Repositioned Office Product Driving Positive Market Change

Research & Forecast Report > MINNEAPOLIS-ST. PAUL OFFICE | Q2 2018

Q2 Market Indicators MSP OFFICE SUBMARKETS

610

94 35W

VACANCY NET ABSORPTION RENTAL RATE

694 35E Relative to prior period WEST/ NORTHWEST 51

494 MINNEAPOLIS 36

VACANCY AND ABSORPTION TRENDS CBD 694 394 ST. PAUL CBD At the mid-year point of 2018, we have seen a continued and 94 steady expansion of positive absorption in the multi-tenant 169 100 office market. There was a total positive 280,000 square feet 35W 55 35E ST. PAUL of absorption in Q2 in the Twin Cities metro, which brings the 62 SUBURBAN total 2018 absorption figure to 407,000 square feet. This positive 494 absorption and a lack of new multi-tenant construction deliveries, SOUTHWEST 10 brought the direct vacancy rate down to 14.33% in Q2. AIRPORT / SOUTH OF THE RIVER The largest changes in vacancy were in two recently renovated buildings—Baker Center in the Minneapolis CBD and West End Center in the West/Northwest office submarket. Both Class B buildings signed several new tenants after undergoing large-scale Inventory by Submarket repositions. Tenants are now starting to occupy these buildings, which is impacting our multi-tenant statistics for Q2.

The Southwest and Minneapolis CBD submarkets had the highest positive absorption totals in both Q2 as well as year to date; Minneapolis CBD St. Paul Suburban the Minneapolis CBD has seen 240,000 square feet of positive Southwest St. Paul CBD absorption and the Southwest reached 146,000 square feet year to West/Northwest Airport/South of date. Another strong performing submarket is the West/Northwest, the River which is holding the lowest overall vacancy rate of our six office submarkets at 11.47%.

Minneapolis-St. Paul Research & Forecast Report | Quarter 2 | Office | Colliers International VACANCY AND ABSORPTION Vacancy TRENDS (cont'd) 15.5% In terms of new leases signed this quarter, eight of the ten 15.0% largest leases were completed in the suburban submarkets versus the Minneapolis CBD. This is a significant change 14.5% from the past three years where the Minneapolis CBD was 14.0$ seeing many of the metro’s largest leases signed. Overall, 13.5% mid-year 2018 stats appear to support a growing demand 13.0% for suburban office product. Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2014 2015 2016 2017 2018 Overall, average rental rates have risen slightly from $14.45 to $14.47 with the Minneapolis CBD averaging the highest asking rents at $16.33 and Class A CBD buildings capping Absorption off at $19.23. For suburban submarkets, the West/Northwest has the highest rental rates with an overall average of 500,000 $15.02 with Class A rates netting out at $18.41. 300,000 100,000 The construction pipeline remains relatively constant with 0 several large deliveries expected in the second half of (100,000) 2018 and first half 2019. The Prime Therapeutics build- to-suit is the largest project set for completion, which (300,000) will be 400,000 square feet in the Airport/South of the (500,000) (700,000) River submarket. MoZaic East in the Southwest submarket Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 is currently under construction and will bring 185,000 2014 2015 2016 2017 2018 square feet of multi-tenant office space to the Uptown neighborhood of Minneapolis. Total Average Rental Rates The largest office product sale was 33 South 6th Street, also known as City Center, which sold for $320 million $14.50 and marks the highest sale of a Minneapolis CBD building $14.00 to date. Other notable sales were T3 in the North Loop $13.50 neighborhood of the Minneapolis CBD, which sold for $87 $13.00 million and Edinborough Corporate Center in the Southwest, $12.50 which sold for $14.45 million. $12.00 $11.50 $11.00 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2014 2015 2016 2017 2018

Lease Activity

TENANT PROPERTY ADDRESS CITY LEASED SF SUBMARKET TYPE

Cantel Medical 9800 at Bass Creek 9800 59th Avenue N Plymouth 159,000 Northwest New

nVent West End Center 5100 Gamble Drive Saint Louis Park 60,000 West New

Kimley-Horn Case Industrial Center 767 North Eustis Street Saint Paul 56,000 Northeast New

