Downtown Minneapolis has faced significant challenges in recent years, but is the narrative about its decline accurate? Avisen Legal’s Creig Andreasen recently sat down with Mike Doyle, a seasoned commercial real estate broker from Kenwood Commercial with nearly two decades of experience, to discuss the current state of Downtown Minneapolis real estate. From office leasing trends to residential conversions and the future of the city’s real estate market, Mike shares invaluable insights into what’s shaping the urban landscape and where opportunities lie.
Downtown Minneapolis: Bustling or Struggling?
Creig: Mike, thanks for stopping by. I recently relocated my office Downtown, and I was struck by how busy it is. You read the news and hear people talk about Downtown Minneapolis as if it was a ghost town, but that’s not what I’ve been noticing. Mike, tell me a little bit about your experience with Downtown real estate.
Mike: I’ve been a broker now going on 18 years. I started in the institutional leasing world at Colliers International in 2007 when the market was hot, and it absolutely crashed after that, so now I’ve seen it all. We’ve kind of done the full cycle. I worked with all the big towers Downtown and in the North Loop, and then we left to start Kenwood Commercial about five and a half years ago to focus on local groups. We found that you can add a lot more value by being smaller rather than a mammoth publicly traded company.
The majority of our work is on the tenant representative side, and investment sales.
The Current State of Downtown Minneapolis
Creig: How’s Downtown Minneapolis doing? What’s going on with Downtown and the skyway system?
Mike: If you look at downtowns across the US, they’ve been challenged and, as in everything, there’s absolute winners and absolute losers, specifically in the office side.
Tenants specifically, have always had the challenge of, how do you get your workforce in? These days you’re seeing a lot more companies pushing back to office mandates, something like 98% of all Fortune 100 companies have policies in place, on average requiring employees to be in the office on average 3.3 days a week. As a result, you are starting to see some ripple effects from the large corporations on down.
You will continue to see more people back in the office, which obviously drives traffic Downtown. I don’t think we’re ever going back to a five-day week, but even when that was the case, desks sat empty 40% of the time because people were moving around, between vacations, sick time, open positions, etc. So, it’s a matter of the city and companies adjusting to a new normal, which typically it’s that 3+ days per week.
Paired with that, you see people when they are Downtown for reasons other than work. They want to do things Downtown. They want to utilize the amenities that you can only find Downtown. Downtown has the best amenities, from easy access for lunch, coffee, shopping, sports, and entertainment. As a result, I think we’ll continue to see more people in the skyways pushing that pace up a bit.
Yes, there’s a lot of vacancies. If you look at the current vacancy on the market, it’ll take about 30 years to fill all that space up based on current absorption numbers. We’ll see the buildings repurposed before we ever get back to full occupancy.
Repurposing Downtown Minneapolis Real Estate
Creig: Let’s talk about repurposing. Are you seeing a lot of smaller buildings with smaller floor plans, looking at going to residential conversions? I mean, obviously we still need housing.
Mike: Yes, the challenge is just the expense. Without federal and state tax credits, it’s cost prohibitive, so you need those incentives. I think it’s interesting to see some of the newer concepts that have come out recently where they’re micro units with shared bathrooms and kitchens. I think it’s a great way to utilize these bigger buildings that just don’t allow for standard individual units. The creativity of architects, designers, and contractors will continue to push more realistic and innovative plans.
A recent example is Sherman Associates in the North Star Center. They were able to get significant tax credits. That’s the challenge, though. It’s still more expensive to rehab a building than it is to build it new. Without those tax credits, it’s dead-on-arrival. The math simply won’t work. You need those incentives to justify doing those types of deals.
Trends in Downtown Minneapolis Office Leasing
Creig: What sort of trends are you seeing in commercial, office-based leasing these days?
Mike: One is quality. Companies want to create a space that employees are actually excited to come back to, which means they go into Class A assets with significant amenities. I call this purpose driven real estate. The question for my tenant clients is: how do you get people back to the office with space that actually works from a functional design standpoint?
Retail Challenges in Downtown Minneapolis
Creig: How about the retail side?
Mike: There, the biggest challenge is not real estate driven – it’s City policy driven. A lot of our clients in the retail world are more concerned about policies like the Labor Standard Board, safe and sick mandates, etc. It’s easier and cheaper to hire employees in Edina than Minneapolis, so why not open a restaurant there instead of Downtown? All it takes is opening on the Edina side of 50th and France versus Minneapolis.
Downtown is immensely important in making the entire Twin Cities region vibrant, including tax rolls and everything else that only Downtown can create. But if you make it less competitive versus other, nearby areas, businesses will move.
