Downtown Minneapolis Office Market

Downtown - North Loop - Mill District - Elliot Park - Loring Park
thespeedmccool
Rice Park
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Re: Downtown Minneapolis Office Market

Post by thespeedmccool »

BikesOnFilm wrote: December 18th, 2024, 5:25 pm I had a conversation with some commercial real estate folks about conversions. The price per square foot needs to be absolutely decimated on a commercial property before they'll think about something like this.
I mean, is a 73% decline in value not enough? That's seems like a total collapse to me, even if it's not the technical definition of a "decimation." What kind of decline would you need to make a conversion like this pencil out?
BikesOnFilm
Wells Fargo Center
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Re: Downtown Minneapolis Office Market

Post by BikesOnFilm »

I'm not in the industry, just an interested layperson, so this is just a semi-informed take and a recollection of a conversation. But the sticker price of the building matters a lot less than the going lease rate per square foot of office space. Office space is significantly higher margin per square foot than apartments, so it needs to reach a point where the going office lease rate per square foot is lower than two numbers - both the going lease rate per square foot for apartments, and the cost per square foot to do the conversion. This is an article from Moodys outlining how that plays out in the NYC market, but to figure out what the calculation looks like in Minneapolis would require some knowledge I don't have.

So if you set out to buy an office building for conversion, chances are you aren't looking at a Class A tower that's 60% leased. That's 60% of tenants paying a lease based off the 2019 valuation, with 73% less loan to service with it. Even if you have to cut sweetheart deals to fill the last 40%, you've got a few years where you're bringing in way more than you need in order to pay the mortgage before things settle into the new normal.

And consider that just because you got a 73% discount off the 2019 purchase price, doesn't mean you saved that 73% in cash ready to deploy for the major renovations necessary to convert it into residential. The tower is now owned by three groups who financed the deal, I think if they had the huge amount of capital needed to convert a building like this to residential (and thought it made financial sense to do so to begin with), they probably would have just bought the building outright instead of putting together a joint deal.

I'm guessing a few more of the big, 1970s-1990s era office towers are going to change hands in the next few years, with similar reductions in value from their pre-pandemic purchase price. I would wager exactly 0% of them will be converted to residential. The best hope would be a new owner of City Center who demolishes the mall portion and builds new apartment towers with a Nicollet Mall address, but even that is a bit of a stretch.
minntransplant
Nicollet Mall
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Re: Downtown Minneapolis Office Market

Post by minntransplant »

BikesOnFilm wrote: December 18th, 2024, 9:13 pm I'm guessing a few more of the big, 1970s-1990s era office towers are going to change hands in the next few years, with similar reductions in value from their pre-pandemic purchase price. I would wager exactly 0% of them will be converted to residential. The best hope would be a new owner of City Center who demolishes the mall portion and builds new apartment towers with a Nicollet Mall address, but even that is a bit of a stretch.
This seems right to me. All the "newer" buildings aren't good candidates.

There's not much publicly listed for sale in downtown. The only opportunity I see for a residential conversion are the Grain Exchange buildings. But who knows how motivated the owners are to actually sell.
uptownbro
Rice Park
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Re: Downtown Minneapolis Office Market

Post by uptownbro »

They are currently for sale
AccordGuy
Metrodome
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Re: Downtown Minneapolis Office Market

Post by AccordGuy »

I'm curious about the future of the former Ameriprise headquarters. Lately they have taken down the art in the skyway lobby and I don't see many people going in and out.
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StandishGuy
Nicollet Mall
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Re: Downtown Minneapolis Office Market

Post by StandishGuy »

Yeah. I get that the Wells Fargo Tower is one of the premier office buildings, but it just sold for a fraction of the price and it is 40% empty. Is it not feasible that some portion of that empty space gets converted to residential creating a mixed-use building? I imagine a Caesar Pelli designed structure would definitely become a premier residential address. Maybe it's too complicated to mix the office and residential uses?
BikesOnFilm
Wells Fargo Center
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Re: Downtown Minneapolis Office Market

Post by BikesOnFilm »

I still don't think we have enough info to know the mechanics of this but let's try and puzzle it out.

Right now, the vacant space in Wells Fargo Tower is being offered at $18-24 per square foot. Let's say for the sake of argument that those prices have been too high, and the new owners are deciding whether to convert some of that space for apartments, or to lower the lease range to $15-20 in order to coax more businesses into a premier address at a discount.

We'll use the Soo Line Building apartments as a basis for comparison because it's a residential conversion located fairly close to Wells Fargo Tower. On Apartments.com right now, I've found a two bedroom, 849 sq ft apartment for $2099 a month. On a per square foot basis, that amounts to a rent of $2.47 cents per square foot. I threw in $10,000 per month to see what would happen, and that only gets to about $11 per square foot. A building owner capable of lowering the lease rate on their office space to $15 per square foot would absolutely choose this over making them into apartments.

And that's only what you can get after you invest in the conversion. The Landmark Tower in Saint Paul, a fairly decent analogue to Wells Fargo Tower in this case because neither are considered "ideal" candidates for conversion, spent $185 million to convert 600,000 square feet of office space to apartments. That comes to about $308 per square foot to convert. A useful number to know here would be the cost per square foot to build a new apartment building in Minneapolis - but I can only find national ranges of $150-400 and a national average of $350, which isn't helpful when that's an effective range between San Francisco and Mobile, AL. I say again - if one of the partners in the Wells Fargo Center deal had hundreds of millions lying around, or they could secure that much capital in financing on their own, they wouldn't have needed to seek partners to buy the building. And as illustrated above, they stand a much better chance of getting a return on their $89 million investment if they don't do this.

