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OFFICE MARKET REPORT MINNEAPOLIS-ST. PAUL | Q3 2019

Multi-tenant Office Leasing Activity Remains Consistent, Rates Flex with Trends

VACANCY AND ABSORPTION TRENDS Q3 MARKET INDICATORS

The quarter three Minneapolis-St. Paul multi-tenant office market NET ABSORPTION closed with a positive absorption of 156,000 square feet and a vacancy rate of 14.9%. Vacancy rates have hovered at the same point since 156KSF the first quarter of 2019. The greatest amount of positive absorption occurred in Minneapolis CBD Class B office product, which gained 157,000 square feet. Another high performing submarket was the West/ Northwest, where Class A office space positively absorbed 51,000 VACANCY RATE square feet. Both aforementioned submarkets that experienced positive absorption in Q3 are amenity rich, with landlords willing to renovate 14.9% or provide modern, creative offices. Overall market trends in Q3 show stable leasing has increased rental rates from $15.36 in Q2 to $15.46 in Q3. These increased rental rates have prompted landlords to follow an W/ SUBLEASE emerging trend of creating spec-suites within smaller vacancies which VACANCY has proven to be a popular move-in ready solution for tenants. SUBMARKET INSIGHTS 16.0% In its entirety, the Minneapolis CBD positively absorbed 91,000 square feet, which was mostly the result of active leasing in the newly renovated Baker Center, which acquired tenants, Foodsby for 35,000 AVG QUOTED RATES square feet and 8x8 for 34,000 square feet. Also, the renovated office PSF at 700 5th Street took in Identifix for 55,000 square feet. Negative $15.46 absorption in the CBD continues to result from existing tenants looking to downsize and consolidate. Class A CBD asking rents increased from $20.27 in Q2 to $20.42 in the third quarter, with landlords flexing their muscles given the high demand for space. However, the overall average CONSTRUCTION asking rent in the Minneapolis CBD dropped in Q3 to $17.77 with asking 1.7MSF rents for CBD Class B and Class C bringing down the average. The vacancy rate in the Minneapolis CBD ended at 15.6% in Q3.

Minneapolis-St. Paul Research & Forecast Report | Q3 2019 | Office | Colliers International VACANCY AND ABSORPTION TRENDS, continued Vacancy

The positive absorption in the West/Northwest 0.155 submarket of 44,000 square feet was the result 0.15 of Element Fleet’s 73,000-square-foot lease 0.145 commencement at Excelsior Crossings. In addition, 0.14 one of the larger leases that kicked off Q3 was Daiken’s move into a 30,000 square foot block at 0.135

0.13 ATRIA Corporate Center in Plymouth. Finally, the Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 newly renovated Leef Office Building in Bryn Mawr 2015 2016 2017 2018 2019 drew the attention of tenants BDH & Young and Way to Grow with both leases totaling 25,000 square feet. Absorption Some of the positive absorption this quarter was offset by Wells Fargo Insurance consolidating 55,000 600000 square feet from 600 Metropoint to other nearby 400000 locations. The rates in West/Northwest remained nearly the same from last quarter, while the vacancy 200000 rate grew slightly to 12.6% for quarter three. 0 The Airport/South of the River submarket also -200000 accumulated positive absorption figures of 63,000 square feet, due to a pair of medium sized Mendota -400000 Heights tenants that commenced leases in Q3. The -600000 first tenant was United Educators Credit Union who Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 took 14,000 square feet in Mendota Office Center II 2015 2016 2017 2018 2019 and Holland Center who moved into 12,000 square feet at the Centre Pointe Business Park V. A surge Total Average Rental Rates of smaller leases, without much negative absorption, Total Average Rental Rates helped to off-set the final absorption totals for 16 15.5 Airport/South of the River in Q3, which year-to-date, 15 has taken in 102,000 square feet. 14.5 14 CONSTRUCTION 13.5 There were no office construction deliveries in Q3 in 13 12.5 the Twin Cities metro. However, there are currently 12 several major projects on the horizon that will change 11.5 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2015 2016 2017 2018 2019

Significant Office Lease Activity

TENANT PROPERTY ADDRESS CITY LEASED SF SUBMARKET TYPE RSM RSM Plaza 801 Nicollet Mall Minneapolis 125,000 Minneapolis CBD Renewal/Expansion Merrill Corp Baker Center 405 & 733 Marquette Ave Minneapolis 78,000 Minneapolis CBD New SRF Consulting Target West 3701 Wayzata Blvd Minneapolis 70,000 West/Northwest New US Bank Capella Tower 225 S 6th St Minneapolis 55,000 Minneapolis CBD New Nilan Johnson The Marq 250 S Marquette Ave Minneapolis 37,424 Minneapolis CBD New