Challenges for Minneapolis Restaurant Owners
Creig: I had a restaurant client who suffered through two years of construction on Hennepin Avenue, and then right after the construction was just about over, the pandemic hit, and he couldn’t be open. Add to that the safe and sick time, and it just caused him to say: I’m never doing another restaurant in the city of Minneapolis. He pulled out to close this restaurant on Hennepin Avenue and moved on.
Mike: This significantly affects real estate values, which are driven by rents. Restaurants moving out of Downtown has pushed rents up in suburban markets outside of Minneapolis, where these mandates don’t exist.
At the end of the day, people aren’t looking for more headaches when they open a business. It’s tough enough already.
Lenders and Minneapolis Real Estate Values
Creig: Are you seeing lenders take back buildings?
Mike: Yes. If you have a quality asset like Capella or Met Life, the lender took the property back because the previous owner had invested significant capital, and it was well positioned to succeed in the market.
On the flip side, places like the Forum, which just sold for 10% from its previous sale (which, hands down, is the lowest price point for office space in Downtown), was the complete opposite. A lender there might work with their borrower to liquidate the asset and move on. And I think lenders are going to continue to think, what will this asset be trading at in the next 24 months? Do you want to own this asset then? Or do you want to liquidate now and get out?
It could be worse. Saint Paul has an even scarier end, because those buildings will theoretically end up being owned by Ramsey County via tax forfeiture if no one buys them. Then the government is saddled with these issues. I can see those buildings being demolished rather than being refurbished.
The Future of Downtown Minneapolis
Creig: So, what’s the future hold? It’s bad right now, but where do you see things going in 5, 10, 20 years?
Mike: Everything reverts back to the mean. Minneapolis will improve. I do see it coming back. I see employees coming back to the office more. I see companies seeing the value in having people in chairs, workplace cultures being formed.
Twenty percent of all jobs never need to be back in the office, but another 20% need to be in five days a week, and then there’s the remaining 60%. How do you figure out their new schedule?
Like anything in a down cycle, there’s a ton of opportunity for people. They understand it’s the bottom right now and it’s time to invest. You’re seeing people that are getting excited about Downtown because of the value proposition of buying extremely low with lots of upside potential. It’s not the institutional money; it’s the local owners and creative groups who have good partners that can get creative.
Creig: What do you think their timing looks like?
Mike: I think it’s one to three years before we’re truly back on the upswing. I think it’s going to be a long, long cycle. Like anything, it takes a while to work through the market. We’ll drag along the bottom for a while. But real estate’s not a short game. It’s always a long haul. So, you need to have a viewpoint that it’s going to be a while.
Minneapolis is turning into an 18-hour city, meaning you’re not just going to dinner – you live, work, and play all in Downtown. You can’t find that anywhere else in Minnesota. It’s not a 24-hour city like New York, but hopefully Minneapolis will continue to stretch into a place where people want to live, work, and play.
Creig: I see Minneapolis as an entertainment spot, with the Twins, Vikings, and Timberwolves stadiums, the theatres, and high-end restaurants. For all those places, people go there because they want to be entertained.
Mike: I totally agree, and sports are a massive driver for downtown Minneapolis. The sports teams fill parking lots, bars, hotels, and restaurants, which are huge economic drivers for the city and surrounding area.
Relocation Advice for Downtown Minneapolis Tenants
Creig: What would you tell a potential tenant if they asked where they should relocate next?
Mike: It really comes down to what and how they utilize their office space. In the whole life cycle of hiring employees, it’s far cheaper to maintain an employee base than it is to replace them.
Real estate is typically the second biggest line item of any company budget. If you are looking to keep your employee base happy, you can do that with real estate. You’re better off spending more on real estate to provide more amenities, spaces that people are going to enjoy coming to, and giving them flexibility in their work environments. A lot of companies are using their space for meetings and culture building more now than they are for head-down work.
Future Opportunities for Minneapolis Real Estate Investors
Creig: What else do you see on the horizon?
Mike: I think the biggest thing is that Downtown is not going anywhere. Billions of dollars have been invested in Downtown, and there’s still a value proposition to it. Yes, the market has changed. And yes, we’re still at the bottom, but this will be some of the best buying opportunities in most people’s lifetime.
Contact Creig Andreasen for Real Estate Guidance
Are you navigating the complexities of real estate? Whether you’re exploring opportunities for investment, repurposing, or leasing, Creig Andreasen at Avisen Legal is here to help. With insights into market trends and commercial real estate, Creig is ready to guide you through your next move.
Reach out today to discuss how Avisen Legal can support your real estate needs.
