MINNEAPOLIS — The nature of downtown office work has shifted dramatically since the pandemic and the impact it's having on the Twin Cities is only beginning to be felt.
According to recent estimates by commercial real estate company Avison Young, nearly 28% of office space in downtown Minneapolis is currently sitting vacant. Office vacancy is nearing 20% in downtown St Paul, according to the same report.
In light of all that available space, some developers say the time is right to convert more offices into housing.
"We are coming into our main lobby entry point for our residents," said Chris Sherman, President of Sherman Associates, who gave KARE 11 a tour of a major office to residential conversion project inside Northstar Center in Minneapolis. "This was a full gut rehab, start to finish."
When Groove Lofts at Northstar Center opens later this year, Sherman believes it will offer a blueprint for what is possible. But he admits that there are a lot of challenges before possibility becomes reality.
"Projects like this take years, if not longer, to bring together," he said. "Our project was about $92 Million of development costs, but the overall block was $250 Million. These projects have significant cost gaps and really require significant partnership, not just on the city level, but at the state and federal level."
Despite those cost challenges, Northstar Center isn't the only big bet Sherman is making on dormant, dusty old offices.
Senior Developer Trevor Martinez gave KARE 11 a tour of another office to residential conversion underway inside St Paul's Landmark Towers.
"Just like innovation in any other industry, as certain spaces become less in demand or obsolete, the market should change with it," Martinez said.
Many floors inside Landmark Towers are still full of cubicles and abandoned office electronics, and Martinez says it will take upwards of $100 million to convert it into 187 apartments.
"This is going to be a lounge for resident use up on the 18th floor that has views of the Science Museum as well as the Mississippi River Valley," Martinez said, walking through one of the floors where the new floorplan is taking shape.
Those million-dollar views of St Paul are a highlight, but also illustrate another big factor limiting the prospects of other conversion projects.
"(The Landmark) project actually has a uniquely good footprint for office conversions," Martinez said. "But most office towers aren't like this."
Because the footprint of Landmark Towers is relatively narrow compared to other buildings of it's size. That means most of the apartment floorplans don't venture further than 30 feet from an exterior window.
"That means you can fit more units in the project without having to have long corridors or dark hallways or buried bedrooms," Martinez said.
In Minneapolis, some floorplans at Northstar Center on the hand, are closer to 60 or 70 feet deep.
"In the longer, deeper units – because of the depth of the building – we will bring in natural light by carving out above the kitchen," Sherman said, while touring one of the nearly finished apartments.
Sherman says 60-70 feet is about as far as they can go before the math just doesn't work, and he says there are plenty of large, square office buildings where these conversions don't make sense.
Erdahl: "How much potential is there, realistically, for these kinds of projects?"
Sherman: "Probably about 10 percent of office space in Minneapolis and St Paul – maybe 15 percent if you start to think outside the box – are good candidates for conversions."
Erdahl: "So is that really enough to move the needle?"
Sherman: "Yes. In Minneapolis alone that probably equates to about two or two-and-a-half million square feet of space. That, in turn, could deliver about 2,000 units of housing."
Though the conversions are more costly per unit than new construction, Sherman says the return on investment is huge for labor and sustainability.
Typically, he says 75% of new construction costs go to materials, while 25% goes to labor. He says that ratio flips in favor of labor for office conversions.
"This is sustainability," Sherman said. "We are coming in, reusing material and have a bulk of our costs go to labor. That is a great outcome."
Giving new life to those towering buildings could also be critical to rescuing the local tax base.
Minnesota's highest tax values, per acre, are concentrated in the downtown's of Minneapolis and St. Paul. But as office vacancies have risen, the value of that commercial real estate has plummeted. The Wells Fargo tower in Minneapolis recently sold for less than half of its sale price in 2019.
During his State of the City Address on Tuesday, Minneapolis Mayor Jacob Frey acknowledged what the loss of value downtown would mean for local property taxes.
"The money has gotta come from somewhere so that burden of a regressive tax it shifts to our residents," Frey said. "Both homeowners and renters."
In St Paul, Madison Equity, by far the largest downtown property owner, just put it's entire portfolio up for sale with no set asking price. When someone strikes a deal for the 1st National Bank Building, US Bank Center and several downtown mainstays, it will reset the market and the tax base for years to come.
"When those values change, that's not only going to affect those cities as a whole, but it also will affect the state as a whole," said Jon Commers, founder of Visible City.
Despite the stark reality playing out right now, Commers also sees signs of hope. Visible City worked with Placer.ai to map cell phone activity in Minneapolis before the pandemic and tracked where it has shifted in the last year. He says there are plenty of bright spots, thanks to a big rebound in event and entertainment traffic.
"The question now is how do we use that to kind of create inroads into the central business district?" he said.
Sherman believes transforming more of it into a central living district is one place to start.
"You look at a lot of the corners immediately around us and they are getting (lease) renewals," Sherman said. "They are even getting new leases coming in and I think - for retail in particular - what we are going to see in the next six to nine months in this location is retail gain more traction."
Martinez: "It's very similar to when one door closes, another one opens..."
Erdahl: "Except you've got to make the door."
Martinez: "That's very true, and tear out a lot of old ones along the way."
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