Minneapolis – St. Paul Office Market

RESEARCH 1Q 2020 MINNEAPOLIS – ST. PAUL OFFICE MARKET

MARKET TRENDS CURRENT CONDITIONS The vacancy rate in the Minneapolis-St. Paul office market was 11.2% during the first quarter of 2020, a continuation of the same vacancy rate Quarterly net absorption of 49,332 square feet from the fourth quarter of 2019. Absorption was positive for the twelfth consecutive quarter at 49,332 square feet. The majority of positive Overall vacancy rate of 11.2% absorption occurred in the West submarket with 69,017 square feet and the Southwest submarket with 67,649 square feet. Regis’s move to their new 1,933,385 square feet under construction headquarters in the West was the largest move of 65,000 square feet. Geronimo Energy occupied 25,000 square feet in the Southwest at the 8400 MARKET ANALYSIS Tower of Normandale Lakes. Gross Asking Rent and Vacancy Absorption and vacancy will be impacted by leases that are projected to commence in the second and third quarters. Notable first quarter tenant $35 14% movement in the Minneapolis CBD include Nilan Johnson relocating to The $30 12% Marq for 37,000 square feet, while giving back 76,000 square feet at $25 10% Canadian Pacific Plaza. Incom begins their lease at 100 Fifth Street Tower $20 8% for 19,000 square feet. The Minneapolis CBD garners a significant amount $15 of vacant space next quarter when renovations at both The Dayton’s $10 6% Project and Thirty become available. $5 4% 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20

Lease costs continued to escalate due to increased sale prices resulting in Average Gross Asking Rent (Price/SF) Vacancy (%) rising assessed values and taxes. Operating costs are also growing as amenity upgrades are passed on to the building’s expenses. Even with higher rental rates, speculative-suites still lease the fastest as move-in Net Absorption (SF) ready options are highly desirable. In spite of increased costs to both spec- suites and traditional vacant, flexible lease terms are used as a way to 500,000 attract tenants. 400,000

300,000 In recent years, the office market has been transformed by the constant challenge that employers face in recruiting and retaining top talent. The 200,000 result has been a focus on the design of workplace environments that 100,000 provide the best experience for employees. However, much of these 0 standards will now change with the Covid-19 pandemic outbreak that has 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 halted businesses and the economy at the end of the first quarter. The Twin Cities future outlook is now uncertain. Before the virus, absorption was MARKET SUMMARY expected to remain steady and asking rental rates were plateauing across a Current Prior 12 Month broad subset of office classes and submarkets. Quarter Quarter Forecast Total Inventory 118.9M 118.9.M 

Remote work was a trend gaining some steam before the pandemic but Vacancy Rate 11.2% 11.2%  social distancing guidelines have forced companies to refine work from Quarterly Net Absorption 49,332 52,268  home measures. Landlords will need to put health and sanitation codes as a top propriety as buildings reopen. Once desired property amenities such Average Gross Asking Rent $29.06 $28.21  as shared seated common rooms and fitness centers could be secondary Under Construction 1,933,385 1,933,385  as tenants may turn a preference to properties with top air quality Deliveries 0 438,436  standards and touch free technology to limit touching doors and elevators.

