The numbers are impressive: In the last 18 months, brokers have sold more than 7.7 million square feet of office space in downtown Minneapolis. And these numbers are only the beginning. Another seven office properties totaling 3 million square feet will be coming on the Twin Cities market to be sold or recapitalized in the next several months.
What this means, according to Brian Woolsey, managing director and principal with the Minneapolis office of Cassidy Turley, is that 10.7 million square feet – or 43 percent of the downtown office market – will have changed hands in the last 24 months.
“That is significant for our fairly small market,” Woolsey said.
What is behind all this activity? First, the amount of shadow office space has declined in the Twin Cities. Three years ago, Woolsey said, local companies were not taking up more office space even though employment was rising. Many corporations were warehousing space.
That has changed. At the same time, major companies such as Target and U.S. Bank have renewed leases in downtown Minneapolis. This has inspired confidence in the downtown Minneapolis office sector.
“These major anchor tenants have committed to being downtown for another decade in the future,” Woolsey said. “That is good news for the Minneapolis office market, and it encourages others to look at the downtown.”
Then there’s the way in which companies are using office space. This isn’t a trend unique to Minneapolis, but a growing number of companies are fitting more employees into a smaller amount of space. They’re doing this not by crowding workers into ever smaller cubicles, but by relying on flexible work schedules, shared spaces and mobile workers.
Because they need a smaller amount of space, companies are able to move up to higher-end spaces that they normally would not have been able to afford.
An example in Minneapolis is RBC Wealth Management. The company until recently occupied space at the 510 Marquette Building in downtown Minneapolis. After moving out of that building, the company was able to send its employees to space that it had already been leasing at the RBC Plaza at 60 S. 6th St. in downtown. When moving these new employees into the RBC building – a nicer space – the company did not need to lease additional square footage. Instead, the company redid its existing space at the RBC Plaza to accommodate its changing workforce, one in which a greater number of employees worked from home at least part of the time or did much of their work on the road.
“We think about this when we are working with tenants,” Woolsey said. “Companies are spending millions of dollars on space. If they will be using that space differently in the future, it should impact the real estate decisions they are making today. They want more common spaces and smaller individual spaces. They want good connectivity to the people they are working with. This is a huge trend that investors are seeing.”
The trend might also give building owners the chance to increase their rents, Woolsey said, because tenants will need a smaller amount of space for their workforce.
“If I own the IDS Center and I want to push rent up $2 a square foot, is that a major concern for a user who at the same time is able to rent 20 percent less space to accommodate its workers?” Woolsey asked.
Finally, there’s another important reason for optimism in the downtown Minneapolis office market: Downtown East. This $400 million mixed-use development spearheaded by Ryan Companies will cover five blocks adjacent to the new Minneapolis Vikings stadium.
“Developers are getting excited about this project,” Woolsey said.
At the same time, developers around the Twin Cities are building new multi-family properties.
“You look around downtown and you see eight or nine cranes all for multi-family developments,” Woolsey said. “There is just a ton of these properties coming online to serve the people who want to come downtown to take advantage of the shows, the dining and the access to the river.”