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MINNEAPOLIS-Despite major challenges facing the Downtown Minneapolis market, the Twin Cities office market will experience slow, positive growth over the next year,according to office market experts. Meanwhile, landlords will take longer to lease uptheir buildings due to a lack of competition and caution about expansion and spending among corporations, says Gordon Hampson, vice president in the office services group in the Minneapolis office of Grubb & Ellis.

Overall, Hampson expects vacancy rates will rise to 13.2% from their present levels at10.5% and leasing rates to dip to an average of $12.59 per sf from its current level of $12.69 per sf. Jim Freitag, vice president of office properties with Coldwell Banker Commercial, is slightly more optimistic, expecting vacancy rates to climb to 12.4% and leasing rates to rise to $12.93 per sf.

Reduced employment growth due to economic uncertainty and layoffs has resulted in huge chunks of office space being put back on the market for sublease, Hampson says. Freitag sees this sublease space as filling the role previously filled by “new product.” Continuing layoffs will likely not be felt in the market until the middle of next year, he says.

In Downtown Minneapolis, construction continues on some 3.7 million sf of space, of which about 2.1 million sf is geared for single users. Because many of these single users are now in leased space, the completion of these build-to-suit projects will drive vacancy rates from their current level of about 6.7% to 14.4%. Most developers that had speculative projects in the works have delayed them indefinitely.

With rising vacancies and flagging competition for space, developers and owners with large blocks of empty space will feel the pressure to cut rates and improve terms in order to fill it. Those who have tenants will need to find ways of keeping them, including common area and system improvements, such as telecommunications.

“The modest concessions appearing today may become greatly enhanced over the next year,” Hampson says.

Both Freitag and Hampson recently offered their market forecasts to the Minnesota/South Dakota chapter of the Commercial Investment Real Estate Institute.

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