Quarterly Market Reports

2025 showed strong overall activity, along with significant signs that the market is slowly moving up from rock bottom.  The number of new office leases signed in 2025 exceeded the 2015–2019 average by 5%; however, overall leasing volume declined roughly 25% as deal sizes continued to shrink. After two years of uneven hybrid experimentation, 2025 became a decisive year for return-to-office policies, with major Twin Cities employers tightening in-office requirements, creating a meaningful test of demand for office space. 

Even with these policy shifts, the average size of new office leases fell nearly 30% below the 2015–2019 average. Smaller tenants are increasingly absorbing available space in the region’s most desirable live-work-play centers, such as West End, the I-494/France corridor, Eagan, and the North Loop, while 1980s-era downtown Minneapolis properties continue to face structurally weaker demand, pushing the divide between Class A buildings and the rest of the market.  It’s creating a K shaped recovery where Class A buildings are achieving record high rents, and other buildings are struggling to lease space unless it’s 2nd generation.

Looking into 2026, we still see a disconnect between owners and users of office space, with extremely high transaction costs resulting in higher net rents for users, but lower returns for owners. 

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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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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