Minneapolis – St. Paul Office Market

RESEARCH 4Q 2019 MINNEAPOLIS – ST. PAUL OFFICE MARKET

MARKET TRENDS CURRENT CONDITIONS The vacancy rate in the Minneapolis-St. Paul office market was 11.2% during the fourth quarter of 2019, up from 11.0% in the second quarter. Quarterly net absorption of negative 139,258 square feet Absorption was positive at 52,268 square feet, bringing annual absorption to 373,926 square feet. The increase in vacancy despite Overall vacancy rate of 14.2% positive absorption was due to new construction adding vacant space to the market along with positive absorption. In the North Loop, Calabrio 1,286,655 square feet under construction moved into 120,000 square feet at the 200,000-square-foot, newly- constructed Two41, built by Swervo Development. In the West MARKET ANALYSIS submarket, Wellington completed construction at the LEEF Building, where BDH & Young, Way to Grow and Creatis leased 39,000 square feet Gross Asking Rent and Vacancy of the 65,000-square-foot building.

A transformative force in the office market in recent years is the $30 20% constant challenge employers face recruiting and retaining top talent. $25 18% This has put a focus on designing workplace environments that provide $20 16% the best experience for employees with the goal of recruiting and $15 14% retaining top talent. The talent war has helped to fuel numerous trends $10 12% in the office market: $5 10% 4Q14 4Q15 4Q16 4Q17 4Q18 4Q19 Overall property investment: Owners are investing in shared spaces Average Gross Asking Rent (Price/SF) Vacancy (%) including fitness centers, conference rooms, bike storage areas and indoor and outdoor gathering spaces. Net Absorption (SF) Tenant improvement investment: Firms want their internal office environment to include high ceilings, connectivity, natural light, spaces for collaboration and quiet work, and employee cafes. 600,000 400,000 200,000 Coworking: This growing market provides flexible, amenity-rich, hip 0 office environments that don’t require a long-term lease or significant -200,000 capital investment. -400,000 -600,000 Speculative suites: Landlords are quickly leasing fully furnished, move- 4Q13 4Q14 4Q15 4Q16 4Q17 4Q19 in ready speculative suites and tenants are willing to pay a premium for them, avoiding lengthy construction timelines and stressful space planning processes. MARKET SUMMARY Current Prior 12 Month Quarter Quarter Forecast Remote work: Companies struggling to find workers locally are expanding their search to other cities and allowing employees to work Total Inventory 84.7M 84.6M  from home. Remote work also provides flexibility to local employees, Availability Rate 14.2% 13.8%  aiding in recruiting and retention. Quarterly Net Absorption (139,258) 177,084 

These treads have spread across the market, from the Minneapolis CBD Average Asking Rent $28.21 $28.42  to properties across suburban submarkets. Under Construction 1,286,655 1,413,791  Deliveries 200,000 0 

CONSTRUCTION LOOK-BACK SALES 2010-2019

Office Construction History Office Sales Volume

Forecast 3,600 1,800 3,000 1,600

1,400 2,400 Millions 1,200 1,800 1,000 800 1,200 600 600 400

Thousands 200 0 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Single-tenant Multi-tenant Source: Real Capital Analytics In the wake of the Great Recession, development was modest, with Institutional investors, priced out of primary markets, are seeking the new supply concentrated in single-tenant build-to-suit activity and returns available in strong secondary markets such as Minneapolis-St. corporate campus development. In the last decade, Minneapolis-St. Paul. Sales volumes have been strong – near or above $2 billion per year Paul-based Fortune 500 companies UnitedHealth Group, Target, Wells since 2014. Investors are attracted to the healthy and diverse economy Fargo, Xcel Energy, Prime Therapeutics, Thrivent Financial, and Land O’ that supports stable investment returns. Lakes expanded their corporate headquarters or developed new ones.

