IDS Center owners negotiate loan extension amid tenuous downtown Minneapolis office market

After months of negotiations and uncertainty for the tallest and most valuable office tower in the state, the owner of the IDS Center has negotiated a three-year extension for its loan on the 57-story tower.

"This extension enables us to continue doing what we've done successfully for many years: adeptly managing the iconic property while executing a highly successful leasing program," Deb Kolar, general manager of the tower, said in a statement.

The agreement gives the owner of the tower, Florida-based Accesso, more time to line up permanent financing several months after missing a balloon payment on the $151.7 million loan. The due date had come in the midst of unprecedented challenges for office owners, including record vacancy rates, declining values and a dire shortage of lenders willing to refinance loans.

The tower, one of the most recognizable on the city skyline, has 1.4 million square feet and has long been considered a premier address off Nicollet Mall and S. Eighth Street. Since the beginning of the pandemic, the tower has lost several key office and retail tenants, including Nordstrom Rack and, most recently, Hubert White, a high-end men's store that was a key retail anchor at the base of the tower for years.

Since then, the tower has scored several leasing wins. Last month, Accesso said it had completed 16 lease transactions for more than 121,000 square feet.

"We are excited to come to terms on a loan extension for the IDS Center as challenges surrounding the availability of capital persist, reflecting our success at the property despite a difficult macroeconomic environment," Kolar said in the statement.

Unlike residential long-term, fixed-rate residential mortgages, most commercial loans are short-term — typically five years or fewer — and many have floating rates, thus requiring more frequent refinancing.

Today, many building owners and their lenders in the Twin Cities are already finding themselves in a state of financial purgatory, with both parties searching for an exit strategy that best minimizes their losses.

"I view it as a bit of a staring contest between office borrowers and lenders. Neither party really wants to blink," said Jeremy Jacobs, executive managing director for Colliers. "Lenders are showing varying levels of flexibility under existing market conditions."

Many buildings are now near or in receivership, he said, and banks are still working through a backlog of distressed asset sales across the United States, including a few in Minneapolis.

"Lenders are showing flexibility where they can, and it makes sense," he said. "But not every borrower should rely on the good graces of an understanding lender to get to the other side of existing office market conditions."

In a healthy market, when a loan matures, the building owner refinances. Today, with values falling and borrowing costs high, few owners are able to manage a new loan. The lender then has the option of foreclosing and taking possession of the building, but for many these days that's a last resort because most don't have the staff or skills to manage the complexity of multiple tenants in a complex building such as the IDS Center.

In some cases, after a loan matures — as it did at the IDS Center — the borrower keeps making payments while the owner and/or lender explores its options including seeking a buyer. If a buyer doesn't emerge, the lender has the option of holding onto the building until occupancy — or building values — increase.

A decade ago, Accesso paid $253.5 million for the IDS Center, valued at $256 million at the start of the current loan. Since, the value of that building and other commercial buildings has fallen, making it difficult for owners to refinance. Earlier this year, the value fell to $180 million.

Trepp, a commercial real estate data and analytics company, reported earlier this year about a quarter of the office space in the building was vacant. That figure is not out of line for office buildings in the Twin Cities metro, according to the latest analyses.

A third-quarter report from Colliers showed that average vacancy rate throughout the Central Business District in downtown Minneapolis was 20.3%. That was on par with previous quarters but was the highest vacancy rate for any submarket in the metro and only slightly higher than the I-494 corridor submarket.

Commercial brokers said that while there's a record amount of vacant office space in the metro, many companies are taking advantage of these vacancies to either upsize at less expensive rents or downsize into higher-quality space with better amenities.

Eddie Rymer and Alex Ach of JLL recently represented Alerus Financial in expanding its footprint in Shoreview and Minnetonka with deals that total nearly 53,000 square feet.

"In today's market, 'flight to quality' continues to be the prevailing trend, helping define the most attractive and in-demand properties across the Twin Cities market," said Rymer, a senior vice president.

He said the deals will enable Alerus the ability to install exterior top-of-building signage, helping the company deepen its visibility and roots across the Twin Cities.

In the Twin Cities, the best-quality buildings in the top-notch locations are garnering significant interest. JLL said that through the past year more than half of all new leases were in these "Class A" buildings.

Ach, a JLL vice president, said it's all part of an effort to make office life more appealing.

"Leadership from the top down is pushing employees back to the office," he said, noting many companies now want to provide dedicated offices and work stations rather than the "hoteling situations" that force employees to share space.

"Alerus is an apt example of how a leading organization is investing in terrific office space that will help its organization grow and further develop a thriving workforce," he said. "These leasing transactions represent broader commercial real estate trends where more demand is seen in Class A and trophy assets."