February might be tipping point for back to office, report says

Minnesota's office market is showing some signs of recovery, as some companies started implementing return to work plans delayed by the delta variant.

A new Cushman & Wakefield report found high office vacancy rates of 26.9% for Minneapolis and 24% for St. Paul during July, August and September. But the authors noted that the landscape continues to improve both nationally and locally.

They predict February as the inflection point in the U.S. regarding back to the office returns. They noted, though, that U.S. office rental rates probably will not inch toward normal until late 2022 or 2023.

"Every week in October, and through November, has represented a new post-pandemic high for the proportion of workers frequenting the office," said Cushman & Wakefield inits "Has the Tide Turned Yet?" office report issued Tuesday.

Rising COVID-19 vaccination rates and a decline in hospitalizations in some states are "giving organizations more clarity around returning to the office over the next few quarters," authors wrote in the report.

Sizable new leases obtained in the third quarter were in Eden Prairie, Minneapolis and St. Paul, the report said.

The new Twin Cities office leases "continued a steady climb back toward pre-COVID-19 levels," said Cushman & Wakefield Market Director Patrick Hamilton. "After bottoming out in the second quarter of 2020, the third quarter of 2021 marked the fifth consecutive quarter-over-quarter increase in total new leased square footage."

The office market was pounded by the coronavirus pandemic, as many U.S. companies sent office workers home to work remotely when the pandemic first hit, leaving downtowns looking like ghost towns. Many employees are still working at home, and real estate and business leaders said while back to work for many will be hybrid, downtowns are starting to show signs of life.

Cushman & Wakefield found that more U.S. companies are now willing to sign longer office leases. When the pandemic hit, many businesses tried to sublease their unused space, or gave up their offices altogether. Those in a position to renew leases did so only in 12-month increments instead of the usual 10 to 20 years.

With the pandemic, "an unusually high percentage of businesses were signing short-term renewals as a bridge to a better day," Cushman & Wakefield reported. That tilt is expected to rebalance faster next year.

Richard Barkham, global chief economist and head of research for the commercial real estate firm CBRE, said Wednesday that in the near term "the supply/demand balance in the office sector will remain highly favorable for occupiers, but the pace of recovery will pick up following a sluggish 2021. With hybrid work the new normal, office properties with amenities that enhance employee collaboration, connection and wellness will fare best."

Barkham's outlook for 2022 is "positive."

Cushman & Wakefield's report found that the rush of office subleases that swelled with the start of the pandemic fell for the first time since March 2020.

After rising for seven quarters, U.S. office subleases peaked at 132 million square feet during the second quarter but fell to 130 million in the third quarter. U.S. subleases are on pace to fall again in the fourth quarter and into next year, C & W officials said.

Target caused concern for downtown when it announced earlier this year it would give up and sublease nearly 1 million square feet of office space in Minneapolis' City Center as it moved employees there to a hybrid work model. City leaders feared other employers would follow and permanently shrink their office needs.

Companies with sizable downtown offices such as Target, Thrivent, Ernst & Young and Fredrikson & Byron say they have embraced a hybrid work method that will allow many office workers to return to the office part time and work remotely from home some days a week even after the pandemic ends.

In some cases, businesses will need their same office footprint, but will focus on offering "enhanced" employee experiences that include first-class amenities, services, wellness classes and first-rate technologies.

Deluxe Corp., which last month officially moved into the renovated former TCF headquarters building in Minneapolis, hopes to have most of its 600-plus workers reporting in person to the office soon after New Year's. U.S. Bank officials also said they hope to have workers inside offices by mid-January.

Companies want their workers back downtown, said Bryan Larson, vice president of St. Paul-based Madison Equities, which owns nearly 12 office buildings and three parking ramps in downtown St. Paul, including the First National Bank building, Alliance Bank Center, Lowry Office Center and the newly purchased Railroader Printer Building at 235 E. 6th St.

Only about 35 % of workers have returned to their usual offices in St. Paul. Across the river, the Minneapolis Downtown Council estimates 39% have returned.

"The common consensus seems to be that all the employers want to get back to normal but there is pushback from employees in this current environment. And you can't exactly force employees to get back to the office," Larson said. "These larger corporations are awful leery to try and force employees to come back if there are still COVID scares with different variants and what have you."

Madison Equities officials originally thought its own and other downtown offices would be packed again in January

"But it looks like that will be pushed back with some of the larger companies" as the delta and omicron variant infections remain in the headlines, Larson said.

Still he is hopeful.

"What I am seeing today, versus two months ago, is that it [office traffic] has gotten substantially better with more people here downtown," Larson said.