As in other cities, EP office vacancies grow

When people gathered under a big tent along Eden Prairie’s Technology Drive, not long after the city’s 1999 approval of plans for a new 90-acre ADC Telecommunications world headquarters, they were joyous about the groundbreaking. It was another feather in Eden Prairie’s cap.

They probably never imagined that, more than 20 years later, the 470,000 square feet of office built there – far short of the 1.2 million square feet projected by ADC – would be an emblem for an office market in contraction. A market dotted with “zombie” office buildings: the lights are on, but (almost) nobody’s there.

Yet, that’s the state of today’s office market in the U.S., due in part to increased work-from-home practices and a labor market where some positions go unfilled.

ADC  has disappeared. Optum, which bought the ADC campus in 2011, has consolidated its workforce elsewhere. And now, the Technology Drive property – named one of the “most innovative and challenging Twin Cities projects built in 2001-2002” – is being marketed for sale or lease by Cushman & Wakefield. The marketing materials for what is being called Prairieview Commons describe it as “a campus ahead of its time.”

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And, it’s not alone.

About one block to the east, Optum is also trying to sublease a 155,000-square-foot office building it occupied at the corner of Technology and Prairie Center drives. One block to the west, the City of Eden Prairie is searching for tenants to occupy 100,000 square feet in its building, most recently leased by United Natural Foods, Inc. (UNFI) and the Eden Prairie Schools.

Eden Prairie is an office mecca, with almost 7 million square feet overall that is part of the community’s enviable tax base. But, more than 1.5 million square feet of office space is available for lease, including sublease listings, according to a December vacancy survey by the city.

The city says Eden Prairie in December 2022 had a direct vacancy rate of 18.4% for multi-tenant office buildings – “direct” meaning directly available from the owner, not as a sublease. That number has been fairly consistent over the past five years.

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What stands out to City Assessor Jon Thompson is that the latest report indicates there is more than 1 million square feet of office space available for sublease, compared to 414,000 square feet in December 2021 and 145,400 square feet in December 2020. That indicates a good number of companies might downsize their office space once their leases are up. Or, they may just re-up their commitments.

“We’ve seen that number slowly creep up, and now a little more drastically in this past year,” said Thompson. “Although it’s not an immediate hit to the owner, who’s still collecting rent from the master lease, it could be a sign of potential impacts to direct vacancy going forward.

“I wouldn’t say it’s an immediate concern, because the building owners are still collecting rent on these. It’s just something to keep an eye on.”

Work-at-home a factor

Eden Prairie isn’t alone in seeing more office vacancies. It may not even stand out. Office vacancies are up from one year ago in most Twin Cities locations.

There are a number of real-estate companies that specialize in the sale and rental of office space, and several publish quarterly reports on the Twin Cities market and sub-markets. Among them are Cushman & Wakefield, Colliers, JLL, CBRE, and Avison Young.

Their calculations of the total Twin Cities office vacancy rate at the end of 2022 vary, but most estimates are in the range of 18% to 22%, and up from 2021.

The future of office vacancies may hinge on how companies fare in this grand, post-COVID-19 experiment in which employees and their employers are blending remote work from home with appearances at the office.

Gallup, Inc., known for its public opinion polls, last June reported that about 56% of full-time U.S. employees – a total of 70 million workers – say their job can be done while working from home. Only 2 in 10 “remote-capable” employees work entirely at the company’s worksite.

Gallup further said that 60% of these remote-capable employees want a long-term hybrid work arrangement, able to split time between home and office.

But, one of the concerns about the vacancies is that they might lower the assessed value of some office buildings, decreasing the property taxes their owners pay.

Here’s the warning Colliers included in its latest report on the Twin Cities office market:

“The decline in revenue, and thus valuations, has consequences for us all. As tax appraisals catch up with declining revenues and increasing cap rates, the taxes collected from commercial office buildings will decline. Those shortages, more than likely, will then be passed on to residential homeowners.”

Thompson says that probably applies more to Minneapolis and St. Paul downtowns, which are such a large part of those cities’ overall tax base, than Eden Prairie. That’s because Eden Prairie has a healthy balance of tax capacity among its property classifications – 9% of the tax capacity is apartments, 28% is a mix of office, commercial, and industrial, and 63% is other residential.

“But it could shift the pie,” he added, noting there have already been some recent shifts in tax capacity, with causes including a big spike in residential property values and a drop in hotel values as a result of COVID.

Amenities make a difference

Still, all is not doom and gloom. 

One course correction that might be working for owners of office buildings is to upgrade amenities to make the offices more attractive to employees – future employees, as well as existing employees that tenants are trying to lure back to the workplace. One Southwest Crossing at 11095 Viking Drive – prominent on the north side of I-494 – did this, city officials point out, and the result is that the owner was recently able to lease roughly 170,000 square feet.

Eagle Ridge Partners, in a joint venture with Boston-based private equity firm Long Wharf Capital, acquired the building in 2020 and renovated it. The renovation included increasing natural light in the existing 20,000-square-foot atrium and adding a coffee shop, fitness center, bike room, and locker room, among other improvements.

The improvements lured Boulay, an Eden Prairie accounting and consulting firm with 210 employees in the metro area, to move into the top floor of One Southwest Crossing late last year.

“Our vision was to create a fresh, fun, and collaborative workspace that inspired people to come back into the office space,” noted Kim Wittmers, chief marketing officer at Boulay.

Matthew Crane, a partner at the firm, said their former building also had amenities. But One Southwest Crossing had more open space and more collaborative space than the company was accustomed to having. For instance, a holiday party the firm held in January in One Southwest Crossing’s atrium was “fantastic,” he said.

The new space also allowed Boulay to implement a flexible “hoteling” concept, in which employees can reserve a desk or room for a set period. At 37,000 square feet, the new space is larger than what Boulay previously leased, Crane says, but not as much as they would have taken without the hoteling approach. Even as Boulay’s employee count has grown, it went from 190 desks at the former location to 155 desks and 10 conference rooms at its new home.

The changes have been positive. “People come into the office more, with this,” said Crane.

Still, the move left a hole at another Eden Prairie office building – 7500 Flying Cloud Drive – where Boulay had been spread across two floors.

What’s next for the office market? Where it lands, as post-COVID work habits begin to solidify, will also depend on the balance between what tenants are willing to pay and building owners are willing to give up.

In some cases, Thompson says, an office tenant might be hesitant to sign a long-term lease, so the building owner decides to test the market by listing the property as available.

“So, they’re both kind of leveraging each other, playing that game of chicken to see who blinks first,” he said. “It might not always be the case that companies up and leave these spaces. Time will tell.”

“Unpredictable” might be the current byword.

“This is a little bit different than previous market swings,” explained Thompson, noting the trend toward more remote work or hybrid work arrangements, and workers’ leverage in the current labor market.

“I think the uncertainty is the biggest difference,” the assessor added. “Nobody knows how this will play out long-term.”