To build or not to build offices in downtown St. Paul.

Byline: William Morris

Does the downtown St. Paul office market face a problem of supply, or of demand?

Joe Spartz, president of the Greater Saint Paul Building Owners and Managers Association, thinks it's the former. BOMA's 2018 office market report, published this weekend, shows a continuing retraction in the amount of office space available in the central business.

Total office space downtown declined from 15.99 million square feet last year to 15.56 million in 2018, and the vacancy rate declined to 19.1 percent.

"We do need new product coming in," Spartz said, noting several consecutive years have seen existing office buildings converted to apartments. "Residential has been growing, and extremely rapidly, but the reality is it's growing at the expense of office."

Not everyone is convinced the demand is there to support new construction.

"It's a hard conclusion to say we can accommodate more office until we have new clients moving in," Madison Equities President James Crockarell said in an interview, noting that St. Paul-based Madison is converting several of its older office properties into apartments. "It's not a situation where if you build it, they will come."

Madison Equities is a big player in the St. Paul office market, with holdings including the First National Bank Center, U.S. Bank Center and 375 Jackson buildings.

The BOMA report shows that the competitive market vacancy rate declined slightly from 20.8 percent in 2017 to 19.1 percent this year. That's higher than the 17.7 percent vacancy rate across the Minneapolis-St. Paul market reported in the latest CBRE Marketview report, which calculated the downtown St. Paul vacancy rate at 23.2 percent.

One reason for Spartz's optimism is that other sectors of the downtown economy are expanding rapidly. The number of people living downtown has grown by 95 percent since 2010 to almost 9,500, according to figures from Golden Valley-based Maxfield Research and Consulting released alongside BOMA's report. The Central Business District has added 2,328 apartments but no condominiums so far this decade, and vacancy rates sit at 3.8 percent for apartments and just 0.3 percent for owner-occupied units.

BOMA also surveyed retail establishments and found total space grew 6.5 percent to a bit more than 1.35 million square feet between 2016 and 2018. While the total number of retailers dipped slightly, the restaurant and bar count is up from 117 in 2016 to 129 in 2018.

"That [residential] growth...