St. Paul office market holding up in pandemic as vacancy rates decline

Despite the pandemic, office vacancy rates in downtown St. Paul have improved in 2020 compared with the previous year, returning to levels on par with 2018.

Vacancy rates for all 7.4 million square feet of Class A, B and C competitive office space fell to 18.6%, down from 21.2% last year, according to the annual market report released Monday by the Greater St. Paul Building Owners and Managers Association (BOMA).

The news was a shot in the arm, considering business shutdowns and restrictions associated with COVID-19 have turned many U.S. downtowns into ghost towns as office workers continue to work remotely from home. Remote work and the need for social distancing are causing many businesses in Minneapolis and St. Paul to rethink office space needs going forward.

But so far, downtown St. Paul offices appear to be holding their own, BOMA officials said.

"It was a little surprising that the overall vacancy rates went down as much as they did in the St. Paul market, just given that we've just been embedded in this COVID pandemic fog and it's just dominated everything about our lives. [So] then to have that kind of glimmer of light shine through? I didn't expect that," said Joe Spartz, president of Greater St. Paul BOMA.

The uptick in office space leases had less to do with the addition of new buildings than it did with status changes involving two key buildings in the city's core.

The First National Bank Building was slated to be converted into a residential property, but those plans changed earlier this year when a new office tenant was found. That put the building's nearly 300,000 square feet back in the "office" category so it could be counted in the BOMA report.

The city's Great Northern Building and the Lowry Building saw reductions in leased space, but the changes — involving a combined 54,000 square feet — were offset by the gains enjoyed by First National Bank.

In another positive for the city, which often sits in the shadow of the larger and livelier Minneapolis, downtown St. Paul dramatically increased its residential population in the past decade.

According to Maxfield Research Inc., which was cited in BOMA's report, the number of people living in St. Paul's central business district more than doubled from 2010 to 10,298 in August 2020.

"All the residential growth in the downtown area of St. Paul is the result of additional rental units," said Mary Bujold, president of Maxfield Research.

According to Maxfield, the number of apartments constructed downtown during the decade rose 82% to 2,969 new units. Apartments have a vacancy rate of 7.2%.

Across from the Xcel Center, Kaeding Development Group is completing a five story and 120-room Courtyard by Marriott Hotel and a six-story, 144-unit apartment building. The hotel was fully framed but badly damaged by arson in August. Kaeding is rebuilding.

St. Paul's downtown is hoping for other major additions in the coming years that could enhance its skyline, provided financing and development plans are able to advance despite the pandemic's economic downturn.

Several ambitious proposals are being reviewed by the city to redevelop the RiverCentre parking ramp across the Street from the Xcel Center on Kellogg Blvd.

Separately, Los Angeles-based developer AECOM Capital is planning a $788 million multitower project — dubbed Riversedge — on the Mississippi River where West Publishing's headquarters used to stand.

The first project tower is expected to be residential; the second calls for a hotel and condominiums, Spartz said. The third and fourth towers call for mixed-use office space and are slated to be developed a few years down the road.