Quarterly Market Reports

Third Quarter of 2025 

A K-Shaped Recovery

As we close out the third quarter of 2025, the market continues to show clear signs of divergence — what one economist aptly described as a K-shaped economy (where segments of an economy recover from a recession at different rates). Some asset classes and properties continue to perform well, while others struggle and will likely continue to do so for the foreseeable future.

The multi-tenant office market posted a net absorption of (271,000) square feet this quarter, bringing overall vacancy to 24.4%. Despite the elevated vacancy rate, there are nine new construction projects underway across the market, totaling approximately 1.2 million square feet. This underscores a consistent trend: occupiers remain willing to pay for quality space. A prime example is Boston Scientific, which recently broke ground on a 400,000 square foot build-to-suit facility.

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Over the past quarter, we’ve seen a continued push from major employers to bring staff back to the office. Target made headlines by mandating its Commercial division return three days per week, with more requirements expected. Today, more than half of Fortune 100 companies have reinstated full in-office policies.

As companies across the Twin Cities plan ahead, many are reevaluating how best to re-engage employees in the workplace—and real estate is playing a key role in that strategy. Overall market vacancy remains elevated at 20%, with multi-tenant buildings even higher at 24.3%, far above what’s considered healthy.

As we’ve noted in prior updates, the gap between Class A and Class C properties  continues to widen. Class A space is now commanding more than a 40% premium—and with rising construction costs, rents in these buildings could exceed 150% of those in Class C. That premium is helping fuel over 1.5 million square feet of new office development currently underway.

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First Quarter of 2025...

The Twin Cities office market recorded 1.3 million square feet of leasing activity across 337 transactions, averaging 3,858 rentable square feet per deal. Many firms are still searching for ways to encourage employees back into the office, often rethinking and reshaping their real estate strategies to support that goal.

Although the city’s strong base of corporate headquarters once provided stability before the pandemic, it has ironically contributed to demand declines in the aftermath. Major employers like Target, UnitedHealth Group, and Best Buy continue to shed surplus space. Across the market, tenants are downsizing or consolidating into fewer locations, typically leasing 20% to 40% less space compared to previous years.

Even with these headwinds, demand hasn’t disappeared — it’s simply become more selective. Newer properties in areas like the West End, I-494/France Avenue, Eagan, and the North Loop are seeing robust leasing activity, outperforming the broader metro, which is still in a period of adjustment.

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Looking Back on 2024...

Office vacancy continued to rise, but companies are starting to better understand the utilization of their office spaces, creating a new normal. Across the entire market, there was a negative absorption of -566,456 square feet as historically large occupiers of office space continued to give back space, setting a new benchmark for the market.

The good news is that there were over 227 transactions in the 4th quarter of the year, indicating that companies remain active in securing office spaces that align with their evolving workforce strategies. Tenants continue to migrate toward quality assets with strong ownership structures, creating a clear divide between high-performing and struggling properties. These buildings are transacting at all-time highs, reinforcing their desirability in the current market landscape. As we move forward, the market will continue to adjust to changing occupier demand and economic conditions, reinforcing the importance of prime properties and strategic investments in commercial real estate.

Regardless of the direction your workspace needs are going, the team at Kenwood Commercial is ready to answer any questions you have.

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