CONSTRUCTION Class A Average Gross Asking Rate Ryan Companies and the Excelsior Group broke ground in the West submarket in the third quarter of 2019 on a 100% speculative office $36 $34.34 building, 10 West End in St. Louis Park. CarVal Investors was the first $33 tenant to sign a lease in 10 West End, a full floor for 34,600-square-feet. $30 $26.45 The 11-story, 343,000 square foot building with a parking structure for $27 1,214 cars is expected to be completed early in 2021. $24 $21 Twin Cities corporate campus development has been prevalent in $18 recent years including UnitedHealth Group in Eden Prairie; the Vikings Mpls CBD, West, SW All other submarkets and Prime Therapeutics in Eagan; and Wells Fargo, Be the Match and Behind the scenes of these rising rental rates are transactions with significant tenant incentives as owners compete for tenants. Xcel Energy in the Minneapolis CBD. Currently under construction is Thrivent’s 350,000-square-foot headquarters building in the CBD, and SALES United Properties began construction in the second quarter on RBC Sales volume has remained robust in 2019, and pricing has continued to Gateway, United Properties’ mixed-use tower on the north end of the rise. Minneapolis benefits from strong demand from investors priced out Minneapolis CBD. RBC Wealth Management will occupy 370,000 square of gateway markets. It is common for investors to turn to secondary feet in the building, and United Properties, along with other Pohlad- markets during the latter stage of an economic expansion; they are owned companies, will occupy 96,000 square feet. seeking yields unavailable in first-tier cities, where cap rates are compressed. Other development is coming in the form of renovations of existing facilities. Opus renovated Target West, Target’s 307,000-square-foot Office Sales Volume former corporate campus along Interstate 394, just outside of the Minneapolis CBD. Tactile Medical was the first tenant to lease space 3,600 and moved into 152,000 square feet in 2019. In the first quarter of 3,000

2020, Regis moved into their new 65,000 square foot headquarters at Millions 2,400 Target West from 7201 Metro Blvd, Edina. Swervo is redeveloping the 1,800 1,200 former YMCA in the Minneapolis CBD; the project is called Thirty and 600 totals 140,000 square feet. Life Time Work announced a deal to move 0 into Thirty for 53,000-square-feet. In a future quarter, the 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 redevelopment of the former Macy’s retail space, called The Dayton’s YTD Project, will add 850,000 square feet of office space to the CBD-Core. Source: Real Capital Analytics RENTAL RATES The largest transaction of the quarter was the West End Office Park In both suburban and urban locations, Class A and Class B properties portfolio sale of $130.1 million. Utah-based Bridge Investment Group with strong amenity packages and renovated spaces are enjoying bought the park, comprised of six properties totaling 557,000 square feet, leasing success. Rental rates at these properties are garnering the from The Excelsior Group. Bridge Investment Group announced they most positive gains. Landlord competition to secure tenants is focused would make additional capital improvements to the park, which was 84% on providing concessions in the form of free rent and tenant occupied at the time of the transaction. A pair of buildings in the improvement allowances. This also provides landlords with an Southwest submarket was the second highest portfolio sold in the attractive rent roll, making it appealing to prospective buyers in case an quarter for $39.8 million. Baker Road Corporate Center and the 4400 owner is considering selling. Extra upgrades and amenities help tip the Baker Building was purchased by the private Chicago firm, Syndicated decision-making process in a building’s favor among businesses Equities from the long term owner WPT Industrial REIT. seeking to attract and retain talent. FUTURE TRENDS Class A projects at in-demand submarkets of the Minneapolis CBD- The impact of the COVID-19 virus will greatly influence the commercial Core, Southwest and West have average quoted rates that are 30.0% real estate market in future quarters as a stay-at-home quarantine order higher than the other submarkets combined. The overall weighted was issued by the Minnesota governor in the final days of quarter one. average rent (FSG) in the Minneapolis CBD-Core for quarter one ended Major sectors of the economy have been temporarily closed to mitigate at $34.06, a full dollar per square foot higher than the previous quarter. the viruses spread. Unemployment fillings rose sharply at the end of Rent growth on the 394 corridor also rose by roughly a dollar per square March and will continue to rise as the economy responds to the crisis. foot, while the 494 corridor office market stabilized at $28.72. Across the Twin Cities market rents peaked at a recorded high of $29.06.

SELECT LEASE TRANSACTIONS

Tenant Property Address City Submarket Type Size (SF)

The Nerdery 7700 France Ave S 7700 France Ave Edina Southwest New 63,791

Toppan Merrill Energy Park Business Center West 1465-1501 Energy Park Dr W St. Paul Northeast New 48,556

West Monroe The Nordic 729 Washington Ave N Minneapolis Mpls-CBD New 42,000

Progressive Insurance Shoreview Corporate Center 4100 Lexington Ave N Shoreview Northeast New 37,731

Benedictine Health Systems 6499 Corporate Cernter 6499 University Ave NE Fridley Northeast New 37,490

