Office Rents in Downtown Minneapolis and Other Major Markets

By: Chris Stockness

In September 2013, Jones Lang LaSalle released a report on the most expensive streets for office space. Sand Hill Road, in Menlo Park, California, took top honors with an average full service rental rate of $110.76/sf. Nicollet Mall in Minneapolis, Minnesota, was 25th on the list, with an average full service rent of $36.60/sf. Of interest: Nicollet Mall moved up four spots from its 2011 ranking of 29th ($29.27/sf.). In terms of the Midwest, Minneapolis ranked 2nd to Chicago’s Wacker Drive, which was 20th on the list with an average full service rent of $36.62/sf. Detroit came in right behind Minneapolis at 26th ($30.00/sf.). Milwaukee’s Wisconsin Avenue ranked 29th ($28.90/sf.) and St. Louis’s Forsythe Boulevard at 30th ($28.06-sf.). America’s top 10 most expensive streets are all in coastal states.




2013 Average Full Service Rent on Street ($ PSF)


Sand Hill Road Peninsula



Fifth Avenue New York



University Avenue Silicon Valley



Greenwich Avenue Fairfield County



Pennsylvania Avenue Washington, D.C.



California Street San Francisco



Boylston Street Boston



Avenue of the Stars Los Angeles



Royal Palm Way West Palm Beach



Newport Center Drive Orange County



El Camino Real San Diego



Congress Avenue Austin



Arch Street Philadelphia



Brickell Avenue Miami



Union Street Seattle



Louisiana Street Houston



McKinney Avenue Dallas



NW Couch Street Portland



East Las Olas Boulevard Fort Lauderdale



Wacker Drive Chicago



Campus Drive New Jersey



Broadway Oakland-East Bay



17th Street Denver



Capital Mall Sacramento



Nicollet Mall Minneapolis


While other markets have seen a range of highs and lows over the years, office rents in the Twin Cities Market and the Minneapolis Central Business District (CBD) have not appreciated significantly in the past thirty-five years. This is due mainly to the availability of development opportunities in nearby first ring suburbs. Because of easy access to major roadways, such as the Interstate 494/694 loop and Interstate 35, supply keeps up with and often outpaces demand. The Minneapolis CBD has experienced major development cycles every 10 to 15 years with the last cycle occurring around the year 2000 and the previous cycle taking place in the late 1980s. During these cycles rental rates waxed, then waned, as more space was placed on the market. As a result, rents have not changed much overall. In contrast, most of the markets at the top of the list are on the east or west coast: locations in areas that are more densely developed, with limited options for new development. Characteristics of the10 most expensive U.S. streets for office space include the following:

  1. Sand Hill Road, Menlo Park, California: $111.00/sf. (-2.5%)
    Historically the most expensive area in Silicon Valley, Sand Hill Road has deep roots with the venture capital community and houses the top VC firms in the greater Bay Area.
  2. Fifth Avenue, Midtown Manhattan, NYC: $102.00/sf. (+5.0)
    Consistently ranked among the most expensive shopping streets in the world, Fifth Avenue is also home to numerous hedge funds looking for top-quality space in Midtown and willing to pay more for those coveted office locations with their unparalleled amenities.
  3. University Avenue, Silicon Valley, Calif.: $95.00/sf. (+14.1%)
    Located in Downtown Palo Alto, University Avenue is known for its vibrant startup community, as its proximity to Stanford University makes it an ideal location for recruiting top young talent.
  4. Greenwich Avenue, Greenwich, Conn.: $93.00/sf. (+3.4%)
    Greenwich Avenue competes with the best commercial real estate, leveraging its rich history preserved through older buildings. Top-shelf retail establishments dot the historically-rich corridor, from the top of the avenue down to the transit center. Hedge fund and financial services firms occupy the majority of office space, with many top executives only steps from their homes. Premier office buildings offer close proximity to train, and command rents as high as $100/sf.
  5. Pennsylvania Avenue, Washington, DC: $76.00/sf. (-5.5%) 
    Despite slower overall market conditions in recent quarters, Pennsylvania Avenue has continued to experience rent premiums. Known as “America’s Main Street,” Pennsylvania Avenue is home to many firms desiring close proximity to Washington’s two main points of power, the White House to the west and the Capitol to the east. Some of the increased growth in tenant demand in recent years has stemmed from the government affairs sector of corporate America.
  6. California Street, San Francisco: $62.10/sf. (+43.9%)
    The main street of the city’s North Financial District, California Street, is known for its historic cable car routes. It is a wide street with high-priced real estate. Growth in technology and associated industries, along with limited new supply, has pushed rents up by almost half over the past two years.
  7. Boylston Street, Boston: $60.20/sf. (+14.3%)
    Boylston Street runs through two of Boston’s most prestigious areas, Back Bay and the Financial District. It is home to numerous landmarks, trophy office buildings, and high-end retail, as well as some of the city’s most distinctive skyscrapers.
  8. Avenue of the Stars, Los Angeles: $60.12/sf. (+1.9%)
    The main thoroughfare in highly-desirable Century City market, Avenue of the Stars is home to many prominent legal and financial service firms and talent firms, as well as the largest cluster of Class A Trophy assets on the Westside.
  9. Royal Palm Way, West Palm Beach: $58.52/sf. (+0.9%)
    Royal Palm Way is dubbed “Banker’s Row” due to the concentration of wealth management and financial services firms, catering to wealthy residents on Palm Beach Island.
  10. Newport Center Drive, Orange County: $50.06 p.sf. (+4.3%)
    Sitting on a bluff overlooking the Pacific Ocean, Newport Center Drive is a 1.3-mile ring that encompasses the Fashion Island retail center. World-class dining and retail amenities along with ocean view suites and access to posh residential neighborhoods make Newport Center Drive one of the most premiere places to rent office space in Southern California.

