Research & Forecast Report > MINNEAPOLIS-ST. PAUL OFFICE | Q2 2018 Repositioned Office Product Driving Positive Market Change 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.