Office buildings in downtown Minneapolis have rapidly lost value over the past two years, but some investors now see an opportunity.
The LaSalle Plaza, a 30-story stone-and-glass office tower in downtown Minneapolis, sold this week for about half its estimated tax value, making it one of the first high-profile office buildings to trade since the start of the pandemic.
Hempel Real Estate in the Twin Cities has purchased the tower – at 800 LaSalle Ave. About half a block from Hennepin Street – and plans to invest heavily in updates to the building. Some of this will involve upgrading the finishes in the building, but others will be larger projects, including adding an indoor blended ball field in place of the vacant restaurant space. Private car service will also be available for a small fleet of Cadillac Escalades to transport building tenants around downtown Minneapolis.
The sale is a vote of confidence in the future of downtown office buildings, but also a reflection of how much the pandemic has hit the commercial real estate sector that thrived before it.
“We want to take a strong stand [in the downtown office sector]”We feel now is the time where the market starts to reset to the baseline where the market now makes sense,” said Humble CEO Josh Kresnak.
Like other buildings in the city center. LaSalle Plaza has declined in value rapidly since the start of the pandemic. In 2020—payable in 2021—the tower’s value peaked at just over $103 million, according to Hennepin County property records.
A source close to the deal said the building sold for $46 million, far below its current estimated market value of $87 million.
Humble essentially bought the debt from Milwaukee-based Northwestern Mutual, which acquired it from the previous owner, the Illinois State Teachers Retirement System, so the terms of the deal have not been made public.
According to recent data from a city assessor, the most expensive office buildings downtown in the Central Business District (CBD) are rapidly losing value, draining millions of dollars in property tax revenue from city coffers.
The building was too good to pass up, Kersnak said, though vacancies in the city’s central business district are now hovering at record levels.
“We’ve been sitting on the sidelines waiting or the market will adjust,” Kersnak said. “The prices were getting foamy.”
Until 2105, Hempel had a large presence in downtown office buildings, having owned several of them since 2006. Although it’s unclear if and when office occupancy rates will return to normal, Krsnak is far from pessimistic. On the city’s office market prospects.
While the sector is still struggling, there is huge demand for smaller, higher-quality office space aimed at luring employees back into the office, said Krsnak, speaking from downtown Milwaukee where the company has already invested $200 million in distressed commercial buildings.
This journey to quality is already well established in downtown Minneapolis, where the race is on to upgrade existing office space in the hopes of attracting new tenants at similar or better rates than current ones.
Resetting prices, Krsnak said, has made such buildings attractive to investors who can purchase the buildings at a discount enough to justify major improvements while still commanding strong rents.
Although the CBD’s vacancy rate hovers at around 30%, according to the most recent data from Cushman and Wakefield, Kersnak said the market is rapidly rebalancing as buildings are remodeled and existing office buildings converted into apartments for rent or demolished.
He said that at least five office buildings are now targets for residential conversion and this will essentially suck two million square feet of office space from the market. With no new office buildings under construction in the CBD, this conversion will help pull some vacant space out of the market.
Kersnak said that while he has no doubts that the building is now valuable, convincing major lenders to finance the deal has been difficult.
“I flew all over the country,” he said. “They said the word ‘office’ has four letters.”
However, he was able to secure financing through local lenders, with the company enjoying a 25-year relationship by creating a complex “split” capital pool that allowed him to secure two mortgages for the land below the building and the building itself. Among the lenders are Premier Bank, Trade Capital Bank and PACE Loan Group.
Construction of the mostly stone building in Kasuta was completed in 1991. It is over 620,000 square feet, not including the 60,000 square feet of street and skyway level retail space. The building is now about 68% occupied, Kersnak said.