In the Minneapolis CBD, two office properties within blocks of each other The latter half of the 2010s saw a resurgence of multi-tenant sold. Xcel Energy’s headquarters, completed in 2016, sold for $108 development, with most built with some leasing secured before million and 510 Marquette, built in 1924 and renovated in 2014, sold for construction completion. The North Loop neighborhood of the $61 million. Xcel has a long-term lease at its property and the price per Minneapolis CBD and saw the most activity; T3 was completed in 2016, square foot of $492 is the highest price per square foot recorded this and the Nordic was completed in the second quarter of 2019. T3 is year. In the suburbs the largest sale was of One MarketPointe in now home to Amazon.com and coworking company Industrious, and Bloomington, which sold for $57 million. the Nordic has digital marketer Ovative Group and coworking giant WeWork. During the fourth quarter of 2019, Swervo Development completed construction on a 200,000-square-foot office property at the FUTURE TRENDS Internet Exchange, where Calabrio moved into 120,000 square feet. Shorter lease terms of 7 years are becoming more common, a turn from previous years when terms were pushing 10-12 years. Lease costs The fourth quarter of 2019 marked the groundbreaking of 10 West End continue to escalate due to rising sale prices causing increased assessed in St. Louis Park, a 100% speculative multi-tenant office building. values, and in turn, taxes. Operating costs are also growing as common area upgrade expenses are passed on to tenants.

While the overall economy continues to be favorable for business expansion, companies are becoming cautious due to increasing costs to do business – primarily the extreme challenge of finding the best talent to run their businesses.

We continue to track a significant amount of vacant space that will become available when renovations at both The Dayton’s Project and Thirty are completed in 2020 and RBC leaves behind vacant space at RBC Plaza as it moves to RBC Gateway in 2021. Although future absorption is expected to remain steady, vacancy levels will increase in the short term. Asking rental rates will plateau and concessions continue to increase, particularly among Class A properties as new space 10 West End Ryan Companies began construction on 10 West End during the becomes available and competition for tenants intensifies. third quarter. The 350,000-square-foot property is a multi-tenant office building in the West submarket Ryan began construction with no tenants secured to lease space in it.

SELECT LEASE TRANSACTIONS

Tenant Property Address City Submarket Type Size (SF)

CH Robinson Flying Cloud Corporate Campus 8967 Columbine Rd Eden Prairie Southwest Sublease 39,862

Minneapolis Provation Millwright Building 533 S 3rd St. Minneapolis New 37,048 CBD

Minneapolis Rally Millwright Building 533 S 3rd St. Minneapolis Expansion 25,573 CBD

Minneapolis Unknown 100 Washington Square 100 S Washington Ave. Minneapolis New 25,394 CBD

Normandale Lake Office Park - 8400 Germonimo Energy 5600 W 84th St. Bloomington Southwest New 24,795 Tower

Minneapolis Unknown 100 Washington Square 100 S Washington Ave. Minneapolis New 24,071 CBD

Sierra Fountain Place 12573-12595 Castlemoor Dr. Eden Prairie Southwest New 23,216

Minneapolis AECOM LaSalle Plaza 800 LaSalle Ave. Minneapolis New 22,419 CBD

Lakeview Hospital Oak Park Ponds 5801-5825 Neal Avenue N. Stillwater Northeast Sublease 19,480

Minneapolis Haberman Riverplace: Exposition Hall 43 Main Street SE Minneapolis New 18,807 CBD

Minneapolis Unknown LaSalle Plaza 800 LaSalle Ave. Minneapolis New 16,681 CBD

VRS Centennial Lakes Office Park III 3601 W 76th St. Edina Southwest New 16,100

Minneapolis Unknown IDS Center 80 S 8th St. Minneapolis New 13,326 CBD

Onward/K2 5050 Lincoln Dr. 5050 Lincoln Dr. Edina Southwest New 12,233

Unknown Whitewater Business Center 12301 Whitewater Dr. Minnetonka Southwest New 11,578

Elior Case Building 767 Eustis Street N. Saint Paul Northeast New 11,552

Dolphin Temp Service The Interchanges Offices - Bldg 2335 2335 West Highway 36 Roseville Northeast New 11,036

National American University Brookdale Corporate Center II 6200 Shingle Creek Pkwy Brooklyn Center Northwest Renewal 10,997

75F Southpoint Tower 1650 W 82nd St. Bloomington Southwest New 10,001

SELECT SALES TRANSACTIONS

Price Property Address City Submarket Buyer Seller Price SF PSF

Sentinel Real Estate Xcel Energy HQ 401 Nicollet Mall Minneapolis Minneapolis CBD The Opus Group $108,275,000 220,000 $492.16 Corporation

510 Marquette Ave 510 Marquette Ave. Minneapolis Minneapolis CBD RREEF Management Spear Street Capital $61,000,000 224,433 $271.80

One MarketPointe 4300 MarketPointe Drive Bloomington Southwest Crestlight Capital NYL Investors $57,350,000 236,939 $242.05

Golden Hills Office 701 Xenia Avenue S. Golden Valley West Altus Properties Lone Star Funds $43,100,000 190,758 $225.94 Center

Boulder Lakes - Prime 2900 Ames Crossing Rd Eagan Southeast Artis REIT United Properties $41,961,105 167,893 $249.93 Therapeutics II

Midloch Investment Crosstown Preserve 10050 Crosstown Cir. Eden Prairie Southwest Lone Star Funds $19,550,000 181,224 $107.88 Partners

BayOne Real Estate Capital Real Estate Calyxt HQ 2800 Mount Ridge Rd Roseville Northeast $19,250,000 43,895 $438.55 Investment Corp Inc.