Estimating Real Estate Taxes

By: Wendy S. Cell and Robert J. Strachota

As the commercial real estate market continues to recover, developers and investors are taking strategic positions in sought-after markets. Estimating real estate taxes is an important component during the due diligence phase of new construction or following the purchase of a property. Shenehon’s unique combination of real estate and business valuation expertise allows us to assist clients in estimating real estate taxes by valuing taxable and non-taxable components.

Real estate taxes vary widely throughout the Twin Cities for many reasons. The primary factors that determine property taxes are the tax levies of the district the property is in, the value of the property relative to the value of all other property in the district, and the use of the property. Real estate taxes are calculated based upon the market value of the property. The market value of the property is determined by the assessor and, quite often, differences are due to their opinions.

When there is a sale of the property in close proximity to the assessment date, the assessor often places great weight on the sale price to determine market value. However, sometimes the sale price is not equal to the market value for assessment purposes. Oftentimes, there are components of the sale price that are not taxable as real estate. For instance, equipment and personal property, financing (favorable or unfavorable), assembled management, tax increment financing, tax-free exchange incentives, eminent domain influences, lease or rent guarantees, and representations and warranties are not real estate. The assessor may not be aware of the various non-real estate components making up the sale price.

We recommend that the components be identified on the certificate of real estate value (CRV). The sale (as it is reported on the CRV) is the foundation for the analysis an assessor conducts on the local market. The CRV includes a place to state the purchase price, itemize personal property and its value, identify the method of financing, and opine and comment on the sale price. Buyers can also include an attachment with additional information. Any adjustments made to the sale price for personal property or business rights should be well-documented. Regardless, there is no guarantee the assessor will deduct the various non-real estate components for property tax purposes. Taxable market value is an assessor’s opinion of market value, and the tax rates are subject to change. If the buyer disagrees with the assessor’s opinion of value, it may be necessary to pursue informal or formal measures. A recent sale is not conclusive of market value, especially where other evidence demonstrates the sale price is above or below market value. Estimating or forecasting real estate taxes is not a mathematical calculation; it is as much an art as it is a science.

Inflation: Your Wallet and the Overall Economy

The Personal Income and Outlays report for April 2013 was recently published by the Bureau of Economic Analysis. According to the data, the year-over-year inflation rate fell to an all-time low of 1.05% based on the core Personal Consumption Expenditures (PCE) price index, which excludes food and energy prices due to their volatile nature. This is the lowest annual core PCE increase ever reported; the previous low of 1.06% was reported more than fifty years ago in March 1963. Including food and energy, inflation was even lower at 0.74%.

Inflation is defined as the rate at which the general level of prices paid for goods and services rises over a period of time. Rising inflation means the cost of goods and services has increased, which leaves the consumer with less purchasing power because every dollar spent will purchase a smaller percentage of a good or service. If low inflation means smaller price increases and greater purchasing power per dollar, wouldn’t such an environment be one we should strive to maintain? Why does the Federal Reserve choose to target inflation at 2.0 percent?

While low inflation allows consumers to purchase more goods with their dollars, its effects extend far beyond the consumer’s wallet and some Federal Reserve officials are worried these conditions could spell trouble for our economy going forward.

Look for a more in-depth analysis in the Summer Issue of Valuation Viewpoint, available August, 2013.

Market Insights

By: Brad Dulas

Despite a new construction pipeline indicating developers will deliver a wave of apartment properties to the region over the next several years, conditions in the Twin Cities apartment market remain tight, as healthy demand continues to support improving operating fundamentals. According to REIS, developers added 1,279 units to the local apartment inventory in 2012, up from 477 units delivered in the year prior and 437 units reaching lease-up in 2010. Further signaling an increase in new apartment construction in the area, multi-family construction permits were issued for 5,719 units in 2012, up significantly from the 1,368 units permitted in 2011. Although new construction activity continues to ramp-up, healthy apartment demand has fostered tight occupancy levels and a solid pace of rent growth throughout the region. According to REIS, average asking and effective rents in the Twin Cities apartment market increased year-over-year by 3.2 percent and 4.3 percent, respectively, at the close of 2012. In near lock step, the average apartment vacancy rate decreased by 20 basis points during this same time period, falling from 2.6 percent in December of 2011 to 2.4 percent in December of 2012.