Amplifon Fifth Street Towers 150 S 5th Street Minneapolis 40,000 Mpls CBD New

CoBank West End Center 5100 Gamble Drive Saint Louis Park 30,000 West New

Magnet 360 West End Center 5100 Gamble Drive Saint Louis Park 30,000 West New

Total Expert 1600 Tower at West End 1600 S Utica Avenue Saint Louis Park 28,380 West Sublease

Country Financial Fifth Street Towers 150 S 5th Street Minneapolis 28,673 Mpls CBD New

Ascentis Windsor Plaza 11995 Singltree Lane Eden Prairie 27,000 Southwest New

Arthritis & Rheumatology SpartanNash S-7600 France Avenue Edina 21,352 Southwest Sublease Consultants, P.A.

Minneapolis-St. Paul Research & Forecast Report | Quarter 2 | Office | Colliers International OFFICE ACTIVITY

94 35W AIRPORT / SOUTH OF THE RIVER Under Construction: 0 Completed in 2018: 0

694 35E ST. PAUL MINNEAPOLIS CBD WEST/NORTHWEST SUBURBAN 51 Under Construction: 3 Projects | 776,700 SF Completed in 2018: 2 Projects | 134,043 SF 494 MINNEAPOLIS CBD 36 SOUTHWEST 694 Under Construction: 1 Project | 185,273 SF 394 Completed in 2018: 0

94 ST. PAUL CBD 169 100 ST. PAUL Under Construction: 1 Project | 60,000 SF CBD Completed in 2018: 0 35W 55 35E 62 ST. PAUL SUBURBAN Under Construction: 1 Project | 409,000 SF Completed in 2018 2 Projects | 202,575 SF 494 SOUTHWEST 10 WEST / NORTHWEST Under Construction AIRPORT / SOUTH OF THE RIVER Under Construction: 2 Projects | 179,525 SF Completed in 2018 Completed in 2018: 1 Project | 81,000 SF

INVESTMENT INSIGHT COLIN RYAN | SVP, INVESTMENT Given these examples and similar investment trends nationally, it is PROPERTIES & CAPITAL MARKETS likely downtown trophy assets will continue to trade at record pricing, 952 837 3093, [email protected] simply because there is more institutional and foreign capital trying to be placed than product on the market. Furthermore, Minneapolis At the halfway point of 2018, the office has strong fundamentals across the board and investors are attracted investment sales trend of urban flight to the yield positioning Minneapolis offers, verses some of the more has not slowed down, as evidenced primary markets. by the sales of HNA’s 33 South Sixth/ City Center and Hines’ T3, both Class A Medical office product continues to be in high demand from investors, trophy product in the Minneapolis CBD. however, because there is little to no product on the market, buyers from coast to coast are being extremely aggressive when bidding for The 33 South Sixth/City Center transaction demonstrates a stabilized medical office. Suburban office investment sales continue continued demand from foreign investors in Class A trophy assets in to lag behind downtown and medical in transaction volume and price, the U.S. The sale of T3 by Hines to LaSalle Investments should only as investors across the country have less demand for suburban assets serve to strengthen the brick and timber market in the Twin Cities. due to the volatile state of the product and unknown future as a whole.

Sales Activity

PROPERTY ADDRESS CITY BUYER SELLER PRICE SF $/SF

33 South Sixth 33 S 6th Street Minneapolis Samsung HNA Group $320,000,000 1,346,500 $197.62

LaSalle Investment Bit T3 Investors LLC T3 323 N Washigton Avenue Minneapolis $87,000,000 225,085 $386.52 Management Hines Interests LP Edinborough Corporate Altus Properties EverWest Real 3300 Edinborough Way Edina $14,450,000 101,206 $142.78 Center Investments LLC Estate Partners Elliot Bay Capital 1390 University Avenue W 1390 University Avenue W Saint Paul MSP Commercial $7,075,000 25,228 $280.44 Trust

1125 Energy Park Drive 1125 Energy Park Drive Saint Paul Metro Deaf School Mapp Property LLC $7,000,000 95,000 $73.68

Edgewood Real Estate 980 Rice Street 980 Rice Street Saint Paul MSP Commercial $5,590,000 15,562 $359.21 Investment Trust 2075 Ford Parkway Main Street Office 7645 Lyndale Avenue S 7645 Lyndale Avenue S Richfield $4,700,000 34,450 $136.43 LLC and WWRE LLC LLC Namakan Properties The James M 3200 Main Street NW 3200 Main Street NW Coon Rapids $4,625,000 45,255 $102.20 Inc c/o Bill Bailey Stanton Trust

