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United Properties Feature: Upsides of Upgrading
1tN
Page 1 of 5
A Race for Space: Speculative Office Building Begins ~`
C:~
ESI~'H'~S ~If?Ylwu ~ fL••i11.11C#25 ~"s"tYl
Increasingly limited options (particularly in Class A space), a relatively healthy economy, growing the nz,mc page
companies and some pent-up demand are spurring the launch of a speculative, multi-tenant office
development cycle in the Twin Cities. Overall vacancy is 15.2%, and Class A vacancy has dipped
below 12%. s~+"~i~~ ~rta~ek~t ally t, a:^.s~a~,r~tt
To help meet the demand for larger blocks of contiguous space, more than 1 million square feet is a,. ~»tlj n~ &u~•~ ~~ ~~~
under construction, primarily in the Southwest, Northwest and West submarkets, while the Northeast
and South/Airport also are seeing healthy activity.
„ a i ~~ ~ ~_~ r~
It's also expected that at least one new downtown Minneapolis office tower will be announced in 2007 mcrt ?rYi;~r7rat~c.r'
-- the first since 2001.
'The Twin Cities is in the beginning stages of a development cycle," says Dan Gleason, United ~cc~ auY ~.,.e~ ~~ :'~~'~-~~~~
Properties vice president -office brokerage. 'The market is tightening and there's a limited number of ~,1~rkei F~ep~sis
buildings that can accommodate a 100,000-sq.-ft. user in the suburbs. I believe we're getting ready
for a slow but steady development run. I also believe we'll see a significant increase in rental rates in
2008."
laNl".fi't` ;'"Q7
Rates are gradually increasing, especially in suburban markets where new development is underway.
Higher rates are needed to justify rising construction costs. zui~+ cr.,~Fa~ ~
Some tenants are cautious about paying new construction rates and are experiencing some sticker
shock. However, in many submarkets, growing companies will have few other options for large blocks
of quality space.
r
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Under Gonstruttiorr
`~
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Submarket Snapshots
What's underway? What's in the pipeline? Who's leasing space? Where's the
demand coming from? Here's a snapshot of each submarket.
Southwest West St._Paul South/Ai~ort
lump to:
Minneapolis CBD Northwest Northeast
Southwest kicks off development
An impressive 2 million square feet is under construction or planned in the Southwest. (The overall
http://outlook.uproperties.com/features/2007/2007Apri1_RaceForSpace.htm 5/11/2007
United Properties Feature: Upsides of Upgrading
vacancy is 11.7%; Class A is 8.8%).
The first spec building completed during this development cycle was the 56,000-sq.-ft. Lake Smetana
Business Center in Eden Prairie, which opened 100% occupied; Compellent Technologies Inc. leased
the entire building. Another 855,000 sq. ft. is under construction, including Duke Realty Corp.'s
330,000-sq.-ft. Norman Pointe II in Bloomington and United Properties' 90,000-sq.-ft. Superior Office
Center in Eden Prairie.
"Superior Office Center's leasing interest is brisk," says John McCarthy, United Properties vice
president -office brokerage. "It is the largest block of space to be delivered in the Southwest market
this summer, and it's being considered by a wide variety of users."
Opus Northwest is developing Excelsior Crossings on the former Supervalu headquarters site in
Hopkins. This project is a 435,000-sq.-ft., two-building build-to-suit for Cargill, who will take
occupancy in phases, beginning in late 2008.
Another 1.24 million square feet is planned, including Solomon Group's 130,000-sq.-ft. building in
Eden Prairie named Windsor Plaza and Liberty Property Trust's 120,000-sq.-ft. Liberty Southwest
Plaza on the former Best Buy headquarters site in Eden Prairie. Supervalu is leasing 350,000 sq. ft. of
the former Best Buy facility. Supervalu recently signed afive-year lease, needing space quickly
following its Albertson's acquisition.
~' ~~~-
~~ ,~~, i ; ; ~ .
