Ambitious remake of Dayton's Project in Minneapolis clashes with new reality

After three long years, the former Macy's in downtown Minneapolis is ready to reveal itself as the stunningly converted Dayton's Project office tower. But there's a hitch.

The gleaming redo — with proud nods to the site's longtime use as the Dayton's Department Store, is all dressed up with nowhere to go.

Much of the 1.2 million-square-foot site, which makes Minnesotans wax nostalgic about annual spring flower shows, Christmas window displays and chummy lunches at the beloved Oak Grill, has been restored or modernized into elegant spaces that were ready to be leased three months ago.

But ...

"There are no signed tenants. When you talk to people in real estate, nobody is signing anything right now," said Brian Whiting, CEO of Chicago-based Telos Group, the partner of the Dayton's development that led the planning and execution. "We were in the process of moving forward with several hundred thousand square feet of tenants when COVID hit. All of those tenants have put any decisions on real estate on hold."

Most are still in talks with Telos, but await new "clarity" on COVID-19 issues before renting space in the 12-story 700 Nicollet Mall, Whiting said Thursday before showing visitors the signature three-story atrium staircase near the skyway bridging to the IDS Center.

An artful chandelier of black dangling lines hangs over the atrium to form a scripted letter "D" when viewed from just the right spot in the still empty basement food hall.

The former JB Hudson Jewelry store on the first floor has kept its vault, marble arches and fanciful bronze gates. It's waiting for a restaurant tenant.

The rooftop Winter Lounge boasts 14 seating areas, two fireplaces, and walls of windows that overlook the outdoor terrace's grass garden, pergola and views of the city.

But it's unclear if it's enough to lure leases in a downtown Minneapolis market that already has 5.8 million square feet of vacant office space, according to Colliers International research.

With COVID-19, leased office space in Minneapolis and St. Paul fell 42% during the second quarter, according to commercial real estate services giant CBRE. Rents also fell. Office vacancy rates in Minneapolis's core business hub hit a somber 19.1% and could worsen this quarter.

Dayton's partners had planned to open the 50-vendor basement food hall and first floor and skyway level shops last year, touting the participation of TV food-host Andrew Zimmern and the famed Gansevoort Market of New York City. But the shops and much anticipated food stalls remain empty and hidden behind wall partitions — yet another victim of COVID-19.

"The timing of the opening is certainly not perfect," said Joe Conzemius, vice president of the CBRE commercial real estate firm that is not involved in the project.

In addition to the unprecedented economic fallout from a global pandemic, the overhaul and relaunch of the former department store also comes weeks after rioters smashed windows and looted stores along Minneapolis' Nicollet Mall and elsewhere downtown for a second time since May.

The Dayton's building was spared. The Nordstrom Rack store across the street was not. Its windows remain boarded.

COVID, the killing of George Floyd and recent riots have "certainly reared [an] ugly head to hurt some of our leasing efforts downtown," Conzemius said. "The impact of all of that remains to be seen."

Many downtown offices have just 10% of their employees working from the actual office, said Colliers International vice president Claire Roberts.

Today, businesses are shortening or canceling leases, and pushing back move-in dates "for as long as they can," Roberts said, noting one of her clients in Denver just deferred a major lease project in Colorado by three months.

Being flexible with lease lengths or working with clients to defer and not cancel leases is one way "these landlords are going to preserve their mortgages," Roberts said. "They are going to have to do something [to protect themselves]. Otherwise we go into default and the banks don't want them back."

The Dayton's Project has the advantage of visibility that could be an edge in a market struggling to regain its moxie.

"This a very, very important building for downtown Minneapolis so we are all cheering and rooting for its success," Conzemius said. "That location is the [equivalent of] Main and Main (street). ... When people have thought of the iconic buildings of Minneapolis, this is one."

Dayton's Project partners said they aren't worried. "There is nothing driving us toward foreclosure," Whiting said. "The building is done and it's paid for. Eventually we've got to lease the space. But we have reserves. And the lenders are all understanding of this situation."

To prove that, Telos said Thursday it's investing another $7 million to convert the fifth and sixth floors into modern, furnished and "rent-ready," office suites so they are "ready for when people come back to downtown," he said.

That surprised some commercial real estate pros who said it flips the usual goal of landing the largest office tenants first and then offering prebuilt spaces to smaller leasers. Prebuilds often command shorter leases and very flexible terms, compared to tenants who might snatch up 80,000 square feet for 10 years.

Telos and its partners at 601W and United Properties remain "very confident" their project will prevail after the city gets through COVID, Whiting said.

His outlook is bolstered by past successes renovating Washington Square and Fifth Street Towers in Minneapolis and by Telos' and 601W's conversion of the massive Chicago Post Office from a gritty processing center into a sophisticated office and retail complex. It's twice Dayton's size and opened in November, fully leased, Whiting said.

His faith in Dayton's is further buoyed by what he witnessed after Sept. 11, 2001, when commercial real estate clients abruptly altered construction plans, demanded bombproof glass, security barriers, metal detectors and bomb-sniffing dogs. Two years later, the clients exiled the dogs, metal detectors and barriers.

Similarly with COVID, the three Dayton's partners will wait it out. For now, they are eager to show off their finished product and its ability to adapt to the current environment.

Walking onto the fifth floor during a tour Thursday, Whiting showed off a 20,000-square-foot furnished suite. Its tables and chairs are easily disinfected and the desks have dividing partitions that adjust. Next, workers will start converting 90,000 square feet on the sixth floor into six modern, furnished offices suites.

Jim Montez, the Transwestern vice president in charge of leasing space in Dayton's, said clients like "spec suites" since they solve problems and can address COVID.

"Most tenants don't want to allocate time and resources in terms of designing the office space. That is not their day-to-day job," Montez said. "So we work with local architects and are designing the space without an exact tenant in mind. But we know what they will need."

Dee DePass • 612-673-7725