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The fortunes of commercial real estate leasing in Twin Cities depend on the most famous adage in the profession — location, location, location.

The Interstate 394 corridor, especially in the West End, has the most expensive leases in the region and the lowest vacancy rates. Downtown Minneapolis isn’t doing badly but the future looks challenging as major tenants decamp to their own new buildings.

St. Paul could see some pickups in leasing in the future but for now it’s a quiet player. Bloomington’s blooming. The southwest suburbs continue a hard slog but optimism remains.  

Bloomington-based Cushman&Wakefield/NorthMarq putsthe third-quarter office vacancy rate for the region at 16.9 percent.

What follows is a snapshot of the region in vacancy and rents, using third-quarter data from C&W/NorthMarq, with an assist from its Compass Report.

Minneapolis Central Business District

Total vacancy rate for downtown: 16 percent; Class A, 10.4 percent

Class A average net rent rates: $17.63 per square foot

Class B: $12.37 per square foot

Despite a generally healthy economic outlook and boom in downtown housing, the Minneapolis office market faces two primary challenges.

One is that businesses want more efficient use of space and are downsizing their footprints, according to Brent Erickson, senior director of brokerage services at C&W/NorthMarq. The other is that three major employers — CenterPoint Energy, Wells Fargo & Co. and Xcel Energy Inc. — all plan to move to build-to-suit space over the next two years, he said. That will open 1.46 million square feet of Class B properties.

Since the recession many tenants have done little to change their offices, he said, and are now figuring out what to do as their leases begin to expire. Many will reduce their footprints while others may add space, Erickson said.

Yet downtown Minneapolis has plenty to attract tenants, he said, noting that the trend has been for businesses to move downtown, not to the suburbs. Aimia and Weber Shandwick are recent examples. A counter-trend, he concedes, is TCF Bank, which is moving to Plymouth.

Class B properties continue to appeal to investors that either turn them into apartments, as in the case of the Soo Line Building, or totally rehab them for offices, as is being done at the 510 Marquette building by Swervo Development Corp., Erickson said.

Downtown has plenty in the works that should attract even more office tenants including the conversion of Block E into Mayo Clinic Square; the Vikings stadium under construction and the nearby Downtown East development anchored by Wells Fargo; redevelopment of the area around Target Field Station in the North Loop, and the Target Center renovation.

West

Total vacancy: 10.8 percent; Class A, 8.8 percent

Class A average net rent rates: $18.29 per square foot

Class B: $12.07 per square foot

Anchored by the popular West End shopping and entertainment village in St. Louis Park, the West market has the lowest vacancy and the highest rents in the metro.  The area is bordered by Highway 55 on the north and Highway 7 to the south and includes Golden Valley, St. Louis Park, Plymouth and Wayzata. The key highway is Interstate 394 from Highway 100 to the West End, where Class A rents have grown 15 percent from $16.50 to $19 net per square foot, according to the Compass report.

The news has all been good lately. TCF Financial Corp. will consolidate operations and move into the Plymouth Corporate Center in 2015. MoneyGram also renewed a 90,000-square-foot lease at the 1550 Tower in the West End.

“This has been the hot market for the past couple of years,” said Bob Revoir, senior director at C&W/NorthMarq. “We’re showing sub-9 percent vacancy for the third quarter; that’s pretty healthy. It’s the highest Class A average in the Twin Cities region.”

The reasons behind the submarket’s success, he added, were little spec development in recent years, making the current real estate particularly valuable, and the popularity of the West End shopping and entertainment area.

North of Highway 55, which Compass defines as the “Northwest,” is much smaller and suffers by comparison. The region had the highest vacancy rate for commercial office spacein the metro but is trending downward, Revoir said.

St. Paul Central Business District

Total vacancy rate downtown: 23.3 percent; Class A, 20.4 percent

Class A average net rent rates: $11.80per square foot

Class B: $8.44per square foot

Downtown St. Paul continues to struggle, although real estate pros and business leaders think the arrival of light rail this year and the success of housing will lead to a pickup in the office market.

The vacancy rate increased as companies such as Comcast and Lawson Software, which downsized in renewing their leases. Class A space seems to be performing better but that has increased the vacancy in Class B and C space.

Joe Spartz, president of the Greater St. Paul Building Owners and Managers Association, thinks the success of new downtown apartments will eventually spur more leasing because employers will see the neighborhood as an attractive place for recruitment and retention of employees.

“The downtown market has been relatively flat but we’re seeing a move in absorption,” Spartz said. With the Green Line now running and the new St. Paul Saints ballpark set to open next year, downtown is seeing new life, he said.

Spartz said a handful of commercial real estate agents have told him they’ve seen more interest in deals this year than in the previous five years.

Southwest

Total vacancy rate: 17 percent; Class A, 15.7 percent

Class A average net rent rates: $16.05 per square foot

Class B: $11.95 per square foot

The best Class A office parks continue to perform exceptionally well with nearly no vacancy, including Centennial Lakes, in Edina,and the recently sold Normandale Lake in Bloomington. Both have rental rates above $20 a square foot, among the highest in the region.

Five deals have occurred that will bring down the vacancy rates next year, the largest being a nearly 50,000-square-foot lease signed by Larkin Hoffman Daly & Lindgren in the 8300 Tower in Normandale Lake.

Yet turnover is hurting occupancy. UnitedHealth Group has and will continue to vacate property totaling 1.4 million square feet as its builds it corporate campus. Wells Fargo is consolidating offices in Metropoint in St. Louis Park, another blow to the area.

The following properties have more than 200,000 square feet of contiguous space available: Minnetonka Corporate Center in Minnetonka; Best Buy headquarters in Richfield and One MarketPointe in Bloomington. Another 125,000 square feet will come available at Wells Fargo Tower in Bloomington.

Still, there’s reason for optimism. Steve Shepherd, a senior associate with Colliers International, called the southwest market “busy as it’s ever been” over the last two to three quarters. “We’re starting to see some Class B absorption and good Class A rates with no concessions.”

South/Airport

Total vacancy rate: 17.2 percent; Class A, 11.9 percent

Class A average net rent rates: $14.14 per square foot

Class B: $11.95 per square foot

The South/Airport region, which includes East Bloomington, Richfield, Mendota Heights and Eagan, is described by the Compass report as “quiet.” It includes the first new multi-tenant office building (200,000 square feet) to be constructed in years with the $325 million addition to the Mall of America in Bloomington.

In Eagan, the Lockheed Martin site is being redeveloped by CSM Corp. while the former Blue Cross Blue Shield building will become apartments.

“A lot of office space came offline with those two deals,” said Eric Rapp, Colliers’ vice president of brokerage.