Renderiny of Windsor Plaza
United Properties plans to break ground in the third quarter on the 280,000-sq.-ft. 8200 Tower at
Normandale Lake Office Park in Bloomington. Welsh Cos. is planning 100,000 sq. ft. at the former
Fingerhut site in Minnetonka and could occupy half the building.
Another 950,000 sq. ft. of space is in "preliminary" stages. While the Southwest is ripe for
development, not everything announced will proceed.
"Class A vacancy is well below 10%, market fundamentals are strong, and large corporate users are
driving the demand for space," McCarthy says. "However, there's also some 'jaw boning' going on.
Not all projects will move forward."
Net rates of $18.50-$21 are needed to justify new construction. Developers believe that as space
tightens, tenants will have few options but to pay higher rates for new development, especially for
highly sought-after Class A space.
"We've seen strong demand for Class A space," says McCarthy. "Many tenants recognize the benefits
of Class Aspace -- even with the higher price tag. These buildings can assist in attracting and
retaining employees because of the added amenities. The incremental increase in Class A costs is
small when you factor in the intangibles and break it down per employee."
Some users are still reluctant to pay new construction rates, and uncertainty about the economy
exists. Tenants who need to expand, however, will have few alternatives to meet their growing space
needs.
Users continue to scout the submarket. 'The prospect list is more serious and longer than a year
ago," says Tom Tracy, United Properties vice president -office brokerage. "While there's less risk for
developers in this submarket, due to pent-up demand, developers will need a good site and a solid
project to drive the rental rates required. The next 6-12 months will be very telling. We believe we're
at the front end of a fairly healthy development cycle. However, if there's little absorption in the next
6-12 months, it will be a shorter cycle."
New tower for downtown Minneapolis?
With the relatively stable economy, expanding companies and a Class A vacancy of 13.6%, at least
one new downtown Minneapolis office tower should be announced this year. On or near Nicollet Mall
is a logical location, as space along the Mall is just 6% vacant.
At least two developers are vying
to be first. Opus has committed to
develop on the southeast corner of
Tenth Street and Nicollet Mall.
Ryan Cos. US Inc. also has a
viable site at 801 Marquette Ave.
S.
Page 2 of 5
http://outlook.uproperties.com/features/2007/2007Apri1_RaceForSpace.htm 5/11/2007
United Properties Feature: Upsides of Upgrading
Due to rising construction costs, „
rates must continue increasing to
support new construction. (Current ',
net rates along Nicollet Mall are
$15-$20). The minimum size of a
new tower would be 500,000 sq.
ft., and an anchor tenant is
needed to occupy one-third to _
one-half of the space.
"An anchor must step up and pay
$22-$25 net rent. That's new
territory in Minneapolis," says Jim
Montez, United Properties senior
office brokerage associate.
f_
" '~f - ~`;
~ ~
~....
e-
~; v ~~iv
1
3{
Potential anchors include Target, (C/ick image to en/age)
which occupies roughly 2.5 million square feet downtown. Capella Education Co., Fallon and Deloitte
and Touche are also on developers' radar screens.
A large acquisition or merger also could result in an "under-the-radar" tenant unexpectedly needing
space. "In a development cycle, there's always pent-up demand that's difficult to predict," Montez
says.
Some large blocks exist downtown. Rider Bennett law firm is closing, leaving behind 100,000 sq. ft, at
33 South Sixth. Blocks are available at 225 S. Sixth, 701 Building, Fifth Street Towers and others. The
only large space along Nicollet Mall is an 80,000-sq.-ft. sublease at Piper Jaffray Tower. In 2008, Fifth
Street Towers and 225 S. Sixth could have blocks of 200,000 sq. ft. or more.
Montez also points to a trend of traditionally suburban tenants relocating downtown. "More than a
dozen suburban tenants moved downtown in the past year," Montez says. 'They fall into two
categories: Target vendors and those who want the downtown 'energy.' Target vendors include
Colgate, Clorox and Revlon. Those that want to be part of the downtown excitement, which aids
employee and recruitment and retention, and capitalize on business opportunities include
Colle+McVoy, Foster Klima & Co., Griffen International Advisors and Dunham Associates. Others
exploring downtown include Virchow Krause."