Siemens Crescent Ridge II 10900 Wayzata Blvd Minneapolis 34,654 West/Northwest Renewal

Golden Triangle Advantage Sales & Marketing 7905 Golden Triangle Dr Eden Prairie 32,389 Southwest Expansion Technology Center

Media Loft Banks Building 615 1st Ave NE Minneapolis 21,096 Minneapolis CBD Renewal

Shriner's Healthcare for Children CityPlace Medical II 215 Radio Drive Woodbury 20,000 St. Paul Suburban New

Minneapolis-St. Paul Research & Forecast Report | Q3 2019 | Office | Colliers International the office market landscape into 2020. Many of these Interlachen Corporate Center for $15,450,000, SARA office developments are occurring in the Minneapolis Investment Real Estate’s purchase of Brooklyn Park’s CBD, case in point, the 37-story Gateway Tower and Quadrant Office for $11,850,000 and Redline Property the Dayton’s Project which are both set for delivery Partners transacting on two 394 properties, Superior in 2020. While much of the Gateway Tower’s total Plaza and Willow Creek, totaling $10,625,000. Most office square footage is accounted for, with RBC properties currently on the market are suburban taking 300,000 square feet, The Dayton’s Project assets, which makes it unlikely that any large Class A will likely open with large vacancies and expected office assets will trade for the remainder of 2019. decreased rates. This could potentially open the door for CBD tenants to maneuver among larger blocks. FUTURE OUTLOOK Additionally, a renovation of 1325 Quincy Street in Absorption is looking to trend up into quarter four and Northeast Minneapolis will deliver 96,000 square feet beyond. The largest lease scheduled to commence office space to the market in the same timeframe. As next quarter is Calabrio for 170,000 square feet at the highlighted earlier, value-add redevelopment projects Swervo’s North Loop office development, which was are forecasted to materialize even more speculative completed in Q2. Most leases signed in 2019 are with office space, after the acquisition of Two22 and the companies who will occupy in the first half of 2020. sale of the Oracle & International Center. Breaking These moves will likely affect the first and second ground in quarter four is a long slated suburban quarter positive absorption figures in the first half of office development from Ryan Construction and the 2020. In the 394 Corridor limited space options and Excelsior Group called 10 West End. The 11-story, rising asking rates could point towards more spec- 343,000-squre-foot office building is scheduled for suites coming online in the near future. With the right delivery in early 2021. size and requirements, businesses currently residing in owner-occupied properties may snap up a multi- SALE ACTIVITY tenant opportunity given the circumstances. he largest transaction of Q3 was the acquisition of Two22 for $81,000,000 by national investor, Lingerfelt Commonwealth Partners. Capital Market interest in value-add Class B office product might be slowing investment sales in top CBD assets, as competition in this product type increases with more and more leasing momentum. In Q3, we saw investors moving towards the potential profits in stable Class B suburban assets. The Q3 suburban investment sales included Wildamere’s purchase of

Significant Office Sale Activity

DATE PROPERTY CITY SF SALE PRICE $/SF BUYER SELLER 7/2/19 Two22 Minneapolis 1,119,477 $81,000,000 $72.36 Lingerfelt CommonWealth 222 South Ninth Street, LLC 7/1/19 Fairview Health Services Portfolio Multiple 152,001 $31,500,000 $207.24 Fairview Health Services Columbia Park Properties 7/25/19 Summit Orthopedic Eagan 70,000 $29,400,000 $420.00 Harrison Street Kara-Mia, LLC 8/29/19 6820 Wedgwood Road N Maple Grove 101,011 $22,770,731 $225.43 Syndicated Equities Westminster Capital

9/13/19 Interlachen Corporate Center Edina 105,084 $15,450,000 $147.03 Wildamere Capital Management Lone Star Funds

9/19/19 Quadrant Office Building Brooklyn Park 103,858 $11,850,000 $114.10 SARA Investment Real Estate Hempel

7/31/19 Superior Plaza and Willow Creek Plaza Multiple 122,680 $10,625,000 $86.61 Redline Property Partners Lone Star Funds

8/29/19 2815 Cleveland Avenue N Roseville 170,325 $9,830,000 $57.71 Land Title, Inc The Blackstone Group LP

