U.S. Bank recommits to downtown Minneapolis amid record office vacancies

U.S. Bank is doubling down on its commitment to downtown Minneapolis.

On Monday, the Minneapolis-based bank said it signed another long-term lease for its headquarters in its namesake tower along Nicollet Mall in Minneapolis. And with that, it will also move hundreds of workers downtown after it vacates the offices it leases in Richfield.

"We have been a company that has had a significant presence in downtown Minneapolis, and it's very important for us to continue that," said Terry Dolan, U.S. Bank's chief administration officer. "We are very committed to the downtown area. It is so critical for the entire metro and the entire Twin Cities area to have a vibrant downtown."

While the decision will reduce the amount of space it occupies in the suburbs, it won't affect the company's headcount or the nearly 450,000 square feet of space it occupies in a 32-story tower at S. 8th Street and Nicollet Mall. Atlanta-based Piedmont Office Realty Trust owns that building, known as the U.S. Bancorp Center.

As the company embraces a more flexible hybrid-work policy it announced last year, Dolan said the company simply needs less space. The company employs about 4,000 people in a couple of locations in downtown Minneapolis and another 2,000 in St. Paul, where the company's leases are also coming due in the next months. Dolan said it's too soon to say what will happen to those offices.

For now, the company said it will vacate 340,000 square feet the company occupies in Richfield's Meridian Crossings and move about 80% of the 1,400 employees who work there to its existing facility at Excelsior Crossings in Hopkins. The remainder will come to downtown Minneapolis.

As part of this reshuffle, the company will reconfigure and remodel its workplaces. Rather than adding decked-out workout rooms and new cafeterias as some companies are doing, the company will focus on creating more open, light-filled work spaces that promote interaction among employees, Dolan said.

"We're very committed to bringing our employees back in a co-located sort of way so they can more effectively collaborate in the office," he said. "It's a modernization of space."

U.S. Bank's announcement comes at a time when many companies are reconsidering their space needs as they adopt and adapt to more flexible hybrid-work schedules that allow some employees to work remotely.

A year ago, U.S. Bancorp CEO Andy Cecere sent a memo to the company's corporate workers, most of whom were still predominantly working remotely, asking them to work in the office more often to help create more collaboration and engagement among workers. The expectation, he said, was workers should be in the office three days a week.

Companies across the metro are making such decisions and thus reshaping the office market. In general, most companies are realizing they need significantly less space than when they originally signed their leases, creating a glut of empty office space as those leases expire.

Many companies are putting their offices on the market long before the expiration of their leases, creating a backlog of what's known as "sub-lease" space.

By virtually every measure, office vacancies across the metro are already at record highs and rising. Earlier this month, Cushman and Wakefield said at the end of the third quarter, the average office vacancy rate increased slightly to 26.5% as additional corporate users like U.S. Bank executed downsizings and initiated remote work decisions.

Though downtown Minneapolis still has the highest vacancy rate among all metro-area submarkets, corporate downsizings have hit the areas along the Interstate 494 corridor especially hard. Best Buy recently consolidated its headquarter operations and vacated more 728,000 square feet in the southwest metro, while United Health Group vacated about 165,000 square feet as it implemented new remote work initiatives.

Those shifts helped boost demand for smaller, higher-quality office buildings.

Colliers — which tracks a broader swath of the office market, including buildings with fewer than 10,000 square feet of space — reported the average vacancy rate for those top-tier buildings, known as Class A spaces, increased slightly to just under 10%.

U.S. Bank declined to discuss terms of its new lease, but it's likely the company received more favorable terms than it might have pre-pandemic, when demand for offices was higher and vacancy rates lower. Piedmont said in a statement that in addition to the building's full-floor penthouse amenity center — which already has a game room with a golf simulator — as well as bike storage with locker and shower facilities, the company plans to add a fine-dining seafood restaurant and refresh its lobby to include additional "tenant collaboration lounges" and an on-site coffee shop.

Building owners have been eager to secure long-term leases as building values have fallen, and the prospect for refinancing their buildings becomes more challenging. Piedmont also owns Meridian Crossings, the building U.S. Bank is vacating in Richfield.

Across the market, tenants have had far more negotiating power than recent years, creating a significant disparity between asking rents and what tenants end up paying. The latest Colliers report showed lease deals this summer closed for 5% to 15% below list price, depending on the building and the submarket.

As the "flight-to-quality" trend continues, the strongest demand for office space has been for the newest and best-quality offices. The Cushman and Wakefield report showed there was a double-digit increase in new leases for smaller but highest-quality space during the quarter. Thomson Reuters led that as it subleased 308,000 square feet of offices where Prime Therapeutics had recently built its Eagan headquarters.

These Class A spaces now represents a much higher share of all new leases than a few years ago as companies try to woo workers back to the office. Class A as a percentage of new leasing volume year-to-date rose from 43.3% of new leases in 2021 to 58.3% at the end of the third quarter.

Dan Gleason, executive director of Cushman and Wakefield, said through all of these shake-ups and consolidations, the suburbs are generally performing a bit better than downtown Minneapolis.

"We're going to, unfortunately, see more new space come on the market," he said. "It's been a little challenging."

Steve Cramer, executive director of the Downtown Council, said the news is a significant boost for downtown.

Cramer said there are about 210,000 employees downtown, though only about 65% of them are coming into the office regularly, according to a September survey. That's down only slightly from a pre-pandemic peak of 219,000.

He cited Wells Fargo's recent decision to close its offices in south Minneapolis and relocate those employees to its downtown buildings as another example of how companies are deepening their commitment to the city's core.

"This will send a really strong sign of confidence to other companies that are evaluating their lease options," he said. "Downtown is not hemorrhaging employers."