Minneapolis-St. Paul Research & Forecast Report | Quarter 2 | Office | Colliers International SUBMARKET DEEP DIVE Airport / South of the River

> The Airport/South of the River submarket is the smallest submarket by total square footage. Vacancy rates ended Q2 at 14.36%, which is consistent with the metro average of 14.33%. Q2 had 1,300 square feet of positive absorption and is negative 41,000 square feet to date overall.

> There have not been any major leases signed in 2018 for this submarket. Tenant movement so far in 2018 has been limited to smaller spaces.

> There are no current under construction projects for this submarket. The last office building to come online was delivered L&H Station in 2017 and was part of the Lake & Hiawatha redevelopment L&H Station located at 2225 E Lake Street in Minneapolis project in Minneapolis at 2225 East Lake Street. was the last office building delivered within the submarket, and was completed in 2017. Minneapolis CBD > The Minneapolis CBD is the largest submarket of the six Twin Cities office markets. The vacancy rate is 15.32%, which is the second highest in the metro. This rate has been impacted by tenants moving to single-tenant buildings and new or renovated space coming online in the last year. The Minneapolis CBD has seen 240,000 square feet of positive absorption year-to-date, which is the most of any submarket.

> In Q1 of 2018, the largest lease of the year was signed by RBC who agreed to anchor a new tower development, taking 310,000 square feet. RBC will move from their current home in “RBC Tower” to the new development in the next three years. Other notable leases in the CBD include US Bank expanding by 50,000 square feet, Amplifon for 40,000 square feet and GlobalTranz for 23,000 square feet. The Gateway The Gateway, a 33-story mixed-use tower on 3rd and > The most notable project that broke ground in Q2 is the City Nicollet in downtown Minneapolis, is projected to be of Minneapolis’ 300,000 square foot build-to-suit office that completed in 2021 with RBC as its anchor tenant. will consolidate hundreds of its city employees into one space. Additionally, there are a number of multi-tenant projects currently under construction, specifically in the North Loop district of the Minneapolis CBD, and when complete, the projects will add 394,000 square feet of new space. Southwest

> The Southwest is the second largest submarket by total square footage and is currently at 13.77% vacancy with 146,000 square feet of year-to-date absorption.

> Early in 2018, there were a number of large new leases signed, headlined by Jostens who will take 58,000 square feet in Edina and Dairy Queen who signed a 50,000-square-foot lease at the Normandale Lake Office Park.

> To date, there have been no new construction deliveries in the MoZaic East Southwest submarket in 2018. However, there is a 186,000 Uptown's 8-story MoZaic East will contain 186,000 SF of square foot project under way in the Uptown neighborhood of office space and 11,000 of retail space, with underground Minneapolis called MoZaic East. When completed in Q4 2018, parking stalls and is the second phase of this redevelopment. it will be the largest office building in that neighborhood with anchor tenant WeWork occupying 53,000 square feet.

Minneapolis-St. Paul Research & Forecast Report | Quarter 2 | Office | Colliers International St. Paul CBD

> The St. Paul CBD is the Twin Cities secondary central business district as well as the civic hub of the state and home to the state capital. The office market is relatively small due to a high number of state-owned buildings that do not count in Colliers MSP multi- tenant stats, which contributes to the high vacancy rate.

> The former Ecolab headquarters was renovated and rebranded as Osborne 370, which was completed this spring and several new tenants have signed leases. The 428, another new renovation, is currently under construction and will add 60,000 square feet of Class A office space to the market.

> Contributing to the negative absorption figures in this The 428 submarket, which year-to-date are at negative 70,000 square- The 428, a renovation of the former Woolworth's building feet, is Ditech, who has vacated space due to at 428 Minnesota Street, is adding 60,000 SF of Class A closing operations. office space to the St. Paul CBD.

St. Paul Suburban

> The St. Paul Suburban submarket is one of the largest in terms of area, spanning much of the east metro. Vacancy is 13.88%, which is below the market average of 14.33% and Class A vacancy in the St. Paul suburbs is the highest of any of our submarkets.

