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Warning: Vacancy rates in downtown Minneapolis about to go sky high

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A journal devoted to commercial real estate predicts the vacancy rates for office space in downtown Minneapolis are going to climb steeply over the next two years.

Projections from Colliers International Minneapolis-St. Paul indicate that multi-tenant space is expected to rise from 14 percent at the end of the March, to 24 percent by the middle of 2016. An overall office vacancy rate of 24 percent would be the highest since Colliers began tracking the data in downtown Minneapolis in 1993.

Colliers senior vice president Jim Damiani, who put together those projections, analyzed the numbers for the Business Journal. He believes the coming higher vacancy rate reflects two trends: First, companies downsizing and using space more efficiently; and second, the pending construction of corporate headquarters space for several large users of multi-tenant space. He believes that when Wells Fargo, Xcel Energy and CenterPoint Energy relocate, there won't be enough commercial clients to occupy the space the companies are now in.

"Now is the calm before the storm." Damiani said.

Colliers predicts that 1.61 million square feet of new downtown space will be completed in 2016. There's currently a boom in new downtown property, with the construction of the Vikings stadium, the new park by the Downtown East development and the new light rail line to St. Paul.

The Colliers analysis suggests the law of supply and demand might take hold, with higher vacancy rates leading to lower rental rates for tenants.

Meanwhile, residential property in downtown Minneapolis continues to be in high demand. Last month, the Star Tribune called the core city the "epicenter of a recent building boom" of apartment complexes. The story said more than 3,100 new units were built last year across the region, with half of them in the downtown area.

"While the average downtown vacancy rate doubled to 4 percent at the end of 2013, the market is expected to easily absorb the 1,200 additional units that will come online this year," the story noted.

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