Few, if any, tenants recently relocated from downtown to the suburbs. Transportation is a growing
factor. 'Tenants today are saying it's easier to get downtown than crossing many of the suburbs,"
Montez says. "Downtown is centrally located, and light rail is making it more accessible."
Developers poised in West
Class A space is at a premium in the West -- no blocks larger than 50,000 sq. ft. are available --
which will spur development. Class A vacancy is 10.3%; overall the West market is 11.9%. Five
leases totaling 190,000 sq. ft. recently were signed, and tenants will take occupancy later this year.
"Users continue scouting the West," says Bob Revoir, United Properties vice president -office
brokerage. "Christopher & Banks is looking fora 100,000-sq.-ft. build-to-suit, and two 30,000-sq.-ft.
users are looking to relocate there in fourth quarter."
While nothing is under construction, developers are in the "starting blocks." Four projects are planned
totaling 1.24 million square feet. The largest is the former Novartis site in St. Louis Park, dubbed
West End. Duke will demolish existing space and develop mixed-use, which could include 1 million
square feet of office. Also planned are the 165,000-sq.-ft. Bassett Creek Office Center, proposed by
Industrial Equities in Plymouth, and the 114,000-sq.-ft. Plymouth Woods Office Center Phase II,
proposed by St. Paul Properties. Also, Hempel Properties will break ground in the third quarter on the
mixed-use, 55,000-sq.-ft. Golden Village in Golden Valley, of which 35,000 sq. ft. will be office.
Page 3 of 5
http://outlook.uproperties.com/features/2007/2007Apri1_RaceForSpace.htm 5/11/2007
United Properties Feature: Upsides of Upgrading
Northwest developers pull trigger
As vacancies continue dropping, the Northwest is seeing strong demand for development. Five
projects are under construction, totaling 386,973 sq. ft. Opus is developing a 150,000-sq.-ft. facility
for Select Comfort at Bass Creek Corporate Center in Plymouth.
Also under construction by McGough Development is a 150,000-sq.-ft. "green" building in Maple
Grove for Great Lakes Energy Development.
"Land is still available in Maple Grove, which continues to lead this submarket's leasing activity and
new construction," says Greg McMillan, United Properties senior office brokerage associate. "Nearly
half the new construction underway is in Maple Grove. There's also land available in Brooklyn Park.
The Highway 610 corridor, running through the northern metro, will drive future development." Class
A net rates are averaging $16-$17. New construction demands rates in the $19-$20 range.
St. Paul may see project
Despite high vacancies, a potential downtown St. Paul office development was reported for a vacant
parking lot at 415 Wabasha St. Dean D. Johnson, a St. Paul native and partner with Brussels,
Belgium-based WingField Corp., reportedly purchased the site where the Wabasha Court office
building once stood and plans to develop mixed-use, including office, hotel and retail.
SouthJAirport remains solid
The South/Airport is the smallest office submarket, but developers are not overlooking this very stable
market. It boasts the lowest vacancy of 11.3%; Class A is 8.8%.
Two new buildings were completed in first-quarter 2007: the 90,000-sq.-ft. Grand Oak X by Interstate
Partners in Eagan, and the 40,000-sq.-ft. Mendota Place by United Properties in Mendota Heights.
Underway is the 30,000-sq.-ft. Centre Pointe VII in Eagan by Roseville Properties.
--
' K ~~-~
Renderin of Mendota Place
In addition, 1.9 million square feet is in preliminary stages, including 1 million square feet of
speculative office space as part of McGough's Bloomington Central Station.
'There's continuing tenant demand, but it's a small submarket," Gleason says. "I expect the market to
continue to tighten, but I don't believe we will see any more speculative development this year. Any
new project will probably need a 50,000-sq.-ft. tenant before breaking ground, and that's a large
transaction in this submarket."