> To date, no significant lease activity has been recorded in 2018. However, a pending item of interest is Prime Therapeutics taking 409,000 square feet in a new build-to-suit slated for delivery in Q1 of next year. This large move will also open several smaller vacancies throughout the submarket, as the Prime Therapeutics company is consolidating several offices. Prime Therapeutics broke ground on its new headquarters in Eagan in Q1 2017 and is looking at a Q1 2019 delivery for project completion.

West/Northwest

> The West/Northwest includes the 394-corridor, one of the largest suburban office trade areas in the Twin Cities. Demand for office space along the 394-corridor has pushed the submarket vacancy rate to the lowest of any submarket and has the highest suburban rental rates. The only submarket with higher average rental rates is the Minneapolis CBD.

> A newly renovated building, West End Center, has seen the most leasing activity of any building in the suburbs. Pentair's electrical spin-off, nVent signed a 60,000-square-foot lease, CoBank and Magnet 360 each signed an additional 30,000-square-feet as well. The largest lease in the West/ Northwest submarket was Cantel Medical who signed nVent 168,000 square feet. Pentair's electrical spin-off, nVent signed a 60,000-square- foot lease in Saint Louis Park's West End Center in the > The only building under construction, which is about to be 394-corridor. delivered, is Thor Construction’s new headquarters in North Minneapolis for which they are, of course, building themselves.

Minneapolis-St. Paul Research & Forecast Report | Quarter 2 | Office | Colliers International SPOTLIGHT TREND: The Changing Dynamics of Tenant Improvement

Most professionals working in commercial real estate has negotiated several different tenant improvement deal know that construction and remodel prices are increasing, parameters on behalf of the clients he serves. In order for especially when talking about tenant improvement (TI) for tenants to get the improved space they want but also keep office space. costs down, according to Brehm, there are work arounds. He says, “One option is to sign longer term deals in the 10-year Megan Huber, Vice President and Director of Tenant range because landlords are willing to accommodate higher Improvement at Welsh Construction, notes that the rising TI’s and are either amortizing the additional costs into the cost of TI is reflected first and foremost in basic construction base rent or not providing other concessions such as offering materials. She says, “In our experience, TI costs have risen free rent.” approximately 4-5% year-over-year since 2014. With the 2017 lumber tariff and the 2018 aluminum and metal tariff impacts, However, on the other side of the coin, with these higher we expect the 2018 overall cost increase to be about 5-6%.” costs, landlords are sharpening their pencils and taking a much harder look at tenant’s financials and credit before Despite these costs, companies know that office spaces must signing leases with TI. become more and more focused on creating a workplace with aesthetic design, employee wellness and amenity options in After an expert tenant rep broker has negotiated the order to retain and attract talent. strongest TI package for a tenant within their unique budget, So how are companies balancing their budgets for TI while the TI project begins. So, while tenants are looking for still affording to make their spaces attractive to employees? unique build-outs more than ever, costs for all aspects of TI projects are going up, from raw materials to custom lighting, This budget balancing act arguably begins with the negotiation and with some consolations, companies don’t necessarily of lease terms. Mike Brehm, Vice President of Colliers MSP, need to spend more money.

Minneapolis-St. Paul Research & Forecast Report | Quarter 2 | Office | Colliers International Katie Berggren, Lead Project Manager at Colliers MSP, has commodity, as employees desire more than one location seen this trend in her role managing numerous TI projects, to be able to work from, rather than being stuck inside of both big and small. “By cutting costs in some places and not a "cubicle farm". others, tenants are not necessarily paying more for their wish list. Though $50 is the new $30, total dollars are not rising, > IT departments still traditionally cable everything, even but the cost for things are,” Berggren said. though there is wireless available nearly everywhere, which is a redundant cost. TI projects become about budget adherence to get what a company wants, or close to what they want, plus some things > Audio/visual equipment is now being used in almost on their wish list. The Project Management teams at Colliers every conference room, when previously companies MSP are finding there are some key trends that are driving up would equip only one or two rooms. costs on TI’s: > Card readers are also trending to replace traditional lock > All glass and aluminum frame systems for enclosed and key systems, which is another added cost. spaces rather than traditional sheetrock and hollow metal framing are a costly new trend. Ultimately, it is important to understand that while these > Open ceiling concept rather than regular ceiling tile is trends are on the rise, so are costs, so setting expectations something that has really gained traction within the last and budgets early on in the process is essential to a 3-5 years and is more expensive than the more typical successful negotiation of any TI project as well as the acoustical ceiling tile and grid system, due to higher costs management of build-out. Because while costs of materials for mechanical, electrical, plumbing and painting, as well and labor are going up, the overall spend in total tenant as higher rates for technology vendors and other trades. improvement budgets generally are not. Tenants and their advisors will continually need to find creative solutions in the > Collaboration spaces that feel more like a high-end deal stage, planning and construction phases to find ways of coffee shop than a traditional office space are a hot providing the most bang for the budget.