Crest Ridge Corporate 11055 Wayzata Blvd Minnetonka Southwest Dominium TPG $18,500,000 120,000 $154.17 Center

Longpoint Realty Pondview Plaza 5850 Opus Pkwy Minnetonka Southwest Excelsior Group $18,450,000 120,478 $153.14 Partners

Redline Property Arbor Ridge 6900 Wedgwood Road N. Maple Grove Northwest Wheelhouse Capital $15,000,000 85,404 $175.64 Partners

City Center Realty Regis Corp (3 Properties) 7101-7201 Metro Blvd Edina Southwest Regis Corp $9,600,000 189,584 $50.64 Partners

The Oaks Office Center Carlson Real Estate 7755 3rd Street N. Oakdale Northeast Ashish Aggarwal $8,755,528 96,000 $91.20 (5 Properties) Services

Town Square MSP/Town Center, 10705 Town Square Rd Blaine Northeast Service Oil, Inc $7,150,000 23,492 $304.36 Professional Building LLC

1315 Mendota Heights 1315 Mendota Heights Rd Mendota Heights Southeast City & County Credit Union United Properties $6,100,000 70,000 $87.14 Rd Office

Trident Pacific Real Cray Plaza 380 Jackson St. St. Paul St. Paul CBD Bigos Management $5,100,000 219,313 $23.25 Estate Group

ECONOMIC CONDITIONS EMPLOYMENT BY INDUSTRY The Minneapolis-St. Paul metropolitan area has a highly educated Employment by Industry Minneapolis-St. Paul workforce and a diverse economy that is home to 17 Fortune 500 Information companies, more than anywhere else in the world. Additionally, more 1.9% Other Services than 320 Fortune 500 companies have a local presence. This Mining, Logging, 3.9% concentration of corporate heavyweights supports a median income of Construction 4.1% $81,000 per year, more than 25.0% above the national average. Trade, Transportation, Minneapolis-St. Paul’s unemployment rate, which is historically lower Financial Utilities Activities 18.0% than the nation’s, was at 2.8% as of December 2019, compared with the 7.4% national rate of 3.9%. The area also boasts a strong work ethic: Its labor force participation rate is the second best in the nation at 69.8%, Leisure & Hospitality compared with 63.0% nationally. 9.5% Education & Health Minneapolis-St. Paul is a global leader in biotechnology and biomedical Services 16.8% Manufacturing research with deep roots in agriculture, food exports and water 9.9% technology, and it has one of the highest concentrations of banks and financial talent of any major metropolitan area. Six of the world’s 10 Professional & Government Business Services 12.4% leading medical device manufacturers have operations in the area. The 16.2% area ranks high in quality of life and enjoys a great education system, low cost of living and high-quality, low-cost housing options. Source: U.S. Bureau of Labor Statistics

UNEMPLOYMENT RATE PAYROLL EMPLOYMENT

Seasonally Adjusted Total Nonfarm, Not Seasonally Adjusted, 12-Month % Change

12.0 4.0

10.0 2.0 8.0 0.0 6.0

-2.0

Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19

4.0 Apr-11

Aug-10 Dec-10 Aug-11 Dec-11 Aug-12 Dec-12 Aug-13 Dec-13 Aug-14 Dec-14 Aug-15 Dec-15 Aug-16 Dec-16 Aug-17 Dec-17 Aug-18 Dec-18 Aug-19 Dec-19

2.0 -4.0

-6.0

Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19

Aug-10 Dec-10 Aug-11 Dec-11 Aug-12 Dec-12 Aug-13 Dec-13 Aug-14 Dec-14 Aug-15 Dec-15 Aug-16 Dec-16 Aug-17 Dec-17 Aug-18 Dec-18 Aug-19 Dec-19 US Minneapolis-St. Paul Minneapolis-St. Paul United States Source: U.S. Bureau of Labor Statistics Source: U.S. Bureau of Labor Statistics

