As Twin Cities area office building owners stomach tanking values, buyers see opportunity

For office owners, 2024 could go down as one of the worst years on record.

By the end of last year, office vacancies in much of the Twin Cities rose to new highs. Nearly a third of all office space across the metro was empty, and the value of buildings plummeted as a result.

Brokers say investors, particularly those with deep pockets, are taking note of the price reset underway. A handful of office buildings sold for a fraction of their value last year, including downtown Minneapolis’ Wells Fargo Center, which went for $85 million — a stunning markdown compared with a $314 million sale price just six years ago.

Some of those deals — however discounted — are actually rooted in optimism and a surprising amount of certainty at an otherwise challenging time for office owners. More companies are returning to a five-day workweek, there’s been barely a whiff of new office construction and rents are rising for the most decked-out office space in the best locations.

“Office is all over the headlines, and there are a lot of people that think it’s uninvestable,” said Jon Lanners, a partner at Minnetonka-based Onward Investors, part of the joint venture that purchased the 57-story Wells Fargo Center. “But we’re a believer that good quality office buildings will be in demand, are in demand. And there’s a real opportunity to sort of come in and help stabilize tougher situations — and, frankly — make a good return.”

Across the metro, the office vacancy rate at the end of last year was 29.3%, up slightly from both the previous quarter and in 2023 at the same time, according to new data from Cushman & Wakefield. Despite the bump in vacancies, asking rents increased by the end of the year, in large part because companies are seeking higher quality, but smaller, offices.

“This whole flight-to-quality trend, that is very real,” said Tom Tracy, executive director at Cushman & Wakefield. “If you’re a tenant looking for the highest-quality space, the options are somewhat limited.”

The new owners of the Wells Fargo tower, which is 38% vacant, are banking on that trend continuing: so much so that they’re contemplating adding a food-and-beverage concept to the building’s lobby as an added draw for tenants.

Lanners said Onward, which has a $125 million dedicated fund raised from private investors, is on the hunt for similar deals across the country. The Wells Fargo tower sold for $75 per square foot; a new house in the metro sells for three times as much. The transaction left many wondering if prices have hit bottom.

Brokers expect more buildings to sell at steep discounts this year as the mortgages on those buildings come due, and their owners fail to refinance or land a mortgage to replace the previous one.

“There is a lack of liquidity right now in office, whether it’s equity or debt financing,” Lanners said. “As a result, we feel like there is a very compelling opportunity to go purchase best-in-class assets across the country at prices that certainly are well below replacement costs.”

Despite several notable new leases last year, reversing the upward trajectory in the vacancy rate will remain a challenge in 2025 as other significant leases expire and tenants continue downsizing. Many brokers are optimistic, however, the glut will diminish as empty offices transform for residential or other uses.

The sale and redevelopment of two major office campuses in the south metro area last year will wipe out 1.4 million square feet of office space from the metro. And if the 12-story Flour Exchange building in downtown Minneapolis, which recently sold to a local affordable housing developer, does convert into apartments, then nearly 100,000 square feet will disappear from the long list of difficult-to-fill office buildings.

Several large chunks of office space put up for sale last year are offsetting those moves, including UnitedHealth Group’s vacated space in Minnetonka. And in downtown Minneapolis, vacancies a handful of large employers left remain a formidable challenge to refill, casting uncertainty on the market.

“Target’s the issue, I would say, for Minneapolis, because of their lack of commitment to coming back downtown in their 3 million square feet of leased and owned space this year,” said Colin Ryan, co-head of the Minneapolis office of JLL Capital Markets. “It just hurts the market substantially because of the unknown. If that much space gets put back onto the market, then what happens?”

Hennepin County, which allows some office employees to work remotely, is “right there with Target with lack of commitment to downtown,” he added.

At the end of last year, Ryan and his team at JLL scored a big win for the metro after facilitating a record office sale in Wazyata. A nearly 20,000-square-foot-building at 401 Lake St., which has offices and retail on the first floor, sold for $17 million. The brokerage firm said the sale represents the highest price per square foot for office sales in Minnesota history.

Ryan said the exceptional rate demonstrates the strong demand and premium placed on high quality office space in the Twin Cities market, adding the sale “provides a much-needed basis reset to kick-start office sales in 2025.”

And, brokers said, the amount of space prospective tenants are shopping for has ticked up recently. JLL said that figure rose 3.5 million square feet at the end of the year, which means leasing is poised to increase in the coming months, according to the brokerage. Tracy, of Cushman & Wakefield, said despite a flurry of interest, the actual amount of leasing last year was less than 2023 by roughly 25%.

“Nobody can a put a finger on why that is,” he said. “Maybe lower rates [in 2023] or the election put things on hold.”

As demand for the best office space improves, the future for outdated office space in less-desirable areas is far more challenging and less certain, Tracy said.

“That part of the market, the lowest 20 percent, is continuing to struggle and will struggle for the foreseeable future,” he said. “It’s a capital-intensive business to convert [into another use] or redevelop.”

A new proposal in Edina from Minnetonka-based Opus Group, however, suggests Class A space — well-appointed buildings in the best locations — is becoming more challenging to find. After searching “far and wide” for space for its new headquarters, the company couldn’t find anything that suited its needs, Tracy said.

So, Opus pitched plans to build. Earlier this month, the developer said it wants to tear down an outdated 38,000-square-foot office building built in the late 1960s and replace it with a 112,000-square-foot, multi-tenant office building.

The proposal is an about-face for the company, which originally had planned to build a seven-story, 136-unit apartment building with retail on the first floor and a portion of the units reserved for lower-income residents. Apartments are in high demand throughout the metro, but higher mortgage rates and construction costs have made such projects challenging for many developers, causing a steep decline in planned apartment projects.

Opus is early in the entitlement process and recently submitted a sketch plan review before the city. Nick Murnane, vice president and general manager of real estate development with Opus, said if approved, the project should break ground this summer and finish in late 2026.

“The combination of this premier Edina location with a modern, [amenity-rich] office building will result in a truly differentiated offering in the market,” Murnane said.

New offices were a rarity last year and likely will be for some time to come. The Opus proposal and two other slightly larger projects in the works on sites created from the demolition of older, empty office buildings along France Avenue in Edina are the only major multi-tenant office projects on the drawing board.

For now, at least.

“It does feel like investor sentiment in office is improving,” said Avery Ticer, executive director of capital markets for Cushman & Wakefield. “Availability of capital is superior to what it has been, and that’s going to improve as leasing continues to improve.”