So you can see just how far the cost of office space has to absolutely plummet before any of this makes sense. Granted - this is just me taking available numbers and dividing them by other numbers. If someone knows better than me, and there's a secret divination that goes into these decisions, I'm happy to learn and be corrected.

I've been complaining for years about building owners in Downtown and Uptown being utterly unwilling to respond to market conditions by lowering the cost of their retail space, and celebrate new ownership at lower prices as the only way we can get prices to come down to breathe new life into dead spaces. If they aren't willing (or able, because of their mortgages) to lower a retail parcel to an attractive rate to fill the space, how can they possibly justify a massive capital expenditure in order to... attract a fraction of the amount they could by lowering the lease rate? It really looks like a building has to have next to no ability to ever attract office tenants again before someone will take this step, and that is not how anyone would describe Wells Fargo Tower.
BikesOnFilm
Wells Fargo Center
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Re: Downtown Minneapolis Office Market

Post by BikesOnFilm »

Looks like the next office-to-residential conversion will be the Flour Exchange Building.

Trellis, an affordable housing developer, is buying the building. It's on the National Register of Historic Places, which will help unlock more funds for renovation as well.
MNdible
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Re: Downtown Minneapolis Office Market

Post by MNdible »

Without reading the article behind the paywall, I'm curious if this building's adjacency to the federal courthouse raises any concerns for security. There are recent examples in Chicago where perceived security issues have doomed viable historic structures.
BikesOnFilm
Wells Fargo Center
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Re: Downtown Minneapolis Office Market

Post by BikesOnFilm »

The article doesn't mention anything about that being an issue. I guess we'll have to see how it plays out.
Silophant
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Re: Downtown Minneapolis Office Market

Post by Silophant »

Seems like that should have been figured out before they built the courthouse abutting the existing building, but that was the case in Chicago too, right? Both the courthouse and the offending building had been there for years before the DOJ or whoever suddenly decided it was a security risk and had to be demolished?
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seanrichardryan
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Re: Downtown Minneapolis Office Market

Post by seanrichardryan »

Hopefully during a conversion with tax credits, they strip all the paint off the terra cotta and brick.
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Wezle
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Re: Downtown Minneapolis Office Market

Post by Wezle »

Image

Oh wow, it used to look a lot different than it does today. Thrilled either way with reducing office space and adding to the downtown population if it does get converted to residential. Every conversion means momentum towards downtown as a thriving neighborhood.
martykoessel
Landmark Center
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Re: Downtown Minneapolis Office Market

Post by martykoessel »

I'd be interested in a photo of the original entrance. The current modernized version is jarring and ugly. If we're fortunate enough to see a residential conversion, it would be nice to see the entrance restored.
HiawathaGuy
Wells Fargo Center
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Re: Downtown Minneapolis Office Market

Post by HiawathaGuy »

martykoessel wrote: January 7th, 2025, 9:39 am I'd be interested in a photo of the original entrance. The current modernized version is jarring and ugly. If we're fortunate enough to see a residential conversion, it would be nice to see the entrance restored.
Maybe I'm missing something, but the only significant change I see in the photo is the top of the building and the color...
Image
BigIdeasGuy
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Re: Downtown Minneapolis Office Market

Post by BigIdeasGuy »

So, uh the Ameriprise building sold for 6 CENTS on the dollar vs 2016. So that's the exact opposite of fun.
BikesOnFilm
Wells Fargo Center
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Re: Downtown Minneapolis Office Market

Post by BikesOnFilm »

I mean...
The deal closed Thursday. Onward said it still exploring options for the future of the property, whether to convert all or some of the building to another use other than office.

"The purchase of the Ameriprise Financial Center is another demonstration of our desire to be an active participant in the recovery of downtown Minneapolis," Onward Partner Jon Lanners said in the announcement. "We believe that now is a great time to be investing in the city's future and look forward to engaging a multitude of stakeholders in the coming months as we re-imagine this well-known asset in the Minneapolis skyline."
Is this not good? An underperforming office property that a year ago was considered a potential candidate for demolition is now owned by a local property management group that sees renovation/retrofit potential in the building. This might be the best possible resolution for this particular property, and up to 31 stories of new apartments would build on the momentum of the Northstar renovation. I would have never expected an office building of this vintage to consider conversion but if the new owners are saying it, that certainly means something!

The local ownership that is committed to helping downtown recover is big to me. I would rather see every trophy asset in Minneapolis sell to a local group like Hempel or Onward for a 90% discount than have them limp along in an out-of-state property portfolio, stuck at 2019 lease rates, and unable to be flexible or creative to try and meet the challenges of the current market.
Tom H.
US Bank Plaza
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Re: Downtown Minneapolis Office Market

Post by Tom H. »

Agree with BoF above. If you take the loss of office demand downtown as a given (which I do), then a private sale at a loss to a creative, local owner is not a bad outcome. No bankruptcy, no foreclosure sale - this is just the market resolving a valuation reset via market mechanisms.

While this isn't great for taxpayers, as it represents a loss in assessed values, this is just a *symptom* of that value loss, not the cause of it. Covid and the WFH trend acceleration was the cause, it's just finally being realized on the balance sheets now.
BigIdeasGuy
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Re: Downtown Minneapolis Office Market

Post by BigIdeasGuy »

I mean it absolutely could have been a worse outcome but an asset losing 99.94% of it's value in less than a decade is pretty fucking terrible no matter the large forces around it.
Tom H.
US Bank Plaza
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Re: Downtown Minneapolis Office Market

Post by Tom H. »

I think 6 cents on the dollar means it lost 94% of its value, not 99.94%. But in any case, I still maintain that the value was lost awhile ago, it's just only being realized now. It is indeed terrible that we're losing such property values, but it's a done thing at this point - optimizing among bad outcomes is the name of the game.
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