One10 Marketing 705 Baker Center 705 Marquette Ave Minneapolis Mpls-CBD New 32,202

Pinstripes 233 Park Ave 233 Park Ave Minneapolis Mpls-CBD New 31,000

NorthRock Partners Capella Tower 225 S 6th St Minneapolis Mpls-CBD New 30,194

PTC Shoreview Corporate Center 4100 Lexington Ave N Shoreview Northeast New 28,380

Flagstone Foods T3 323 Washington Ave N Minneapolis Mpls-CBD New 26,353

Avtex Northland Center I 3500 American Blvd W Bloomington Southwest Renew 23,640

Big G Tech Support Westwood III Business Center 6251-6279 Bury Dr Eden Prairie Southwest New 23,386

Sonex Grand Oak Office IV 950 Blue Gentian Rd Eagan Southeast Sublease 20,316

Wipfli Fifth Street Towers - 150 Tower 150 S 5th St Minneapolis Mpls-CBD New 20,260

Incomm Fifth Street Towers - 100 Tower 100 S 5th St Minneapolis Mpls-CBD New 19,680

Earl Giles Distillery & Eatery Kurt Building 1325 Quincy St NE Minneapolis Mpls-CBD New 17,500

Harmon Construction Southpoint Tower 1650 W 82nd St Bloomington Southwest New 17,294

Empyrean Benefit Solutions, Inc The 15 Building 15 S 5th St Minneapolis Mpls-CBD New 16,489

Daikan Applied Americas ATRIA Corporate Center 3033 Campus Dr Plymouth Northwest New 15,839

SELECT SALES TRANSACTIONS

Price Property Address City Submarket Buyer Seller Price SF PSF

West End Center (Part of 1665 Utica Avenue S St. Louis Park West Bridge Investment Group Excelsior Group $46,675,559 196,708 $237.28 Portfolio)

West End Plaza (Part of 1660 Highway 100 St. Louis Park West Bridge Investment Group Excelsior Group $45,246,849 209,180 $216.31 Portfolio) South

Falcon Ridge Bass Creek Business Park 6150 Trenton Lane N Plymouth Northwest Waitt Company $24,250,000 185,870 $130.47 Partners

Baker Road Corporate 4350 Baker Road Minnetonka Southwest Syndicated Equities WPT Industrial REIT $21,571,662 107,100 $201.42 Center (Part of Portfolio)

Baker Road Corporate 4400 Baker Road Minnetonka Southwest Syndicated Equities WPT Industrial REIT $18,228,338 90,000 $202.54 Center (Part of Portfolio)

West End I (Part of 5401 Gamble Drive St. Louis Park West Bridge Investment Group Excelsior Group $8,156,549 37,547 $217.24 Portfolio)

West End IV (Part of 5353 Gamble Drive St. Louis Park West Bridge Investment Group Excelsior Group $7,335,186 37,656 $194.79 Portfolio)

West End II (Part of 5402 Parkdale Drive St. Louis Park West Bridge Investment Group Excelsior Group $7,036,854 37,591 $187.20 Portfolio)

Park Glen Corporate Center 4500 Park Glen Road St. Louis Park West Carlson Partners AtWater Group $6,895,000 48,816 $141.24

West End III (Part of 5354 Parkdale Drive St. Louis Park West Bridge Investment Group Excelsior Group $6,215,718 38,423 $161.77 Portfolio)

2740 American Blvd Capstan Penn American Center Bloomington Southwest Schneiderman's Furniture $5,700,000 69,330 $82.22 W Corporation

Heutmaker Business Plymouth Office Center 3025 Harbor Lane N Plymouth Northwest Colltech, Inc $4,981,000 45,641 $109.13 Advisors

9380 Central Avenue 21st Century Bank Blaine Northwest Bella Vita Holdings, LLC Steven Fischer $4,560,000 29,521 $154.47 NE

816 Wayzata Copeland-Buhl Building 800 Wayzata Blvd E Wayzata West WSP Wayzata, LLC $3,600,000 22,930 $157.00 Associates, LLC

