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Minneapolis office vacancies increase
by Art Hughes, Minnesota Public Radio
February 17, 2003

With vacancy rates on the rise, office tower owners are more willing to make attractive lease arrangements and configurations. Here, work is underway on the new offices of the Minneapolis Foundation in the IDS tower. (MPR Photo/Art Hughes)

Office vacancies in downtown Minneapolis continue to push higher, even after three years of a down market. The vacancies create headaches for owners of some of the most valuable properties in the state, and increase the tax burden for residential property owners. Meanwhile, people wanting space in Minneapolis are snatching up deals.

Minneapolis, Minn. — A new report by Collier-Towle Real Estate in Minneapolis shows vacancies for the nearly 26 million square feet of office space available downtown rose from 14 percent last summer to more than 17 percent at year's end. Factoring in the amount of sublease space bumps the vacancy rate up to more than 21 percent. That's more than four times the rate for what's considered a stable lease market.

Commercial real estate consultant Russ Nelson with Nelson, Tietz and Hoye said the vacancy rates are the highest in a decade. While vacancies 10 years ago were caused by overbuilding in a good economy, the current dilemma appears more troubling.

"This market is a problem of lack of demand," Nelson said. "The recession and the shrinking of the labor force left desks empty, and that's a more chronic and difficult problem to solve. Even though the technical number is somewhat less, it's every bit as much of a problem to solve, -- probably more so."

The amount of sublease space ballooned after American Express and the Target Corp. moved into new buildings downtown. Nelson said sublease space is typically harder to fill because terms are shorter and tenants can have a harder time making improvements.

"These are absolutely historic, record amounts of sublease space available," Nelson said.

He said the projections only get worse. General Mills is scheduled to move out of downtown's Pillsbury Tower when its new building in Golden Valley is finished next year.

In addition to creating financial and logistical problems for building owners, the high number of vacancies has a significant effect on homeowners' tax statements. City Assessor Scott Renne said the vacancies make the office buildings less valuable, therefore the owners pay less property tax. He said the city collects the same amount of tax dollars regardless -- so it has to come from somewhere.

"Property taxes are hydraulic. So if downtown pays less taxes, by definition, other property types, primarily residential, pay more taxes," Renne said.

Renne said the number of commercial property tax appeals jumped almost 32 percent last year.

Tax records show the amount of property tax and assessments paid by the Wells Fargo Tower alone dropped $2.2 million last year from the year before.

The Minneapolis Downtown Council's Sam Grabarski said the millions of vacant square feet add up to a giant property tax void.

"That's almost the same as if an entire ward of our 13 wards decided to not pay taxes," Grabarski said. "Think of what that does to the bottom line."

A tax consultant for the city calculates a nearly 4 percent decrease in commercial taxes in Minneapolis this year. At the same time, taxes for homeowners increased 18 percent. Grabarski said Minneapolis recovers vacant office space at a rate of about a half a million square feet a year.

"We see it's going to take anywhere from four or five years on up to 10 years to bring this back down to where it was -- which used to be a very low vacancy rate," Grabarski said.

Lean times for landlords open up opportunities for tenants. Renters are renegotiating leases and moving to bigger, more desirable spaces.

The Minneapolis Foundation has been in the historic Foshay Tower since first opening a formal office in the early 1970s. In March, the non-profit will move to the eighth floor of the gleaming IDS Tower.

Foundation President Emmett Carson says it will have much more space, configured in a more efficient way. Carson also says the new office will have much better heating and ventilation, security, parking and elevator access. He says the market definitely works in his favor.

"The weak market has made landlords work hard to attract tenants," Carson said. "What IDS brought to those negotiations was a real passion to want us there, and to think about ways the building itself could complement our mission -- consistent with what they want for the building. So it was a hand-and-glove kind of fit."

Experts say aggressive recruiting by the IDS property managers have helped the building maintain a relatively healthy vacancy rate, compared to the dozens of surrounding buildings that so far see no end to the slow drain of tenants.

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