Downtown Minneapolis is down, not out

Downtown is down, not defeated.

The huge Hilton Hotel that serves convention center trade is in default on its $180 million mortgage and is for sale. A third of retail space remains vacant since early 2020.

LaSalle Plaza on 9th Street is for sale. Ameriprise Financial plans to vacate its leased headquarters on 2nd Avenue and consolidate its workforce into a nearby building it owns by 2025. And discounter Marshalls is closing in City Center.

Recent developments are concerning but not calamitous.

The real estate industry, prone to volatility, also has proven resilient and creative through tough times in the past. Several dated office buildings, such as the Soo Line Building and Rand Tower, were converted to apartments, condos and hotels over the past decade. There may be more.

Downtown has undergone a building boom since 2012. But with the pandemic, many employers have left or downsized in favor of work-from-home arrangements for office employees. Others have negotiated lower rents for less space.

"There are [troubled] buildings in every city," said Manus Clancy, a senior managing director at Trepp, the New York City-based commercial-real estate financial analyst. "In Minnesota, we're seeing more concern in the suburbs, where firms are giving back big parcels of space, from UnitedHealth Group and [UnitedHealth subsidiary] Optum in Minnetonka and Eden Prairie, and Prime Therapeutics in Eagan. Hundreds of thousands of square feet."

Kimberly Gibson, a Prime Therapeutics officer, said in a statement that "a successful hybrid approach" has left it with unspecified "underutilized space" for lease.

UnitedHealth confirmed that it also has acquired space near its Minnetonka headquarters but declined comment on whether it has acquired more than it has released.

Nashville-based Brookwood Capital Advisors is auctioning Maplewood Mall, which it bought for $27.5 million last year. The bidding starts at $7.5 million for a center that's about 70% full and worth $48.5 million and makes money, according to Brookwood. Other suburban mall operators have struggled to stay leased.

IDS Center, the largest building in downtown Minneapolis, is 75% leased. Its longtime owner, Florida-based Accesso, said it has signed renewals this year for more than 20% of the building's 1.4 million square feet. Huntington Bank and Sit Investment are among those staying.

IDS General Manager Deb Kolar said in a statement: "Even in an uncertain economic environment, our tenants are choosing to renew their leases with us because of the iconic stature the IDS Center holds … and our ability to accommodate their needs.''

Meanwhile, rates are getting cheaper for new and renewing tenants at such "Class A" buildings. And there's disruption from new buildings.

The 2022 opening of the huge RBC Gateway Tower brought several big tenants, including RBC Wealth Management, from elsewhere in downtown, creating holes for other building owners. Securities firm Piper Sandler will leave its longtime headquarters downtown for a new building in the North Loop in 2025.

Mayor Jacob Frey and real estate veterans note that downtown has survived challenges for generations to grow into a residential neighborhood of 55,000 people and 200,000-plus workers. Maybe half of them are working any day in these hybrid-work days.

They assert that downtown and the neighboring North Loop are growing vibrant specialty retailers, including dozens of boutiques operated by local vendors at the Dayton's Project and the refurbished, once-vacant main floor of Young Quinlan Building on Nicollet Mall.

"I think this is a hiccup," said Jim Durda, a veteran corporate real estate executive who most recently managed City Center. There, anchor office tenant Target is exiting over several years to consolidate downtown and elsewhere.

"I can't say Target or any employer will force all their people back to work," Durda said. "It will be figured out. There is such a strong downtown infrastructure of business, and a major-league sports and arts district."

Avery Ticer, an executive director at property firm Cushman & Wakefield, said downtown "is evolving and … companies want to get employees and teams together to collaborate. They are looking for assets with good amenity packages and collaboration spaces."

Ticer noted that there has been $700 million in suburban-office transactions this year, also providing some pretty good values to new buyers who will invest.

"There's potential to see downtown buildings trade hands. That will be positive for the market," Ticer said. "There could be some attractive acquisitions that will demonstrate confidence in the Minneapolis central business district and opportunities to create dynamic work environments.''

Adam Barrett of Colliers real estate, who places tenants, said he believes more people will be back in offices next year.

"Return-to-work will take hold in 2023," Barrett said. "More employees will be back … and that will be a catalyst for the retail sector. We're moving to a better, dynamic hybrid-work model. One that also acknowledges that being together helps produce better work.''