6442 City West Primetech Office Center I Eden Prairie Southwest Matthew Frauenshuh Kraus-Anderson $3,355,553 51,940 $64.60 Parkway

6462 City West Primetech Office Center III Eden Prairie Southwest SCCE & HCCA Properties Kraus-Anderson $2,458,000 35,914 $68.44 Parkway

3805 Washington KIVVUN Property Day One Property Orbit Studios Minneapolis Northwest $2,275,000 15,500 $146.77 Avenue N Management, LLC Services, LLC

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 companies, more than anywhere else in the world. Additionally, more Mining, Logging Information than 320 Fortune 500 companies have a local presence. This Construction 3.2% 4.1% concentration of corporate heavyweights supports a median income of Government $81,000 per year, more than 25.0% above the national average. 4.6% Trade, Minneapolis-St. Paul’s unemployment rate, which is historically lower Other Services Transportation, Utilities 5.4% 21.6% than the nation’s, was at 3.3% as of January 2020, compared with the national rate of 3.6%. The area also boasts a strong work ethic: Its labor force participation rate in January 2020 tied for the second best in the Financial Activities 7.5% nation at 68.1%, compared with 63.4% nationally.

Minneapolis-St. Paul is a global leader in biotechnology and biomedical Professional Business Services research with deep roots in agriculture, food exports and water 8.2% Education & Health Services technology, and it has one of the highest concentrations of banks and 20.6% financial talent of any major metropolitan area. Six of the world’s 10 Leisure & Hospitality 10.8% leading medical device manufacturers have operations in the area. The Manufacturing 11.1% 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-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Apr-20 Dec-10 Aug-10 Dec-11 Aug-11 Dec-12 Aug-12 Dec-13 Aug-13 Dec-14 Aug-14 Dec-15 Aug-15 Dec-16 Aug-16 Dec-17 Aug-17 Dec-18 Aug-18 Dec-19 4.0 Aug-19 -4.0 2.0 -6.0 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Apr-20 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 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 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 STATISTICS5

Total Percent With Weighted Avg. Total 2019 Q1 2020 YTD Under Inventory Sublease Rental Rate Vacant Absorption Absorption Absorption Construction (SF) Vacant (FSG)