CONSUMER PRICE INDEX (CPI) EMPLOYMENT GROWTH BY INDUSTRY

All Items, annual % Change, Not Seasonally Adjusted, 12-Month % Change, Seasonally Adjusted 1982-84=100 Total Nonfarm 6.0 Mining, Logging, Construction Manufacturing 4.0 Trade, Transportation, and Utilities 2.0 Information Financial Activities 0.0 Professional and Business Services -2.0 Education and Health Services Leisure and Hospitality -4.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Other Services Government

United States Minneapolis-St. Paul -6.0 -3.0 0.0 3.0 6.0 9.0 Source: U.S. Bureau of Labor Statistics Source: Bureau of Labor Statistics

MINNEAPOLIS CBD STATISTICS

Total With Weighted Total Q1 2019 Q2 2019 Q3 2019 Q4 2019 YTD Under Inventory Sublease Avg. Rental Vacant Absorpition Absorption Absorption Absorption Absorption Construction (SF) Vacant Rate (FSG)

Core

Class A 16,399,896 1,934,231 11.8% (9,922) (14,524) (34,180) 4,923 (53,703) $34.75 881,000

Class B 6,686,715 1,748,038 26.1% 43,590 33,669 61,107 (38,635) 99,731 $28.75 0

Class C 75,738 29,500 39.0% (7,000) 0 0 9,173 2,173 $18.30 0

Totals 23,162,349 3,711,769 16.0% 26,668 19,145 26,927 (24,539) 48,201 $33.10 881,000

East

Class A 207,443 67,274 32.4% 40,000 0 5,797 (5,225) 40,572 $33.97 0

Class B 527,912 34,773 6.6% 12,080 15,378 11,538 (18,204) 20,792 $27.89 0

Class C 108,150 0 0.0% 0 0 0 0 0 $23.61 0

Totals 843,505 102,047 12.1% 52,080 15,378 17,335 (23,429) 61,364 $29.33 0

Loring

Class A 0 0 NA 0 0 0 0 0 NA 0

Class B 48,012 0 0.0% 0 0 0 0 0 $20.00 0

Class C 96,724 0 0.0% 103 0 0 0 103 $16.16 0

Totals 144,736 0 0.0% 103 0 0 0 103 $18.72 0

Northeast

Class A 200,739 2,791 1.4% 2,842 0 0 23,540 26,382 $24.51 0

Class B 1,431,685 145,195 10.1% 10,199 24,188 (9,525) (50,142) (25,280) $21.99 0

Class C 989,285 52,928 5.4% (118) 2,759 7,937 (51,932) (41,354) $21.16 0

Totals 2,621,709 200,914 7.7% 12,923 26,947 (1,588) (78,534) (40,252) $22.23 0

Northloop

Class A 943,475 188,113 19.9% 27,782 112,281 48,438 130,586 319,087 $37.95 94,355

Class B 1,061,985 321,685 30.3% (40,673) 21,548 3,863 (23,177) (38,439) $31.82 0

Class C 273,320 82,329 30.1% (9,037) (21,039) (12,016) (29,901) (71,993) $23.49 0

Totals 2,278,780 592,127 26.0% (21,928) 112,790 40,285 77,508 208,655 $33.47 94,355

Warehouse

Class A 434,333 0 0.0% 0 0 0 0 0 NA 0

Class B 1,515,170 310,463 20.5% (45,396) 8,069 (19,217) (98,312) (154,856) $27.33 0

Class C 161,093 8,146 5.1% (17,740) 17,002 (7,408) 0 (8,146) $23.00 0

Totals 2,110,596 318,609 15.1% (63,136) 25,071 (26,625) (98,312) (163,002) $27.18 0

Overall

Class A 18,185,886 2,192,409 12.1% 60,702 97,757 20,055 153,824 332,338 $34.75 975,355

Class B 11,271,479 2,560,154 22.7% (20,200) 102,852 47,766 (228,470) (98,052) $27.81 0

Class C 1,704,310 172,903 10.1% (33,792) (1,278) (11,487) (72,660) (119,217) $21.64 0

Totals 31,161,675 4,925,466 15.8% 6,710 199,331 56,334 (147,306) 115,069 $31.84 975,355

Data includes multi-tenant office buildings; does not include single-tenant or owner-occupied properties (75% or more occupied by owner)