Northeast is strong
The Northeast submarket boasts 208,005 sq. ft. under construction and 855,205 sq. ft. proposed.
Woodbury and Lake Elmo lead development.
'The Woodbury market became really tight in 2006," says Tom Stella, United Properties vice
president -office brokerage. "You couldn't even find 3,500 sq. ft. Subsequently, developers pulled the
trigger, so now there will be some vacancy, but absorption as well. Most Northeast leases are new to
the submarket, so it'll be true absorption."
Projects underway include Welsh's 95,000-sq.-ft. Oakdale Tech Center, United Properties' 40,000-sq.-
ft. Eagle Point Office Park Phase III in Lake Elmo, MSP Commercial Management's 53,500-sq.-ft. City
Centre Professional in Woodbury and Commercial Equity Partners' Tamarack Hills in Woodbury. Also,
Keller Williams will anchor MSP's 35,000-sq.-ft. North Central Professional Center in Roseville."
'There are not many quality blocks of space larger than 50,000 sq. ft.," Stella says. 'This submarket,
like many others, is well-positioned for development."
Page 4 of 5
http://outlook.uproperties.com/features/2007/2007Apri1_RaceForSpace.htm 5/11/2007
United Properties Feature: Upsides of Upgrading
.- a. ; 'r>. '4 ti
4..t t ~~»
Dan Gleason John McCarthy Greg McMillan Jim Montez
Copyright 2002-2007. United Properties. All Rights Reserved.
3500 American Boulevard West, Minneapolis, MN 55431
Privd POlicv ~ Contact UP ~ Download Hard Coov ~ Request Hard Coov
Page 5 of 5
http://outlook.uproperties.com/features/2007/2007Apri1_RaceForSpace.htm 5/11 /2007
United Properties Market Activity
Page 1 of 4
M~RK~~` A`1l11`Y "' ~q 1._! :.. , ::,
January 1 through March 31, 2007
f'.t~w4r ';~~:i~.us`ea;ures fr_:sn
Jump to: OFFICE INDUSTRIAL RETAIL INVESTMENTS ~ ~~~~~ -~~
^
OFFICE MARKET
West ~c~ttvifF br su'; ~ ~~~~
• Buffalo Wild Wings signed a 10-year lease for 44,000 sq. ft. at the Colonnade on Wayzata
Boulevard in Golden Valley starting October 1, 2007. The company is vacating 17,000 sq. ft. i:.~s; 3 ~ ~,~ ~,~~ >vt~~r_x}~~r~~=. in
at the 1600 Tower. ~,~~ rite:~,~tsti~a,
• Three major leases were signed at Metropoint in St. Louis Park. UnitedHealth Group will take
59,000 sq. ft. at the South building effective August 1. Aetna will vacate 38,000 sq. ft. at Acc ; ~ wr ;,,r.~ _~ ~_-,,, „t
Crescent Ridge to relocate to Metropoint North and take 44,000 sq. ft. as of October 1. Wells ~d~r~et f~~~~rr~
Fargo insurance expanded by 9,000 sq. ft. for a total of 54,000 sq. ft. in the Tower in March
2007 and extended their lease for another five years. These transactions will help offset the
92,000 sq. ft. that Allianz Life Insurance vacated at the end of February to relocate to its own
facility. ! " li 11 { «`~ ~ ` ~?
• As of May 1, HCC Benefits Corporation will vacate 20,000 sq. ft. at Metropoint North and , { ~ ~ ~ ~.^ € ~ ~ ~ '
11,000 sq. ft. at 605 Waterford Park to move into 25,000 sq. ft. at Crescent Ridge Corporate
Center on Wayzata Boulevard in Minnetonka.
Southwest
• Anew, two-building, 450,000-sq.-ft. build-to-suit project for Cargill is now under construction
at Excelsior Crossings in Hopkins.
• United Health Group signed a lease for 70,000 sq. ft. at Market Pointe in Bloomington,
bringing the building to 100% occupancy. The property is now being marketed for sale.
