The Next Major Office Building

Predicting new office development in the metro area requires a seasoned soothsayer. Conflicting real estate market indicators have some observers uncertain about when and where the next new office buildings will rise in the area—and if they’ll be affordable at the pricey rents landlords may need to charge.

Construction costs and land prices have been on an unforgiving rise, yet interest rates remain low, keeping the cost of financing fairly inexpensive. First quarter 2007 office absorption rates suggest promise, but the rental rates being charged in new Class A suburban towers to cover the cost of raw materials and land are sure to give some potential tenants pause.

Amid those mixed signals, there is a point of consensus: most real estate experts believe plans for a new office building in downtown Minneapolis will be announced in the next 12 to 18 months, with delivery likely in 2010 or 2011. With Class A vacancy shrinking among top floors of Minneapolis office high rises and along Nicollet Mall—vacancy in both areas is below 10 percent—demand has grown for large blocks of contiguous space and the benefits of a downtown address.

Few, however, think a developer would build such a building without a client or clients signed on. “It will likely be a single-user building or one that is heavily anchored by a single tenant,” says Jeff LaFavre, managing principal of Colliers Turley Martin Tucker, a commercial real estate firm located in Minneapolis.

Pat Mascia, senior vice president of Twin Cities operations for Duke Realty Corporation, believes large corporate users will welcome the arrival of new Class A space downtown. “If there is, say, three million square feet of vacancy in a downtown area, but it is split up into 50,000- or 60,000-thousand-square-foot chunks, and there is nowhere to put a 200,000-square-foot user, that creates real opportunity for development,” he says.

To make a new building feasible, landlords will most likely have to charge rents of $20 and up per square foot net, LaFavre believes. Average rental rates downtown today run in the mid teens.