MINNEAPOLIS-”Overleased” is a useful way to characterize the year-end status of the Southwest submarket, says a recent report on the office market by Bloomington, MN-based United Properties. The term “overleased” refers to the combination of companies that have reduced head counts but not attempted to release their unused space and companies that actively seek to sublease their excess capacity.

Between them, there is an undetermined amount of space for the market to reabsorb when demand improves.

Total listed sublease space at year-end in the Southwest was 533,215 sf, according to the survey.

New development delivered an additional 600,000 sf of new space in 2001. With demand down, this new space has contributed to a substantial increase in vacancy rates. Vacancy among class A properties was at 13.1%, and 18.3% with subleases at year-end. Class B vacancies were at 11.9% and 15% respectively, and class C vacancies were 13.9% and 14% with subleases.

Absorption was on the negative side for the second half of the year, at negative 168,585 sf, although slightly positive for the entire year at 60,579 sf. Much of the new leasing activity during the year occurred in a small number of newer buildings, including Normandale Lake Office Park’s 8000 Tower, Centennial Lakes V and MarketPointe, which together yielded more than 160,000 sf of new leases throughout the year.

The trend by major users to consolidate operations into single-tenant corporate campuses continues to hurt demand and increase space for subleases. Wells Fargo, Best Buy and ADC Telecommunications, all historically major multi-tenant users in the Southwest, are examples of companies that either recently acquired or are developing new corporatefacilities.

For example, Best Buy is scheduled to put additional space on the market for lease, sublease or sale totaling more than 700,000 sf in preparation for its phased move into a new corporate headquarters campus in Richfield.

In Eden Prairie, ADC Telecommunications has completed work on its new corporate headquarters, a move that returned several hundred thousand square feet of spaceto the market. And Wells Fargo Mortgage will consolidate its operations, a large proportion of which were located in the Southwest, under one roof in south Minneapolis in the former Honeywell headquarters property.

Looking ahead, the submarket remains vulnerable to the down economy, especially given the high concentration of tech-oriented users. United officials expect more space for sublease, and declining demand for new space in the first half of 2002.

As landlords agree to more concessions and lower pricing, United recommends they closely review tenants’ credit worthiness and business models given the rise in corporate bankruptcies.

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