• SuperValu has taken 350,000 sq. ft. at the former Best Buy headquarters site in Eden Prairie
at Shady Oak Road and Highway 212. The lease is believed to be for five years and would still
allow LIberty to develop 130,000 sq. ft. on the existing site.
South/Airport
• No significant transactions to report.
Northwest
• ChildrenJane Claytons Health Care signed a 10-year lease at Maple Grove Executive Plaza on
Elm Creek Boulevard for nearly 13,000 sq. ft., effective February 1.
• Verifications expanded their space by 7,500 sq. ft. at Wedgwood Commerce Center I in Maple
Grove and extended their lease. The company now occupies just over 17,000 sq. ft.
• Occupancy at Bell Tower South on Kirkwood Court in Maple Grove increased to 47%. The
larger tenants in the building include Mortgages Unlimited with 8,500 sq. ft., Atacom with
6,500 sq. ft. and Hogue Clinic with 7,500 sq. ft.
Minneapolis CBD
• Minute Clinic signed aseven-year lease for 52,650 sq. ft. at International Center on Second
Avenue South. Commencing July 1, the lease encompasses space on second, third and fourth
floors with expansion options for the fifth floor.
http://outlook.uproperties.com/features/2007/2007Apri1_MarketActivity.htm 5/11 /2007
United Properties Market Activity
• Kimberly Clark's six-year lease at US Bancorp Center on Nicollet Mall is for 16,000 sq. ft. on
the 29th floor.
• Opus has committed to developing a new office property on the Southeast corner of Tenth
Street and Nicollet Mall. The timing of the project has not been determined.
St. Paul CBD
• Health Partners signed a 10-year renewal for 102,894 sq. ft. at 180 E. Fifth Street.
• Alliance Bank will move out of Town Square and occupy 25,000 sq. ft. in Fifth Street Center at
55 East Fifth Street. The lease includes street-level bank space with drive-up teller lanes as
well as the top floor of the tower.
• Also at Fifth Street Center, Peterson and Fram leased 12,000 sq. ft. (a full floor).
• Arch Insurance renewed their lease for 15,000 sq. ft. at Wells Fargo Place on Seventh Street.
Northeast
• Phoenix University, a new tenant to the market, signed a lease for 9,000 sq. ft. and will
anchor a new 18,000-sq.-ft. building to be developed at Tamarack Hills in the northeast
corner of Bielenberg Drive and Tamarack Road in Woodbury.
• Keller Williams will be the lead tenant with 10,000 sq. ft. at North Central Professional Center,
a new 35,000-sq.-ft., Class A building that will break ground this spring at the northeast
corner of County Road C and Snelling Avenue in Roseville.
Medical Office
• Minnesota Eye Consultants, P.A. will consolidate its clinic, ambulatory surgery center and
central business office at Dupont Center, 9801 Dupont Avenue South in Bloomington. The
medical group signed a 20-year lease for 35,875 sq. ft.
• Minneapolis Clinic of Neurology, Ltd. will take 9,494 sq. ft. in a 15-year lease at Southdale
Place in Edina. The medical group will move off campus from Fairview Southdale Hospital to
expand its space and provide comprehensive neurological diagnostic services.
• Minnesota Oncology Hematology, P.A., will move off campus from Woodwinds Hospital to
11,130 sq. ft. at Cornerstone Medical Building on Lake Road in Woodbury. Cornerstone
Medical is a new development anchored by Metro Urology.
INDUSTRIAL MARKET
Back to Too
Northwest
• Arch Aluminum took 70,000 sq. ft. at the Weber Distribution Center at 13251 George Weber
Drive in Rogers.
• Dakota Drug purchased a 172,000-sq.-ft. property at 1101 Lund Boulevard in Anoka.
• US Food Service purchased the 81,826-sq.-ft. Zomax building at 5353 Nathan Lane in
Plymouth from Nathan Lane Partnership.