Minneapolis-St. Paul Research & Forecast Report | Quarter 2 | Office | Colliers International MINNEAPOLIS CBD NEIGHBORHOODS N

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# OF BUILDING DIRECTDIRECT DIRECT% DIRECT % DIRECTW/SUBLEASE W/ SUBLEASE % VACANT% VACANT AVERAGEASKING AVERAGEAVERAGE YTD SUBMARKET # BLDGS BUILDING SF ABSORPTIONABSORPTION SUBMARKET BUILDINGS SF AVAILABLEVACANT SF SF VACANTVACANT SF VACANTVACANTVACANT SF SFW/SUBLEASEW/ SUB" RATERATE OPERATINGOPERATING ABSORPTIONABSORPTION

Minneapolis Core A 18 13,041,205 1,681,267 1,593,214 12.2% 1,603,818 12.3% $18.97 $14.68 69,183 94,261 B 29 7,593,305 2,008,085 1,785,176 23.5% 1,809,925 23.8% $15.42 $10.65 85,950 69,346 C 9 733,626 137,449 119,261 16.3% 119,261 16.3% $13.50 $10.17 -22,234 -1,741 Totals: 56 21,368,136 3,826,801 3,497,651 16.4% 3,533,004 16.5% $16.53 $12.25 132,899 161,866 Minneapolis East A 1 163,000 108,400 108,400 66.5% 108,400 66.5% $21.50 $11.26 0 0 B 9 631,341 34,827 10,204 1.6% 10,204 1.6% $16.00 $10.60 -1,351 -8,551 C 4 510,918 27,180 131,623 25.8% 131,623 25.8% $15.50 N/A 0 0 Totals: 14 1,305,259 170,407 250,227 19.2% 250,227 19.2% $17.00 $10.76 -1,351 -8,551 Loring Park A 0 0 0 0 0.0% 0 0.0% N/A N/A 0 0 B 2 106,681 9,755 9,755 9.1% 9,755 9.1% N/A N/A 0 0 C 2 68,019 1,759 928 1.4% 928 1.4% $7.00 $8.90 0 0 Totals: 4 174,700 11,514 10,683 6.1% 10,683 6.1% $7.00 $8.90 0 0 Northeast A 1 180,739 45,333 94,385 52.2% 94,385 52.2% $14.50 $11.07 0 0 B 18 1,811,873 198,287 168,503 9.3% 168,503 9.3% $14.36 $8.29 -8,371 17,951 C 2 85,000 0 0 0.0% 0 0.0% N/A N/A 0 0 Totals: 21 2,077,612 243,620 262,888 12.7% 262,888 12.7% $14.38 $8.50 -8,371 17,951 North Loop A 4 958,594 185,530 69,069 7.2% 69,069 7.2% $20.98 $13.49 21,318 21,318 B 20 1,414,083 156,531 158,325 11.2% 165,326 11.7% $19.21 $8.92 0 0 C 4 262,893 8,886 8,886 3.4% 8,886 3.4% $15.25 $7.84 8,886 10,150 Totals: 28 2,635,570 350,947 236,280 9.0% 243,281 9.2% $19.33 $9.99 30,204 31,468 Warehouse District A 1 220,897 0 0 0.0% 0 0.0% N/A N/A 0 0 B 12 1,430,889 307,387 273,523 19.1% 305,856 21.4% $15.23 $9.15 333 333 C 8 555,773 52,714 28,918 5.2% 28,918 5.2% $14.96 $6.36 0 38,719 Totals: 21 2,207,559 360,101 302,441 13.7% 334,774 15.2% $15.13 $7.91 333 39,052 Total Minneapolis CBD A 25 14,564,435 2,020,530 1,865,068 12.8% 1,875,672 12.9% $19.23 $14.17 90,501 115,579 B 90 12,988,172 2,714,872 2,405,486 18.5% 2,469,569 19.0% $15.79 $9.61 76,561 79,079 C 29 2,216,229 227,988 289,616 13.1% 289,616 13.1% $13.68 $8.08 -13,348 47,128 Totals: 144 29,768,836 4,963,390 4,560,170 15.3% 4,634,857 15.6% $16.33 $10.68 153,714 241,786

