in vacancy rates, as large companies such as Wells Fargo and UnitedHealth Group consolidate their real estate into large corporate campuses. COLLIERS INTERNATIONAL I MINNEAPOLIS -ST. PAUL