Tenants Battle Soaring Office Rents on I-394
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Colonnade Building

Are you paying the highest rents in the metro? If you lease space in the I-394 corridor, odds are you just might be. For office space users, the rents at certain Class A and B buildings are getting steeper each month. In fact, rents are to the point where they are even with downtown Minneapolis. There are several west metro office properties that have had rents increase by up to 30% since 2011.  Ouch – that’s right off the bottom line for most tenants, and money they could be using for growing their business.

Until some tenants start looking for space elsewhere, the landlords and their building leasing agents will keep pushing rents higher.  The Class A properties top the list with the highest increases overall.  But, there are several Class B office buildings whose rents have increased by over 20%.  These are all-time highs for this submarket.

The following charts show the Class A and Class B buildings with the highest rates of increase since 2011 when the economy started to finally inch forward.

West Class A Office

West Class B Office

As you can see from the charts, there is a “micro market” of full buildings near I-394 and Xenia, also known as West End.  The local amenities and adjacency to downtown make this a preferable location for many businesses.  The costs are due to simple supply & demand. As several of the buildings are full, landlords have pushed rents higher.

 

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MetroPoint Tower

Unfortunately for tenants, the “rent pushers” along I-394 is not a short list. All Class A properties along I-394 now  have very low vacancy rates, which is giving landlords leverage over tenants.  In some cases, large space users have given landlords the leverage they need to spin a tale that all of the space is being gobbled up, such as the MetroPoint complex at I-394 and Highway 169.  With Wells Fargo taking a very large block of space several years ago, the MetroPoint complex went from 65% occupancy to about 95%+ occupancy.  The pain continues for smaller, long term tenants at this building as quoted rates have increased by 22% in the Tower building, approaching Class A rental rates.  In addition, some long-term tenants have not had their lease renewed at all and needed to relocate.

The complexities of a “landlords market” for tenants are:

  • Very little leverage against landlords as market factors support higher rents
  • Landlord concessions like free rent and tenant improvement dollars are far less or non-existent
  • Other tenants in your building likely need your space, so landlords are even slower than normal to give you a commitment on a lease renewal. This is by design just in case they have a better option come to the table.
  • It is far more difficult for a tenant to obtain reasonable lease rights and options for renewing a lease or expanding their space

So, are tenants just stuck?  No!  The best solution for tenants in these high occupancy buildings and submarkets is to seek experienced tenant representation. At CREST, we have navigated our clients through these landlord markets before.  Space opportunities do exist and tenants do have options.   We understand the landlord’s leverage points and know the steps necessary to mitigate them in lease renewal discussions.

While relocating is not preferred by most companies, there may also be opportunities to change how you work to make your space more efficient moving forward, decreasing the amount of square footage you require to lower your monthly rental expenses.   For some companies, purchasing a property may be the best option given the low interest rates and more aggressive lending.  And of course there are various sublet space opportunities on the market from time to time at a discount from the full market rates.

Given the costs of new construction, the 394 and western suburb office market is expected to generally remain tight looking forward and rents could continue to tick upward.  The most probable new building would be located near West End at Highway 100 and I-394.  For some companies, that may be a good options versus paying top market rents in an older building.  There are some other office development sites along the 394 corridor as well at Hopkins Crossroad and at Carlson Center.

If your company is facing an upcoming lease expiration, our advice is to start early to preserve the leverage points you may have.  For larger companies, that is 2 to 3 years in advance of when the lease expires.  For smaller companies, 12 to 18 months.  Contact us today for a complimentary review of your current lease as compared to the market.

CREST Commercial Real Estate Strategies represents corporate space users in real estate lease negotiations, property purchases, property sales, site selection, and strategic planning.  The company is located in Plymouth, MN.

 

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