Minneapolis passes law aiming to bolster office-to-housing conversions

A new Minneapolis ordinance will make it easier for developers to convert office buildings into housing, a key aspect of civic leaders’ plan to help downtown rebound from the COVID-19 pandemic.

The policy, which City Council Members Michael Rainville and Katie Cashman authored, allows office-to-residential conversion projects to seek administrative approval instead of having to go before the Planning Commission. It also exempts conversion projects from the city’s inclusionary zoning requirements for up to five years and allows them to undergo less-extensive traffic studies.

Mayor Jacob Frey signed the law Tuesday in the lobby of Groove Lofts at Northstar Center, a vacated downtown office building that developer Sherman Associates converted into 216 housing units.

In the wake of the pandemic and subsequent rise of remote work, office-to-residential conversions have become a hot topic in cities across the country. Downtown boosters especially have heralded the redevelopments as a multipronged solution to some of the cities’ most pressing problems: Conversions bring vitality to empty office districts while providing much-needed housing.

But, Cashman noted, these types of projects can pose extraordinary costs and logistical challenges for developers.

“So as a policymaker, it’s our mission to remove barriers to investing in the city for those who are doing everything that they can to make these projects viable,” she said.

Assistance from all levels of government helped make the $97 million Groove Lofts project possible, developer Chris Sherman said. Roughly $35 million came from federal and state historic tax credits. The city is contributing nearly $7 million in tax-increment financing to help keep 20% of units affordable for households earning up to 50% of the area median income, which is $62,100 for a family of four.

Sherman said developers and the city are lobbying the Legislature for another temporary tax credit program that would provide assistance to convert vacant and underutilized buildings. As borrowing costs increased and lending became more restricted, many would-be conversions are facing budget gaps too large for local governments to fill.

But the city’s efforts still help, Sherman said. The five-year exemption from Minneapolis’ inclusionary zoning policy — which requires 8% of new housing units to be income-restricted — would save a 100-unit project roughly $1.2 million.

City officials also said allowing staff to approve projects speeds up review time by one to two months and removes uncertainties tied to political whims.

The overall vacancy rate in Minneapolis’ central business district at the end of June was 33%, exceeding the metro-wide average, according to a quarterly report from Cushman and Wakefield, a brokerage that tracks mostly larger, multitenant office buildings with 20,000 square feet or more.

Frey acknowledged the state of the office market is taking a toll on the tax base. But he said the drop in commercial values will hopefully enable more developers to purchase buildings for conversions at cheaper prices.

“While this is a turbulent time, the next phase is really exceptional,” Frey said. “It’s a massive opportunity that is before us right now.”

Other parts of the Northstar Center complex, built in the 1960s, are also seeing significant transformation. The Hotel Indigo opened last year, and the west tower will soon reopen as a luxury office and hospitality space.

“This block is going to have living, working, playing and staying,” Sherman said at Groove Lofts, which will have tenants moving in next month. “And that truly is the future of downtown.”