Minneapolis-St. Paul Research & Forecast Report | Quarter 2 | Office | Colliers International MINNESOTA 610

INTERSTATE INTERSTATE 94 35E

INTERSTATE

394/494INTERSTATE TRADE 694AREAS 494

INTERSTATE MINNESOTA 694 55 394 Corridor

TheINTERSTATE 394 Corridor is a seven million square foot 694 169 office trade area that spans the area around I-394 MINNESOTA 100 MINNESOTA from the Minneapolis CBD, west to I-494. The 47 INTERSTATE trade area falls primarily in the West/Northwest 35W

MINNESOTA submarket and centers around the West End district. 55 12 INTERSTATE 394 Corridor Average rental rates are higher in the 394 corridor INTERSTATE 35E 394 than any other submarket or trade area. Highway Minneapolis INTERSTATE INTERSTATE access to the western metro drives demand. 94 494 MINNESOTA St. Paul 7 INTERSTATE INTERSTATE 35W 494 Corridor494 52

MINNESOTA The 494 corridor is a 14.5 million square foot trade MINNESOTA 7 5 MINNESOTA area in the Southwest metro from the bend in I-494 62 to the MSP Airport with the center of the trade 494 Corridor INTERSTATE area being France Avenue. Most of the Southwest 494 submarket falls within the 494 corridor boundary.

MINNESOTA This office trade area is second in size only to the MINNESOTA 13 55 Minneapolis CBD. Rents trend slightly above metro

INTERSTATE 212 10 35E averages, with the demand driver for space being INTERSTATE proximity to housing in the Southwest metro. 35W

MINNESOTA 169 77

DIRECT DIRECT % DIRECT W/ SUBLEASE % VACANT AVERAGE AVERAGE YTD SUBMARKET # BLDGS BUILDING SF ABSORPTION AVAILABLE SF VACANT SF VACANT VACANT SF W/ SUB" RATE OPERATING ABSORPTION

394 Corridor A 24 4,176,457 616,070 379,466 9.09% 433,077 10.60% $18.10 $14.62 23,451 93,569 B 30 2,511,155 952,923 259,503 10.33% 259,503 10.33% $16.22 $11.60 60,030 90,636 C 6 238,123 20,783 17,595 7.39% 17,595 7.39% $11.25 $9.74 -8,203 -8,203 Totals: 60 6,925,735 1,589,776 656,564 9.48% 710,175 10.50% $16.77 $12.94 75,278 176,002 494 Corridor A 49 8,593,472 1,449,956 1,125,380 13.1% 1,125,380 13.1% $16.54 $12.84 102,240 120,956 B 69 5,375,903 1,216,995 909,158 16.91% 909,158 16.91% $12.92 $10.53 10,963 10,375 C 11 509,080 69,873 60,785 11.94% 60,785 11.94% $8.00 $7.47 0 1,912 Totals: 129 14,478,455 2,736,824 2,095,323 14.47% 2,095,323 14.47% $14.64 $11.60 113,203 133,243

Minneapolis-St. Paul Research & Forecast Report | Quarter 2 | Office | Colliers International MARKET TRENDS FUTURE OUTLOOK The "other corridor" leasing surge Construction Completions The 494 corridor is the largest suburban office trade area in the metro, yet it has taken a backseat to the 394 corridor, the main artery connecting downtown to 1,800,000 the affluent western suburbs, especially in the press. 1,600,000 What has been somewhat forgotten in the news of late, 1,400,000 is the leasing surge that has occurred in the Southwest 1,200,000 submarket, particularly along the 494 corridor. 1,000,000 800,000