• Enpath Medical took occupancy of 100,000 sq. ft. on March 1 at the Continental Building in
Plymouth. The company's lease term is 10 years.
Northeast
• Federated Department Stores is selling its 575,000-sq.-ft. warehouse at 701 Industrial
Boulevard in Minneapolis. It was put under contract by First Industrial.
• Home Delivery Link has signed afive-year lease for 40,000 sq. ft. in the AMB Aurora Industrial
building at 2500 Walnut Street in Roseville.
• Supply Network, Inc. signed afive-year lease in the heart of the Midway area of St. Paul,
taking 25,200 sq. ft. at the Midway Distribution Center at 2079 Ellis Avenue.
Southwest
Page 2 of 4
http://outlook.uproperties.com/features/2007/2007April_MarketActivity.htm 5/11/2007
United Properties Market Activity
. General Dynamics signed along-term lease with First Industrial for 140,000 sq. ft. at 11300
Hampshire Avenue in Bloomington.
• Progressive Rail signed aseven-year contract for 146,500 sq. ft. with two acres of outside
storage at the former John Deere site on 94th Street in Bloomington.
• Also on the former John Deere site in Bloomington, DHL signed along-term lease for 79,058
sq. ft.
Southeast
• Up North Trading Company signed athree-year lease for 39,296 sq. ft. at Nicollet Business
Campus VII on Nicollet Avenue South in Burnsville.
• Jostens took 33,924 sq. ft. in a long-term lease for office/tech space at the Armstrong
Business Center in Eagan.
• The 24,600 sq. ft. American Red Cross Building at 2919 Eagandale Boulevard in Eagan was
purchased by The Builder's Group.
RETAIL MARKET
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• Best Buy will build a 45,000-sq.-ft. prototypical store at Timbercrest at Lakeville, scheduled to
open in fall 2007. The store is part of the second phase of the development located at I-35
and 185th Street in Lakeville. United Properties represented both the tenant and the landlord
in the transaction.
• Ryan Companies, represented by United Properties, sold 3.5 acres to Slumberland in the Dean
Lakes development, located at Highway 169 and County Road 83 in Shakopee.
• Primrose, a school franchising company, purchased the 104,979-sq.-ft. site at 1 Rockford
Road in Plymouth from RSE Properties to build a prototype.
INVESTMENT MARKET
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Office
• Hempel Properties purchased atwo-building, 221,765-sq.-ft. portfolio from Urdang Capital
Management. The properties, One Corporate Center I and III, are located on Metro Boulevard
along Highway 100 in Edina. They are 87% occupied.
• Hoyt Properties sold a 47-acre property at 7075 Flying Cloud Drive in Eden Prairie (the site of
Best Buy's former headquarters) to Liberty Property Trust. To start redevelopment, the buyer
is planning a 120,000-sq.-ft. Class A office building.
Multi-Family
• Stuart Companies purchased afour-building portfolio from Equity Residential Properties Trust,
who is exiting the Twin Cities market to focus on coast cities. Included in the transaction were
the 154-unit Coachman Trail Apartments on Olive Lane North in Plymouth, the 72-unit
Fernbrook Townhomes on 43rd Avenue North in Plymouth and the 72-unit Summer Creek
Apartments on Plymouth Boulevard.
Retail
• No significant transactions to report.
Industrial
• High Street purchased from First Industrial a 252,000-sq.-ft. property at 375 Rivertown Drive
in Woodbury that is 100% occupied by a single tenant. This acquisition brings High Street's
Twin Cities portfolio to 772,000 sq. ft.
• Hillcrest sold a 180,000-sq.-ft. property at 3311 Broadway Street Northeast in Minneapolis to
Synergy. The property is 100% occupied.
• The 184,671-sq.-ft. Roseville Distribution Center on Long Lake Road in Roseville was sold to
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http://outlook.uproperties.com/features/2007/2007April_MarketActivity.htm 5/11/2007
United Properties Market Activity
Investors Real Estate Trust by First Industrial in a transaction with a 7.6% cap rate.
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