The market posted 48,739 square feet of positive absorption its first since Q1 2022 and only the second since Q3 2020. Suburban submarkets led, absorbing 220,855 square feet and outperforming central business districts. Suburban vacancy stands at 19.6%, compared to 29.3% in the Minneapolis CBD and 33.4% in St. Paul.

Return-to-office momentum is gaining traction, with major employers like General Mills, 3M, and the State of Minnesota increasing in-office requirements. Nationally, 80% of tenants report no plans to reduce their space, suggesting greater stability in future occupancy. Meanwhile, heavily discounted office sales in downtown Minneapolis are resetting market valuations.

While vacancy continues to rise, the lack of new construction may help stabilize the market by limiting new space and increasing competition for existing options. Sublease supply appears to have peaked, with expiring leases converting to direct availabilities and fewer new listings hitting the market.

Companies remain cautious about long-term space needs and are seeking shorter terms with extension and early termination options. Termination clauses, once rarely used, are being exercised by tenants downsizing by 50% or more often finding it more cost-effective than amending existing leases. In response, landlords are raising termination fees and investing in premium amenities like upgraded HVAC systems, walkable locations, and features such as pickleball courts and complimentary tenant transportation to attract and retain tenants.

Absorption has been negative for 16 of the past 17 quarters. In Q3, negative absorption reached 432,847 SF, increasing vacancy to 22.9%. Some tenants, seeking to downsize, are opting to pay termination fees to exit leases.

With many needing to reduce their space by 50% or more, paying the fee and negotiating a smaller, more affordable lease often proves more cost-effective than restructuring an existing lease. While rents have remained relatively stable, tenant concessions are on the rise.

Leasing activity slowed to 886,793 square feet in the 2nd quarter, down from an average of1.6 million square feet per quarter during the previous five quarters. Most companies arereducing the amount of space they occupy but are making longer-term decisions by eithercommitting to new office spaces or renewing for longer terms.

Steve Shepherd lends his expertise in Design-Builder ARCO/Murray's, report on the current market. ‘Hot Takes’ from experienced Minneapolis brokers on everything from industrial, office, and retail leasing activity by submarket to the impact of rental rate increases,  the current lending appetite, and more. 

After negative 1.7 MSF in 2023, absorption continues to moderate, slowing to negative 189,219 square feet in the 4th quarter of 2023 and negative 138,102 in the first quarter of 2024.

Challenges in the Minneapolis CBD have contributed to a steep increase in vacancy since the 1st quarter of 2020. The vacancy rate has climbed over 60% from 15.8% in the firstquarter of 2020 to 25.3% currently. This compares to a 52.0% increase in the suburbs and a 40.4% increase overall. 

As the office market grapples with significant changes in space utilization, the Minneapolis market also has the highest reduction of office-dependent employment. Information, financial activities and professional and business services were industries that had a decline in employment levels on an annual basis as of August. 

As the office market grapples with significant changes in space utilization, the Minneapolis market also has the highest reduction of office-dependent employment. Information, financial activities and professional and business services were industries that had a decline in employment levels on an annual basis as of August. 

As the office market grapples with significant changes in space utilization, the Minneapolis market also has the highest reduction of office-dependent employment. Information, financial activities and professional and business services were industries that had a decline in employment levels on an annual basis as of August. 

As the office market grapples with significant changes in space utilization, the Minneapolis market also has the highest reduction of office-dependent employment. Information, financial activities and professional and business services were industries that had a decline in employment levels on an annual basis as of August. 

As the office market grapples with significant changes in space utilization, the Minneapolis market also has the highest reduction of office-dependent employment. Information, financial activities and professional and business services were industries that had a decline in employment levels on an annual basis as of August.