COVID stresses downtown Minneapolis commercial property owners

Jim Durda, general manager of City Center in Minneapolis, several weeks ago opened a $3 million-remodeled entrance on Seventh Street and the Nicollet Mall. The response in COVID-19 times was underwhelming for what's definitely an upgrade.

"In this lousy economy, we're doing OK," said Durda, an optimist by nature who's focused on the post-COVID future.

Chase Bank will soon open an office in City Center. Brooks Brothers has reopened in renovated space and Bell Bank plans to begin construction this fall on an inaugural downtown office. Discounter Marshall's is open seven days weekly and several restaurants remain open.

"Once we add Bell and Chase, we'll be about 90% leased in the retail portion and office tower" of square-block City Center, Durda added. "But retail sales are probably half of what they should be. It's really tough, particularly for independent operators."

Tenants are renegotiating their leases downward to reflect reduced revenue. Banks and other financial institutions are preparing to take write-downs on mortgages, thanks to property owners who can't make full payments.

Downtown Minneapolis had a record 50,000-plus residents and more than 200,000 workers when the COVID-19 virus shut it down in March. Less than a quarter of those folks, who drive downtown retail and hospitality sales, as well as tourists, are showing up to shop, sleep or eat downtown.

Durda is looking ahead to a better 2021.

"Last year was a terrific year downtown," Durda said. "We need to help our tenants get through the pain this year. We and others are investing in our properties. The mall was rebuilt at a cost of $50 million. The people eventually will return and things will be good again."

Durda also pointed to a survey that shows about 90% of workers look forward to returning at least part time to their jobs.

Downtown, the commercial and entertainment hub of the Twin Cities area, is not going away. It's also hard to envision anything faster than a gradual return to something approaching normal activity, if the virus can be contained and eliminated.

City Center in 2018 was sold to a subsidiary of South Korea's Samsung Life Insurance for a record $320 million.

"We have a committed owner," Durda added. "We did an important fix on Seventh Street. We just need customers."

Dozens of independent shop owners and restaurateurs on the street level and skyways downtown already have shuttered permanently or aren't expected to reopen. Several, such as owner-operated Hen House, are operating at about one-third of capacity with skeleton staffs, having survived the spring shutdown thanks to forgivable SBA loans.

No industry has been hit harder downtown than the travel and convention based hotels and restaurants.

At the downtown Hyatt Regency and Hilton hotels, with about 1,450 rooms in aggregate, about 800 of the 850 workers who make base wages of $13 to $16 an hour are idled.

Doug Greene, managing director of Florida-based Haberhill, which owns the hotels, blames Gov. Tim Walz. And he asserts that crime on the street is a bigger problem than COVID.

Greene fumes that big-box retailers are open and making money hand over fist but he can't host more than 250 people, or 25% of capacity for meetings at the Hilton, as he can at properties in Atlanta and Missouri, using protocols that he has said are working.

Guests only have occupied 344 rooms in the first 10 days of September at the Hyatt Regency, which offers 644 rooms nightly. At the Hilton, only 800 rooms have been rented so far this month at an 826-room hotel.

"What makes a big-box store with little or no capacity regulation different from an event venue like our hotels?," Greene said. "I would suggest … we can operate more safely than the big-box retailers or other indoor venues. We have total control as to who comes into our hotels. We can set up our meeting space in a way that protects our customers and employees.

Greene noted that COVID-related deaths and hospitalizations have fallen in Minnesota.

"Yet, the governor continues to use scare tactics, saying we are at a 'crisis,' " Greene said. "The reason for the initial shutdown was to prevent a surge in hospital ICUs. That never happened. The numbers are headed in the right direction, but … little, if any, relief to businesses like ours. "

The Walz administration has taken a go-slow approach to try and avoid spikes that have occurred in Texas, Florida, Arizona and elsewhere due in large part to gatherings. It declined this summer to let operators such as hotels increase room capacity to 50%.

Haberhill has invested at least $150 million to buy and renovate the Hilton since 2016 and at least $76 million to buy and renovate the Hyatt Regency since 2011, according to its website.

Haberhill's financial partner is private-equity firm Walton Street Capital of Chicago, which refinanced the Hilton at $180 million, even though the property was judged by bond-rating firm Moody's to be worth less than $120 million, as prices got way ahead of valuations during the go-go years for hotels of 2010-19.

Greene said the payments on the interest-only mortgage are lower than under the former mortgage.

"That loan is under 4% interest today and we were paying $7 million in debt service and we had $18 million in cash flow last year and there was no stress. COVID has added stress. We're working with our lender on forbearance. The hotel is assessed by Hennepin County at only $115 million. But that strips out the value of the business."

And right now, that business is in the tank.

Neal St. Anthony has been a Star Tribune business columnist and reporter since 1984. He can be contacted at nstanthony@startribune.com.