In the last nine months, Jostens signed a new FEET SQUARE 600,000 58,000-square-foot lease on I-494 and France Avenue 400,000 and Ascentis headlined multiple new leases off of 200,000 I-494 in Eden Prairie, totaling 85,000 square feet 0 for their new corporate headquarters. Finally, just 2013 2014 2015 2016 2017 2018 over 100,000 square feet of space has been leased at Normandale Lake Office Park, located at I-494 Completed Expected Completion 2018 and Highway 100, by tenants Dairy Queen, USI, Coca Cola and Gander Outdoors. Previous to this leasing momentum, the Normandale Lake Office Park had seen rising vacancy rates after departures of several large Looking Ahead tenants, some of which left for the Minneapolis CBD.

Overall, the 494 corridor has seen over 135,000 square feet of absorption in the last year, which is a notable shift worth paying attention to, as this activity in the Southwest suburbs points to a more even suburban demand than just the 394 corridor. VACANCY NET ABSORPTION RENTAL RATE

Sublease a more palatable option for users > Expecting rates to rise in core assets.

There appears to be a recent trend of larger and > Sublease space is on the rise. corporate users choosing to sublet or defer to vacancy. For example, even if there is 1-2 years of term left on > 2018 expected to end with over 1.5 million square feet of existing leases, if there is a need for a consolidation or a new construction, only the second year to reach that level move for employee retention or attraction, corporations in the last 12 years. are finding that the benefits often outweigh the costs of the vacancy rent.

Recent examples of this trend can be seen with St. Paul submarket, Cargill consolidated two of their three buildings at Excelsior based Ecolab, who left leased space in the St. Paul CBD Crossings and moved back into their renovated space in their Wayzata for their owned building, also in the St. Paul CBD. The headquarters. They are subleasing the two vacated buildings at Ecolab University building now sits vacant, even though Excelsior Crossings, totaling around 500,000 square feet, one of which there is over a year left in term remaining. It seems was leased by US Bank. Ecolab made the decision for consolidation over the sunk cost of the lease. Jacks Links also made a similar move This situation can be a win-win for users on the other side as well, within the Minneapolis CBD last year, when they moved those looking to move into subleased space. For example, Gander into new space in Mayo Clinic Square, vacating their Outdoors, a spin-off version of the bankrupt Gander Mountain, was previous location with an existing lease term in place. looking for a shorter term real estate solution for their company and took a sublease space at Normandale Lake Office Park in the It is evident that this trend is happening across the metro Southwest. Other users who may be interested in sublease space could as Prime Therapeutics will be going through a similar be those who currently own. Subleasing provides an opportunity to sell situation in the Southeast metro soon, as they consolidate owned buildings at a time when investment markets are strong and get multiple locations into their new build-to-suit building into a nice space at a discounted rate. in Eagan. Some of their existing locations will still be under lease, but again, it appears that the benefit of one Ultimately, the trend of subleasing is on the rise and companies appear new location outweighed the costs and are looking to to be making business decisions first and foremost, then considering sublet vacancies. In previous years, in the Southwest real estate outcomes as secondary.

Minneapolis-St. Paul Research & Forecast Report | Quarter 2 | Office | Colliers International MARKET STATISTICS

DIRECT DIRECT % DIRECT W/ SUBLEASE % VACANT AVERAGE AVERAGE YTD SUBMARKET # BLDGS BUILDING SF ABSORPTION AVAILABLE SF VACANT SF VACANT VACANT SF W/ SUB" RATE OPERATING ABSORPTION

Airport/South of the River A 21 1,883,357 412,446 220,871 11.73% 220,871 11.73% $16.02 $11.11 0 -47,240 B 62 4,271,786 747,475 713,708 16.71% 713,708 16.71% $12.42 $8.94 -1,665 3,238 C 29 1,273,707 137,697 132,400 10.39% 137,200 10.77% $9.14 $9.72 3,000 2,849 Totals: 112 7,428,850 1,297,618 1,066,979 14.36% 1,071,779 14.43% $12.78 $9.66 1,335 -41,153