Core

Class A 17,577,963 1,943,546 11.1% (53,703) (78,708) (78,708) $36.17 1,590,385

Class B 6,989,659 1,688,002 24.1% 84,731 74,447 74,447 $28.50 0

Class C 124,201 29,500 23.7% 2,173 0 0 $16.38 0

Totals 24,691,823 3,661,048 14.8% 33,201 (4,261) (4,261) $34.06 1,590,385

East

Class A 1,407,443 62,049 4.4% 40,572 5,225 5,225 $34.97 0

Class B 879,568 183,106 20.8% 20,792 (18,333) (18,333) $27.55 0

Class C 175,842 19,241 10.9% (12,615) (10,609) (10,609) $23.61 0

Totals 2,462,853 264,396 10.7% 48,749 (23,717) (23,717) $29.16 0

Loring

Class A 0 0 N/A 0 0 0 N/A 0

Class B 58,312 3,538 6.0% 0 (3,538) (3,538) $29.28 0

Class C 165,797 0 0 103 0 0 $16.16 0

Totals 224,109 3,538 1.6% 103 (3,538) (3,538) $24.90 0

Northeast

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

Class B 1,819,478 162,661 8.9% (25,280) 66,280 66,280 $22.73 0

Class C 1,159,464 51,898 4.5% (41,354) 4,696 4,696 $19.66 0

Totals 3,179,681 217,350 6.8% (40,252) 70,976 70,976 $22.59 0

Northloop

Class A 1,236,475 166,867 13.5% 319,087 1,246 1,246 $39.03 0

Class B 1,173,777 218,002 18.6% (38,439) (10,245) (10,245) $31.91 0

Class C 329,449 99,105 30.1% (71,993) (16,776) (16,776) $25.98 0

Totals 2,739,701 483,974 17.7% 208,655 (25,775) (25,775) $34.01 0

Warehouse

Class A 434,333 0 0.0% 0 0 0 $23.73 0

Class B 1,565,289 373,224 23.8% (154,856) (62,761) (62,761) $27.60 0

Class C 311,165 4,282 1.4% (8,146) 3,864 3,864 $23.00 0

Totals 2,310,787 377,506 16.3% (163,002) (58,897) (58,897) $27.44 0

Overall

Class A 20,856,953 2,175,253 10.4% 332,338 (72,237) (72,237) $34.13 1,590,385

Class B 12,486,083 2,628,533 21.1% (113,052) 45,850 45,850 $28.05 0

Class C 2,265,918 204,026 9.0% (131,832) (18,825) (18,825) $21.87 0

Totals 35,608,954 5,007,812 14.1% 87,454 (45,212) (45,212) $32.93 1,590,385 Data includes single and multi-tenant office buildings; does not include owner-occupied properties (75% or more occupied by owner)

SUBMARKET STATISTICS Total Percent With Weighted Avg. Total 2019 Q1 2020 YTD Under Inventory Sublease Rental Rate Vacant Absorption Absorption Absorption Construction (SF) Vacant (FSG)

St. Paul CBD

Class A 3,111,558 325,759 10.5% (72,845) (28,816) (28,816) $27.26 0

Class B 4,724,322 903,431 19.1% (59,484) 15,692 15,692 $22.74 0

Class C 411,084 96,096 23.4% 36,889 (587) (587) $17.24 0

Totals 8,462,964 1,325,286 15.7% (95,440) (13,711) (13,711) $23.89 0

Northeast

Class A 1,245,396 134,975 10.8% (40,613) 14,136 14,136 $24.57 0

Class B 12,998,812 1,001,689 7.7% 191,783 (16,665) (16,665) $21.01 0

Class C 3,740,967 122,237 3.3% 18,331 31,914 31,914 $19.95 0

Totals 17,985,175 1,258,907 7.0% 169,501 29,385 29,385 $21.51 0

Northwest

Class A 971,953 14,713 1.5% 187,333 15,608 15,608 $24.37 0

Class B 3,574,452 361,742 10.1% 48,917 (54,694) (54,694) $21.01 0

Class C 1,072,052 24,291 2.7% 630 (5,876) (5,876) $19.95 0

Totals 5,618,457 400,746 7.1% 236,880 (44,962) (44,962) $19.79 0

Southeast

Class A 2,611,888 302,747 11.6% 165,578 25,430 25,430 $29.58 0

Class B 9,815,573 945,998 9.6% (53,399) (38,820) (38,820) $22.06 0

Class C 3,647,290 188,622 5.1% 5,813 556 556 $20.30 0

Totals 16,074,751 1,437,367 8.9% 117,992 (12,834) (12,834) $23.70 0

Southwest

Class A 8,016,986 944,867 11.8% 230,141 10,053 10,053 $32.80 0

Class B 10,399,270 1,420,043 13.7% 68,116 16,204 16,204 $24.88 0

Class C 5,330,719 269,195 5.0% 69,260 41,392 41,392 $23.58 0

Totals 23,746,975 2,634,105 11.1% 367,517 67,649 67,649 $28.72 0

West

Class A 3,562,631 515,322 14.4% (90,443) 15,146 15,146 $36.10 343,000

Class B 6,091,438 613,914 10.1% (21,648) 57,542 57,542 $29.06 0

Class C 2,058,975 114,778 5.6% 7,485 (3,671) (3,671) $23.89 0

Totals 11,713,044 1,244,014 10.6% (104,606) 69,017 69,017 $31.35 343,000

Total Market

Class A 40,377,365 4,413,636 10.9% 711,489 (20,680) (20,680) $34.06 1,933,385

Class B 60,089,950 7,875,350 13.1% 61,233 25,109 25,109 $25.08 0

Class C 18,527,005 1,019,245 5.5% 6,576 44,903 44,903 $22.88 0

Totals 118,994,320 13,308,231 11.2% 373,926 49,332 49,332 $29.06 1,933,385

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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