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��1'1 impress at 3.0%,down 0.1 percentage point from second quarter 1994. The annual absorption was barely negative with an annual absorption rate of -0.1°/a, or negative 272 sq.ft. As the State's fastest-growing county, Washington County is ripe for development. State Farm Insurance is - - constructing a new headquarters in Woodbury,and several large commercial lots are available with office zoning. :The dramatic change in this market was the 15.6% rise in the average quoted net rent to$9.44 psf. After experiencing a 10.2% drop in real estate taxes the year prior,property taxes ticked up slightly to r $1.91 psf. Total expenses rose 3.4% to $5.84 psf. ♦ TOLD Development's proposed office project in the Southwest Sector proposals to work up to market rates. Minneagaso site, the Conservatory, the MARKET Then, many upgraded tenants (who Ritz block, the Powers site and OUTLOOK moved up to Class A from Class B) will Metropolitan Centre Phase II. In the be forced back to Class B or take"as is" Southwest Sector, TOLD Development With the tightest office market ever Class A space with a less aggressive Company recently announced plans for reported by the Towle Report,we do not owner. As building values climb, real a two-phase, two-office building devel- expect absorption to continue at the estate taxes will rise, increasing tenants' opment. And in the West Sector, MEPC rates we saw in 1993 and 1994. However, operating expenses. continues to pre-lease its proposed the office market recovery will continue, On the subject of new office devel- 235,000 sq.ft.office tower. fed by continued job growth; rising opment, several points must be evaluat- The return of lenders to the real rental rates; no new space under ed even though many real estate estate market is also fueling the construction; and availability of capital observers feel the metro area is construc- construction talk. This talk gives rise to (debt and equity). tion-ready today.First,as long as compa- a debate over what to expect, build-to Tenants should plan ahead for nies see the value of buying versus build- suit for a single tenant or multi-tenant further market tightening as the market ing, we may not see new development office buildings? rebounds. Landlords want to keep big right away in the office market.A strong Whatever the result, few in the blocks of space available for larger indicator to look for is when companies industry are concerned about a repeat of tenants and expanding companies. stop buying. the disastrous 1980's cycle of 100% Small-tenant leases are likely a be Next, a building can't be started speculative office development. The renewed on a short term basis, or have until the pre-Leasing is at a rental rate Minneapolis-St. Paul metro area's office relocation clauses. Therefore, tenants that will support new construction. Net market has rebounded and is expected to need to be flexible and plan advance rents will have to be in the$17-$18 range remain healthy in the coming year. in suburban Class A, and $19-$20 in of their lease renewals. They may also downtown Class A.Though we're seeing consider alternate plans of going increases, as witnessed by the dramatic outside the Minneapolis CBD, Southwest and West suburbs. As space rise during the last 18-month period, it becomes more scarce and expensive in could take one to two years in the Southwest and West sectors and two to downtown Minneapolis and the suburbs, for example, St. Paul may benefit. three years in downtown Minneapolis. Thus, it appears a new office build- Another solution is to turn toward the in will be feasible in about a three year reuse of retail or entertainment space for g y period. This coincides with the amount office use. of time it would take to secure new Tenants must also be prepared for leases, design and build the structure. rising rents and operating expenses, especially as their leases with rock- Therefore we should hear an announce- ment this year about plans to build a new bottom rents expire. In most situations, Class A office tower.Possible downtown tenants will find stepped-rent-renewal development locations include the •