Downtown Minneapolis’ office market is waking up

Minneapolis/St. Paul Business Journal

By Dylan Thomas

July 22, 2021

For anyone looking to gauge the downtown office market’s ability to rebound from the pandemic and last summer’s civil unrest, there may be no more important date upcoming than Tuesday, Sept. 7.

Several major Minneapolis employers, including U.S. Bancorp and Wells Fargo & Co., set the first workday after the Labor Day weekend as the beginning of a push to return remote workers to their desks inside downtown office towers. Those workers will return to a downtown still waking up from a troubled 18-month slumber, rubbing its eyes and squinting for a glimpse of the new normal.

Instead of driving or biking or taking transit downtown each weekday, some portion of office workers are likely to spend part of their week at home, practicing remote-work skills honed during the pandemic. It’s not clear yet how many workers or how often they’ll stay home, but the change could have massive implications for both the downtown office market and the ecosystem of shops and restaurants that thrive on business from weekday commuters.

“We know that will be a reality. Everybody may not be in the office five days a week,” said Steve Cramer, president and CEO of the Minneapolis Downtown Council, which has been tracking the return-to-office movement.

Target Corp. provided one dramatic example of the potential impacts this spring, when it announced it would shift its downtown headquarters employees to a flex-work model. The retailer vacated nearly 1 million square feet of office space in City Center, creating what real estate firm JLL described as the largest single office sublease opportunity in the country.

The office market in Minneapolis’ central business district posted a 23.6% vacancy rate in the first quarter, according to Cushman & Wakefield, up from 19.9% for the same period a year ago. It was the highest vacancy rate in the Twin Cities office submarkets tracked by the firm and more than two points higher than the metro average.

Still, some observers aren’t particularly troubled by those numbers, citing the cyclical nature of the downtown office market. And there are signs that workers are already returning to offices even faster than many expected.

Space needs

Brent Robertson, a managing director in real estate firm JLL’s Minneapolis office, said summer is typically the slowest time of year for his agency leasing team, which works with building landlords to lease office space.

“That’s not the case this summer,” Robertson said.

Things started to pick up in mid-May, when Gov. Tim Walz announced a timeline for ending the state’s Covid-19 restrictions. By June, Robertson said he was giving as many office tours to potential tenants as he would in a typical summer month, if not more — a big turnaround from a very atypical 2020, and a sign that a flurry of new lease signings could arrive by fall, he said.

But will those leases be for smaller spaces? That’s one of the big questions hanging over central business districts as companies re-evaluate their square footage needs in a dawning era of flex work and hoteling. And answers may take time.

“Most of these businesses are going to need a minimum of six months … to fully understand what the needs of their workers are,” suggested Adam Barrett, who advises companies seeking office space as a member of Colliers’ Minneapolis-St. Paul office. “… My prediction is you start to see more movement come second quarter of ’22.”

Barrett said workplace surveys conducted by Colliers indicate some offices may shrink their footprints, but most reductions will be in the range of 10% — not 30% or more, as some have predicted. And they may reverse course in a few years, he added, recalling Richfield-based Best Buy Co.’s decision in 2013 to end an eight-year experiment that allowed corporate employees to work remotely.

Barrett noted that real estate is often the second-highest cost for a business after personnel, and if a company is paying for space, they’re going to want to use it.

Robertson, too, predicted that flex work will fade, with most companies eventually bringing workers back to the office full time, or close to it. It’s a perspective informed by his role as an office manager whose team thrives on collaboration and communication.

“That just can’t happen unless we’re all bumping elbows and eating lunch together and talking,” he said.

A butts-in-seats metric tracked by the Minneapolis Downtown Council shows workers have been returning downtown in greater numbers since this spring. The council estimated 32.3% of workers were back in downtown’s major office towers as of early July, up from 16% in January.

Downtown’s appeal

An even more important question facing downtown is whether the pandemic has permanently shifted opinions about the value of a central business district office.

Barrett said some downtown Minneapolis employers who had never considered the suburbs are sniffing around, but few leases are being signed. And downtown landlords are countering with aggressive offers to tenants, he added.

Robertson said it’s important to remember the cyclical nature of markets when considering downtown’s metro-leading first-quarter vacancy rate. The central business district’s office market enjoyed a long run of positive absorption in the 2010s — meaning more space was being leased than going vacant — turning negative before the pandemic, he noted.

Yes, downtown has some gaping vacancies — not just Target’s former space inside City Center, but the vast majority of the 1.2 million-square-foot Dayton’s Project, as well. The team behind the renovated former department store so far has announced just one 30,000-square-foot office lease with accounting firm Ernst & Young.

Robertson said those two examples are distorting what is an otherwise “pretty healthy” downtown office market.

Barrett noted that Fredrikson & Byron, the Twin Cities’ largest law firm, signed a lease in December for 178,000-square-feet inside RBC Plaza. Other major employers, notably U.S. Bank, have made clear they have no plans to leave downtown.

“You have really big companies that have already said we’re committing long-term to downtown Minneapolis,” Barrett said.

Jim Durda, general manager of City Center, pointed to the steady increase over the summer of workers reporting to their desks in downtown office towers as evidence that a trend toward remote work hasn’t eclipsed the importance of a central business district footprint.

“Even if it’s for only a few days a week, forward-thinking business leaders are aware there is no centralized, amenity-rich location like downtown. It’s the place to attract talent. And it’s the place to be,” Durda said in a statement provided by Ryan Cos., his employer.

Challenges

In July, Metro Transit, which cut bus and light rail trips when demand fell during the pandemic, announced plans to ramp up service beginning Aug. 21 in anticipation of more workers returning to the office. It addresses one of the big challenges of restarting downtown: getting people there. And like other challenges facing downtown Minneapolis as it emerges into the post-pandemic environment, it’s a bit of a chicken-and-egg problem.

Deb Kolar, general manager of IDS Center, downtown’s most recognizable office building, said it’s the same issue facing her skyway and ground-floor retail and restaurant tenants. Shops within walking distance are a big part of the appeal of working downtown, but they’re going to struggle until foot traffic returns.

“It forces us all to get creative, and that’s what we have to do,” Kolar said, adding that she’s renegotiated lease terms with those tenants to help them through the pandemic.

The Minneapolis Downtown Council is also attempting to get things moving with the Spaces #OnNicollet campaign launched this summer, which aims to place pop-up shops in vacant spaces on Nicollet Mall, downtown’s main commercial corridor. And in a possible preview of what awaits the downtown core this fall, Cramer noted downtown at the edges was already returning to its pre-pandemic life.

“The more residential parts of downtown are, for all practical purposes, getting close to normal right now,” he said, referring to the Mill District and North Loop.

From Kolar’s perspective, it’s going to take a concerted effort from stakeholders to reawaken downtown, and that means everything from pop-up shops that reanimate sleepy streets to the $5 million renovation underway in her building’s iconic Crystal Court.

“I feel we all have to rethink what the definition of normal is,” Kolar said. “If we haven’t learned anything out of the last 18 months, we’ve missed a big opportunity.”

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