Some market observers speculate the anticipated wave of new construction could result in softer market conditions, particularly within the core and inner-ring submarkets. Occupancy levels in the local apartment market, however, are among the highest in the nation, and vacancy rates in the Twin Cities apartment market have remained resilient in the face of macroeconomic headwinds over the last several years, barely exceeding the market equilibrium of 5.0 percent even at the peak of the recent economic downturn. While average vacancy rates may tick upwards within some submarkets in the near-term as a result of the surge in new construction activity, we believe the local apartment market has the wherewithal to weather the storm in a reasonably impressive fashion. Factors indicating the local market will remain strong include the steady stream of apartment demand supported by broad-based employment growth, encouraging demographic trends, and the region’s relatively youthful population. Moreover, recent gains in the local for-sale residential sector are likely to keep some potential buyers from entering into homeownership. According to the National Association of Realtors, the median single-family home sale price in the Minneapolis-St. Paul Metropolitan Area increased by 15.7 percent over the year ended in the fourth quarter of 2012, reaching $175,300 at the close of 2012. In comparison, as of the fourth quarter of 2012, the median single-family home sale price in the Chicago Metropolitan Area stood at $167,400, while the median home sale price in the Kansas City Metropolitan Area was recorded at $146,600. As sale prices in the for-sale residential sector increase, more entry-level buyers will be unable to afford or qualify for a home mortgage and remain in the renter pool as a result.

Tight market conditions and an overall positive market outlook have encouraged a high level of investment interest and activity in the Twin Cities apartment market. A relatively robust pace of sales transactions showed no indications of waning in the final six months of 2012 and through the first quarter of 2013. On an annual basis, according to transactions tracked by Shenehon Company, sales volume for 50+ unit market-rate apartment properties in the Twin Cities increased by 23.4 percent in 2012, while the average price per unit increased by 14.4 percent during this same time period, reaching nearly $90,000 per unit. Although cap rates may pull back slightly for lower-tier product, investor appetite for multi-family assets in the greater Twin Cities region is expected to remain essentially unchanged, through the near-term, due to attractive financing opportunities and strong market fundamentals. A bullish outlook from investors is likely to keep cap rates in the low- to mid-5 percent range for the most desirable assets with quality Class B and C assets trading at rates between approximately 50 to 150 basis points higher. Rising building costs are also forecasted to help maintain a comparatively low cap rate environment in the market, preventing sale prices on a per unit basis from bumping up against replacement cost.

Beyond the Headline: Housing Starts Data

In its latest release, the U.S. Census Bureau reported that total housing starts in December 2012 increased 36.9 percent over December 2011 to a seasonally adjusted annualized level of 954,000. This level is the highest reported since July 2008 and signals the housing market continues to improve. While this is a positive indicator for the economy, additional time spent investigating the underlying data may lead to a better understanding of current market conditions.

A closer look at the seasonally adjusted annualized data reveals that the 36.9 percent year-over-year growth was driven primarily by increased starts for multi-family units (apartment complexes) rather than single family units. Compared to a year earlier, multi-family starts increased 115.7 percent while single family units increased only 18.5 percent. The table below reports historic seasonally adjusted annualized data for the month of December from 2009 through 2012. This information uncovers a longer term trend in which multi-family start growth outpaced single family growth in each of the past three years, based on December data, and these growth rates have widened over time. The remaining component of housing starts, two-to-four unit data, is typically not given much consideration due to its small representation.

Could this growth inequality have any impact on the pace of our economic recovery? According to data released by the National Association of Home Builders (NAHB), it is very possible. Based on historical estimates from 2008, the average new single family home creates 3.05 jobs and $231,288 in total income, while an average multi-family rental unit creates only 1.16 jobs and $86,709 in total income. A detailed account of these potential economic impacts is shown in the table below.

This data suggests that the economic impact of constructing a new single family home is greater than that of a multi-family unit. Therefore, while housing start growth of any kind is positive in this environment, growth driven by single family units rather than multi-family units would likely prove more beneficial to the economy, all else being equal.

“Appraising Railroad Corridors: Misconceptions about Across-the-Fence Methodology”

Shenehon is pleased to announce that the International Right of Way Association (IRWA) published “Appraising Railroad Corridors: Misconceptions about Across-the-Fence Methodology” by John T. Schmick in its March/April issue. The IRWA Magazine is a national publication providing news and information for real estate professionals.

In his article, John discusses how the across-the-fence (ATF) methodology has been transformed from a textbook definition to an applied definition with regard to valuing railroad corridor land. In the process, many appraisers no longer understand when the ATF methodology is applicable or how to apply it correctly. As a result, appraisers commonly produce a valuation based on an assumed minimum valuation (AMV) which is not the same as market value. The article presents two cases studies based on actual transactions where the ATF methodology was misapplied. These are real world situations where the sale price was based on a faulty premise. In each case, hundreds of thousands of dollars changed hands based on a flawed analysis when the AMV model was erroneously substituted for the ATF appraisal model.