8/28/19 601 2nd Avenue S Hopkins 29,660 $4,750,000 $160.15 Acquisition Company 19 Robert Lunieski

7/19/19 4719 Park Nicollet Avenue Prior Lake 22,364 $2,905,000 $129.90 VCB Properties, LLC Village Commerce Building

Minneapolis-St. Paul Research & Forecast Report | Q3 2019 | Office | Colliers International MULTI-TENANT MARKET STATISTICS

DIRECT DIRECT % DIRECT W/ SUBLEASE % VACANT AVG QUOTED SUBMARKET # BLDGS BUILDING SF ABSORPTION YTD ABSORPTION AVAILABLE SF VACANT SF VACANT VACANT SF W/ SUB RENTAL RATE

Airport/South of the River A 21 1,883,357 361,327 375,518 19.94% 378,166 20.08% 15.71 41,914 69,914 B 62 4,271,786 804,299 611,991 14.33% 611,991 14.33% 13.04 33,768 42,363 C 29 1,273,707 251,660 171,448 13.46% 196,330 15.41% 11.61 -12,511 -9,923 Totals: 112 7,428,850 1,417,286 1,158,957 15.6% 1,186,487 15.97% 13.22 63,171 102,354

Minneapolis CBD A 26 14,759,135 2,420,237 1,884,561 12.77% 1,917,065 12.99% 20.42 -34,288 32,570 B 92 13,248,501 2,691,210 2,421,526 18.28% 2,599,116 19.62% 17.34 156,657 169,728 C 29 2,216,229 453,063 416,240 18.78% 430,880 19.44% 15.36 -31,174 -34,568 Totals: 147 30,223,865 5,564,510 4,722,327 15.62% 4,947,061 16.37% 17.77 91,195 167,730

Southwest A 62 9,396,347 1,644,137 1,210,860 12.89% 1,259,229 13.4% 16.64 -20,697 -44,097 B 88 5,963,520 1,262,174 919,553 15.42% 1,062,095 17.81% 13.47 19,437 35,019 C 22 870,251 189,224 135,158 15.53% 135,158 15.53% 11.38 900 -5,231 Totals: 172 16,230,118 3,095,535 2,265,571 13.96% 2,456,482 15.14% 15.34 -360 -14,309

St. Paul CBD A 6 2,061,859 385,351 385,351 18.69% 390,760 18.95% 12.33 -4,327 -15,105 B 26 4,515,000 793,799 854,575 18.93% 999,274 22.13% 14.00 -25,307 -82,350 C 12 639,936 79,993 100,098 15.64% 100,098 15.64% 15.50 -6,256 -5,187 Totals: 44 7,216,795 1,259,143 1,340,024 18.57% 1,490,132 20.65% 13.71 -35,890 -102,642

St. Paul Suburban A 37 2,579,057 488,358 264,528 10.26% 264,528 10.26% 14.58 434 48,923 B 101 6,306,769 800,576 906,050 14.37% 922,851 14.63% 13.07 4,846 117,521 C 34 1,912,372 360,323 326,510 17.07% 326,510 17.07% 11.20 -11,235 -20,404 Totals: 172 10,798,198 1,649,257 1,497,088 13.86% 1,513,889 14.02% 13.40 -5,955 146,040

West/Northwest A 46 5,796,536 1,114,408 700,419 12.08% 937,099 16.17% 18.26 51,199 154,332 B 95 6,196,550 1,336,304 938,342 15.14% 1,032,802 16.67% 15.69 -10,826 22,088 C 41 2,057,208 178,150 141,129 6.86% 149,971 7.29% 10.24 3,560 -9,399 Totals: 182 14,050,294 2,628,862 1,779,890 12.67% 2,119,872 15.09% 15.78 43,933 167,021

Total All Markets A 198 36,476,291 6,413,818 4,821,237 13.22% 5,146,847 14.11% 17.07 34,235 246,537 B 464 40,502,126 7,688,362 6,652,037 16.42% 7,228,129 17.85% 15.16 178,575 304,369 C 167 8,969,703 1,512,413 1,290,583 14.39% 1,338,947 14.93% 12.27 -56,716 -84,712 Totals: 829 85,948,120 15,614,593 12,763,857 14.85% 13,713,923 15.96% 15.46 156,094 466,194

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.

FOR MORE INFORMATION CONTACT: Colliers International | Minneapolis-St. Paul ANDREW BRICK 4350 Baker Road, Suite 400 Senior Research Analyst Minnetonka, MN 55343 952 374 5861 colliers.com/msp

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Copyright © 2019, 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.