Office vacancy rate decreases in downtown St. Paul

Tenants currently fill a larger percentage of downtown St. Paul offices than they did last year as available space continues to shrink with many offices being turned into other uses.

But more developers have begun to test the market and invest in renovations and construction of new office space.

The vacancy rate for competitive office space in downtown, which omits owner-occupied and government-occupied space, was 19.1 percent in October, a decrease from 20.8 percent around the same time last year, according to a recent report from the Greater St. Paul Building Owners and Managers Association (BOMA).

However, it wasn't an influx of tenants that led to higher occupancy numbers. The amount of occupied square footage has declined from 2017 as former offices continue to be converted to other uses. For example, a portion of the Park Square Court near Mears Park is being turned into a boutique hotel, and an office building near the Minnesota State Capitol is planned to be demolished to make room for apartments.

"We have over the last couple years converted so much office space over to residential and other uses, hotel etc.," said Joe Spartz, president of St. Paul's BOMA, in an interview. "What we don't want to do is we don't want to put ourselves in an untenable position of making significant efforts to attract new businesses and tenants and then not having the space that they are going to need. We are going to need to keep moving forward."

For nearly a decade, office space in downtown St. Paul has been gradually shrinking as one vacant office tower after another is converted into mostly new apartments. The overall office market that includes competitive, government and owner-occupied space has shrunk from about 17.38 million square feet in 2010 to 15.65 million square feet of space.

What's needed in St. Paul is more Class A space for growing businesses, Spartz said. Over the last couple of years, downtown St. Paul has seen the departure of several companies such as software firm When I Work Inc. and supercomputing company Cray Inc., both of which outgrew their St. Paul offices.

"If you look at what's available in the marketplace, there's a lot more [Class] B available than [Class] A, and the A that's available is not highly contiguous," Spartz said. "If you have somebody coming in that wants A space that's together we don't have a lot of options."

But there has been momentum for more investment in St. Paul office space, with several enterprising developers revamping offices.

The 428, the former Woolworth store on the corner of Minnesota Street and 7th Place, opened this summer as the city's newest office property. The 428, which was included as part of BOMA's new report, hasn't signed a major tenant yet meaning most of the more than 63,000 square feet of space in the building is currently empty.

The Osborn370 building, which used to be occupied by Ecolab, has been renovated and continues to attract new businesses including appliance-repair company Smart Care, software firm Structural and the Lunar Startups incubator out of the Glen Nelson Center workspace. Still, more than half the building is currently unoccupied, according to the BOMA report.

While it may take time, there have been signs that the St. Paul commercial real estate market has potential to grow, said Joe Spencer, president of the newly formed St. Paul Downtown Alliance.

Spencer pointed to plans to develop the former city public safety annex building near Pedro Park into offices and retail as one example of more development. Next month, Ramsey County officials are scheduled to discuss proposals for how to develop a stretch of St. Paul riverfront, possibly into towers of apartments, hotels or other uses.

In addition to people working in offices, BOMA said more people live in downtown. A study by Maxfield Research and Consulting shows 9,457 people living downtown in August 2018, up from 4,862 in 2010.

Retail space also continues to grow, according to BOMA research, exceeding 1.35 million square feet in 2018, up more than 82,000 feet from 2016. Restaurants and bars account for nearly 30 percent of the retail space.

Nicole Norfleet • 612-673-4495 Twitter: @nicolenorfleet