Minneapolis CBD A 25 14,564,435 2,020,530 1,865,068 12.81% 1,875,672 12.88% $19.23 $14.17 90,501 115,579 B 90 12,988,172 2,714,872 2,405,486 18.52% 2,469,569 19.01% $15.79 $9.61 76,561 79,079 C 29 2,216,229 227,988 289,616 13.07% 289,616 13.07% $13.68 $8.08 -13,348 47,128 Totals: 144 29,768,836 4,963,390 4,560,170 15.32% 4,634,857 15.57% $16.33 $10.68 153,714 241,786

Southwest A 61 9,211,074 1,540,910 1,206,368 13.10% 1,206,368 13.10% $16.69 $12.80 109,334 134,456 B 90 6,176,050 1,292,987 955,150 15.47% 955,150 15.47% $12.83 $10.54 10,963 10,375 C 22 870,251 119,783 76,592 8.80% 79,592 9.15% $9.11 $7.84 0 1,912 Totals: 173 16,257,375 2,953,680 2,238,110 13.77% 2,241,110 13.79% $14.65 $11.50 120,297 146,743

St. Paul CBD A 7 2,491,750 516,287 317,732 12.75% 317,732 12.75% $12.31 $12.26 -18,229 -61,517 B 26 4,515,000 894,627 920,345 20.38% 920,345 20.38% $11.21 $10.11 -44,568 -8,343 C 12 639,936 88,719 84,044 13.13% 84,044 13.13% $15.17 $6.00 0 0 Totals: 45 7,646,686 1,499,633 1,322,121 17.29% 1,322,121 17.29% $12.24 $10.46 -62,797 -69,860

St. Paul Suburban A 36 2,199,057 443,769 396,811 18.04% 396,811 18.04% $14.37 $11.06 -2,070 -1,336 B 100 6,286,769 728,245 865,777 13.77% 865,777 13.77% $12.13 $9.07 0 0 C 34 1,912,372 376,684 180,986 9.46% 180,986 9.46% $11.31 $7.67 12,573 12,573 Totals: 170 10,398,198 1,548,698 1,443,574 13.88% 1,443,574 13.88% $12.98 $9.49 10,503 11,237

West/Northwest A 42 5,099,479 757,236 503,696 9.88% 557,307 10.90% $18.41 $13.39 17,496 93,569 B 95 6,196,550 1,505,152 888,471 14.34% 892,325 14.40% $14.36 $10.40 53,946 36,597 C 41 2,057,208 171,830 139,739 6.79% 139,739 6.79% $9.53 $7.42 -13,719 -11,306 Totals: 178 13,353,237 2,434,218 1,531,906 11.47% 1,589,371 11.90% $15.02 $10.94 57,723 118,860

Total All Markets A 192 35,449,152 5,691,178 4,510,546 12.72% 4,574,761 12.90% $16.73 $12.70 197,032 233,511 B 463 40,434,327 7,883,358 6,748,937 16.69% 6,816,874 16.86% $13.66 $9.82 95,237 120,946 C 167 8,969,703 1,122,701 903,377 10.07% 911,177 10.16% $11.03 $8.20 -11,494 53,156 Totals: 822 84,853,182 14,697,237 12,162,860 14.33% 12,302,812 14.50% $14.47 $10.59 280,775 407,613

The above table is summarized data on multi-tenant office buildings greater than 20,000 square feet. Not included are single-tenant, owner-occupied, medical or government buildings.

Minneapolis-St. Paul Research & Forecast Report | Quarter 2 | Office | Colliers International Comprised of Leased in Metro Area Sold in Metro Area Local Expertise .M .M Licensed CRE Agents (square feet) (square feet)

Comprised of Leased in Metro Area Sold in Metro Area Years in Business Sale Transactions Lease Transactions .M .M Licensed CRE Agents (square feet) (square feet)

Comprised of Revenue Managing Global Reach . professionals (US$) (square feet) Years in Business Sale Transactions Lease Transactions

Comprised of Revenue Managing Established in Lease/sale transactions Transaction value . professionals (US$) (square feet) countries (US$) All statistics are for 2017, are in U.S. dollars and include aliates.

Established in Lease/sale transactions Transaction value countries (US$) All statistics are for 2017, are in U.S. dollars and include aliates.

FOR MORE INFORMATION CONTACT: Tyler Allen Senior Research Analyst 952 897 7706 [email protected]

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Copyright © 2018, Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.