MID-YEAR 2020 OFFICE MARKET UPDATE


UNDERUTILIZED OFFICE SPACES

The office market holds on while companies extend work from home options into 2021.  While the expectation stays the same that amenities will continue to drive demand, those amenities have gone nearly unused during Q2 2020.  It is anticipated that in upcoming months, those underutilized spaces will help alleviate some congestion as workers return and a relief valve is needed for the more heavily occupied tenant spaces.  For now, every other chair is literally turned on end.  Parking ramps and common area cafés remain empty and there isn’t a waiting line in the elevator lobby.  Certainly, leased office spaces are currently underutilized.  Because of this, a reduction in operating costs due to lower utility and cleaning costs could be forthcoming. 

Office Market Vacancy

POSITIVE ABSORPTION & LOW INVENTORY

The above narrative however, is not reflective in the Q2 data as businesses, bound by leases, utilize PPP programs to keep productivity up.  Unemployment surged in May 2020 to 10.4% from 2.6% in May 2019.  Even with that bad news, the overall office market experienced 664,000 square feet of positive absorption ending Q2 with a total market vacancy rate of 12%.  Focusing on multi-tenant properties only, the overall vacancy rate hovers at 15.7%, 0.3% up from year end 2019.  The clear winner continues to be the Northwest submarket with an overall multi-tenant vacancy rate of 9.5% with overall quoted gross rental rates averaging $21.95/SF.  The Northwest market is a sharp contrast to the 20% vacancy rate experienced in St Paul CBD.  These two markets show quoted gross rates that are nearly equal at $21.98/SF. 

Total sales volume for Q2 surpassed 1.3 million square feet.  Low interest rates continue to drive sales but inventory is low and investors have few options readily available. 

IN CONCLUSION

Returning to the office remains unknown to many employees.  Much rides on finding a vaccine.  Mass transit and social distancing don’t mix well and parking lots have disappeared in the downtowns.  Winter is calling, so keep wearing your mask and together we will ride this out. 

Written by: Nancy Powell, Vice President