Now is the best of times for owners of well-located office buildings looking to sell — in fact, it’s never been better, with highly capitalized potential buyers from across the globe getting in line to invest in what has become a highly desirable Twin Cities market.
But the picture’s not nearly as rosy for developers seeking to construct office space from scratch. For them, the financial markets are being much more selective and anchor tenants are harder to land. Those factors have the area’s biggest office builders predicting a languid pace of new development into the coming year and perhaps beyond.
The differences between the office sales and office development situations are so stark, a panel of Twin Cities commercial real estate figures said this week, thanks in part to the staggering amount of foreign and domestic capital chasing after existing office building assets in the Twin Cities.
Ryan Watts, a senior vice president of capital markets for the Twin Cities office of CBRE, said the metro has emerged as a one of the best “secondary” U.S. markets for quality office buildings due to the soaring prices of similar assets on the East and West coasts.
“Since the presidential election, there’s been upward pressure on prices due to rising interest rates,” he told members of the NAIOP real estate industry trade group Tuesday in Golden Valley, “but that’s being overwhelmed by the sheer amount of capital in the market. We’re very much feeling that right now. We’re getting calls from new capital sources thinking about Minneapolis every day.”
Indeed, Watts noted that the Twin Cities market recorded the single largest office asset deal in its history with the November purchase of City Center by HNA Holding Group for $315 million, some $62 million more than the previous record set when the IDS Center traded hands in 2013.
City Center sold at $286 per square foot, illustrating the bidding wars that have erupted over prime Twin Cities office centers.
“2016 was extremely active for sales, both internationally, nationally and locally, and we’re cautiously optimistic that will continue in ’17 with similar volumes, particularly here in the Minneapolis market,” Watts predicted.
Meanwhile, a pair of prominent Twin Cities developers — Tony Barranco of Ryan Cos. and Gordon Stofer of United Properties — said their expectations for new office construction are not nearly as lofty, but rather much more measured, citing higher financial and leasing hurdles for new office construction.
Barranco, whose firm is getting set for the April opening of the Millwright Building in downtown Minneapolis, is also ramping up marketing efforts to find a lead tenant for 10 West End in St. Louis Park, a planned 11-story Class A building being codeveloped by the Excelsior Group. The project earned city approvals last year but its groundbreaking date is still unannounced.
“We’re confident it’s going to happen soon, but we’re not going to rush into building speculative office space without some preleasing in place,” he said. “It’s getting harder to build new. Demand has to keep ticking up to get to a threshold where rents can be high enough to cover the costs of creating the kind of unique spaces tenants want.”
United Properties’ office development strategy is to focus on downtown, which it’s doing with its upcoming Nordic House project at 729 Washington Av. N., a mixed-use office-residential building designed to evoke the feeling of the surrounding historic North Loop warehouses.
“Technology tenants have been a bright spot,” said Stofer, United Properties’ vice president of office development. “We’ve got a pair of them committed for two-thirds of our building [including digital marketing firm Ovative Group]. They’re expanding quickly, as are co-working space providers.”
But with multitenant construction trickier to finance and populate with takers, Stofer said interest in “build-to-suit” projects in the suburbs is picking up some of the development slack.
United Properties, he added, is finalizing a deal to build a 400,000-square-foot headquarters campus for prescription manager Prime Therapeutics in Eagan.
Don Jacobson is a freelance writer based in St. Paul. He is the former editor of the Minneapolis-St. Paul Real Estate Journal.