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Eagan Hit By High Commercial Office Vacancy Rates

Large corporate contractions and more than enough developable land have led to a saturated market.

In boom times, Greg Miller would have no problem finding tenants for the Boulder Lake Business Park in Eagan.

Miller is the president and co-owner of Interstate Partners, a power player in the local commercial real estate scene. The company built more than 100,000 square feet of office space at Boulder Lake, which is located off Hwy. 55 in Eagan, and has plans to add roughly 600,000 square feet to the complex.

But the Boulder Lake project has been on hold for years, stopped cold by the economic downtown.

“In the last four years, we planned on building four buildings in that park, and we’re still sitting on that land looking for potential users,” Miller said.

A “Saturated” Market

Miller’s problems aren’t unique.

Nearly one-fifth of all commercial office properties in the southeastern metro market stood vacant at the end of 2011, according to reports issued by Transwestern and Cushman & Wakefield/Northmarq. But those reports don't include large, single-tenant buildings, like Northwest Airlines' former headquarters and the Waterview Tower, according to Mike Salmen, a Transwestern principal in Minneapolis. Factor those properties into the rate, and the Eagan and Mendota Heights market may have a vacancy rate as high as 30 percent, Salmen said.

That vacancy rate puts Eagan/Mendota Heights amongst the highest in commercial office vacancies in the Twin Cities market, Salmen said, even when single, large-tenant vacancies are factored into the rates for other markets. Only two areas, Woodbury and the St. Paul suburban market, are at a comparable vacancy rate level, Salmen said. Both those cities also have large, single-tenant spaces—like the State Farm building in Woodbury—that stand empty.

Eagan's commercial offce vacancy rate, Salmen added, is compounded by the more than 1 million square feet of proposed office space that has been approved by Eagan city officials but not yet built by developers.

"There’s no doubt, they’ve been hit harder than most," Salmen said. “I would say the [Eagan/Mendota Heights] market is saturated due to the existing inventory of vacant space and available land sites that are and have been ready for the last ten years."

The city is close to amenities that make it attractive for developers, but Eagan is still a fairly new alternative for companies, Salmen said, and is considered a secondary market when compared to cities like Bloomington and Edina.

A larger market would be better equipped to absorb significant corporate contractions and closures, Salmen added, but when those losses occurred in Eagan, it left large, difficult-to-fill holes in the city’s commercial real estate fabric.

“The good news, bad news about having these big corporations in your city is that when they grow, it’s fabulous, but when they shrink it takes a big hit out of the city,” Salmen said.

The availability of office space across the region has also helped drive leasing rates down for developer/owners like Interstate Partners. In Eagan, Miller estimates, tenants are paying an average of 30 or 40 percent less to lease space than they would have several years ago.

“Eagan has been over the last 10 years a very attractive market for corporations to expand or relocate to,” Miller said. “But what was a very strong, vibrant market, became a very soft market.”

 

An Uptick in Activity

While Eagan’s commercial office vacancy rate is higher than the regional average, commercial development within the city has increased within the last several months. Last November, , which was followed by that it would lease the 100,000 square foot Buffets Inc. building in Eagan.

The condition of Eagan’s commercial office real estate market will also play a role in the . Although the site is zoned for commercial office development, developer CSM Equities LLC. has asked the city to rezone the property for retail.

Developing a significant office complex on that site, Miller said, would set the already-saturated commercial office market back.

“It would not help us at all with our activities if that was to go with more office and industrial, it would just be like pouring gasoline on the fire,” Miller said.

Eagan’s Community Development Director Jon Hohenstein acknowledges that the city is seeing higher commercial office vacancy rates than in the past, but hopes the recent uptick in activity is a positive indicator.

The city has a very diverse set of employers and is still a net importer of jobs,  Eagan Mayor Mike Maguire added. Maguire believes that the current conditions facing the city are part of the natural economic cycle.

“In Eagan we do a particularly good job of being patient through these rolls in the market and understand that there are booth ebbs and flows,” Maguire said. “As economy starts to turn, we’re on potentially one of the leading edges of bring the office market back.”

Clarification: This article has been changed to clarify how commercial office vacancy rates are calculated and add context from the regional commercial office real estate market.

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