SUBMARKET STATISTICS Total With Weighted Total Q1 2019 Q2 2019 Q3 2019 Q4 2019 YTD Under Inventory Sublease Avg. Rental Vacant Absorpition Absorption Absorption Absorption Absorption Construction (SF) Vacant Rate (FSG)

St. Paul CBD

Class A 2,242,863 393,035 17.5% 11,615 (87,964) 1,195 2,309 (72,845) $25.99 0

Class B 4,441,757 721,928 16.3% 31,668 (57,299) (34,199) 8,595 (51,235) $21.27 0

Class C 411,084 29,102 7.1% 1,883 25,606 9,189 211 36,889 $17.24 0

Totals 7,095,704 1,144,065 16.1% 45,166 (119,657) (23,815) 11,115 (87,191) $22.57 0

Northeast

Class A 535,976 149,111 27.8% 7,231 (47,723) 589 (710) (40,613) $25.28 0

Class B 7,117,913 737,109 10.4% 34,021 (10,775) 20,437 109,521 153,204 $20.86 0

Class C 1,544,817 74,232 4.8% 1,290 22,375 (15,796) (1,720) 6,149 $17.68 0

Totals 9,198,706 960,452 10.4% 42,542 (36,123) 5,230 107,091 118,740 $21.18 0

Northwest

Class A 451,567 127,626 28.3% 6,188 10,820 6,066 5,207 85 $23.56 0

Class B 2,173,958 235,182 10.8% (2,569) 18,456 18,567 22,772 57,226 $19.45 0

Class C 380,568 11,029 2.9% 834 0 168 (3,789) (2,787) $15.72 0

Totals 3,006,093 373,837 12.4% 4,453 29,276 24,801 24,190 54,524 $19.79 0

Southeast

Class A 1,228,723 186,871 15.2% 13,186 3,719 (6,158) (18,169) (7,422) $29.52 0

Class B 4,398,809 716,265 16.3% (29,041) (1,521) 123,053 (60,820) 31,671 $22.50 0

Class C 1,465,894 98,435 6.7% 1,736 17,481 3,170 (15,510) 6,877 $18.26 0

Totals 7,093,426 1,001,571 14.1% (14,119) 19,679 120,065 (94,499) 31,126 $23.77 0

Southwest

Class A 6,898,992 956,137 13.9% 71,164 46,597 93,459 (29,222) 181,998 $32.73 0

Class B 7,490,816 1,103,599 14.7% 145,945 16,956 (62,308) (26,797) 73,796 $25.51 0

Class C 2,713,703 325,653 12.0% (15,975) (32,396) 25,540 10,868 (11,963) $21.90 0

Totals 17,103,511 2,385,389 13.9% 201,134 31,157 56,691 (45,151) 243,831 $28.80 0

West

Class A 3,213,783 360,725 11.2% 5,650 45,727 (55,916) 28,136 23,597 $35.53 311,300

Class B 5,499,108 752,332 13.7% (49,551) 33,638 (2,791) (32,333) (51,037) $28.20 0

Class C 1,315,121 93,021 7.1% (17,846) 23,061 (3,515) 9,499 11,199 $24.36 0

Totals 10,028,012 1,206,078 12.0% (61,747) 102,426 (62,222) 5,302 (16,241) $30.84 311,300

Total Market

Class A 32,757,790 4,365,914 13.3% 175,736 68,933 59,290 141,375 445,334 $33.05 0

Class B 42,393,840 6,826,569 16.1% 110,273 102,307 110,525 (207,532) 115,573 $24.74 0

Class C 9,535,497 804,375 8.4% (61,870) 54,849 7,269 (73,101) (72,853) $20.70 1,286,655

Totals 84,687,127 11,996,858 14.2% 224,139 226,089 177,084 (139,258) 488,054 $28.21 1,286,655

Data includes single and multi-tenant office buildings; does not include owner-occupied properties (75% or more occupied by owner)

NEWMARK KNIGHT FRANK MINNEAPOLIS OFFICE SUBMARKETS

MINNEAPOLIS ANDREW BRICK 100 South 5th Street Research Manager Suite 2100 612.440.0042 Minneapolis, MN 55402 [email protected] 612.430.9950

Newmark Knight Frank has implemented a proprietary database and our tracking methodology has been revised. With this expansion and refinement in our data, there may be adjustments in historical statistics including availability, asking rents, absorption and effective rents. Newmark Knight Frank Research Reports are available at www.ngkf.com/research

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