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Tuesday, September 14, 2010 3:00 AM

Shuffling the Commercial Real Estate Deck

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According to the Star Tribune the Minneapolis suburban office market suffers from 20 percent vacancy rates. Recent large deals have done nothing to dent that glut of inventory.

Please consider Deals don't make dent in the southwest metro's empty offices

Several high-profile office leases have been signed in the Twin Cities' key southwest submarket this year, grabbing headlines and generally giving the impression that things might not be as bad as they seemed in terms of vacancies.

Rasmussen College took 48,000 square feet in the Normandale Lake Office Park's 8300 Tower. Meanwhile at the next-door 8200 Tower, Plato Learning signed a lease for 27,400 square feet. But, given the fact that the southwest submarket was significantly overbuilt with new office space in the pre-recession boom times, the new leases have barely made a dent in the area's 20 percent vacancy rate.

Even with the new transactions, the "absorption" effect on the southwest's vacancy rate was minimal because companies are essentially making lateral moves, said Northco Senior Associate Heather Alderink.

"Every single deal that I did in the southwest submarket in the second quarter was a case of someone coming into new space from somewhere else in the area, rather than completely new companies coming in," she said. "It's been a lot of shuffling from one space to another. They may be taking a little more space in their new offices, but usually it's a little less space."

Indeed, a closer look at some of the recent big leases reveal why they aren't doing much to alleviate the southwest metro office vacancy crisis. Plato Learning vacated twice as much Class B space in Bloomington in its move to the 8200 Tower; Rasmussen's new digs in the 8300 Tower includes employees relocated from Eden Prairie and Lake Elmo; and the U.S. Bancorp move to Richfield involves shuffling 1,600 workers from its Shepherd Road facility in St. Paul.
Deflationary Pressures

Companies are moving at the drop of a hat to get better rates or a better location for the same price. The effect of this is of course deflationary, adding to price pressures and more commercial real estate defaults.

Remember that commercial real estate lags residential and residential real estate has not yet bottomed, and indeed may not bottom for years.

Mike "Mish" Shedlock
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