With more than 1,000 empty parking spaces and do-not-enter signs taped to several locked doors, Prudential's 75-acre office campus in Plymouth feels nearly abandoned.
It's been that way nearly since the beginning of the pandemic when the company sent most of its workers home, leaving the 450,000-square-foot office building nearly empty. And like a lot of large companies, Prudential began re-evaluating its space needs.
Late last month the company sold the property to a pair of development companies that decided that, although the building is only 42 years old, it doesn't have the features and amenities most companies want. Demolition is the only sensible option, they determined.
"It's getting more and more difficult to fill existing [office] space ... and that's a really tough building to repurpose," said Jeff Koch, principal partner of Twin Cities-based Roers Cos. "But it's a perfect site for residential."
Koch and Dan Salzer, a director of development for Scannell Properties, said that over the next five years the team plans to spend $300 million to build 12 to 15 buildings that will include rental apartments, medical offices and retail space in what will become one of the biggest redevelopment projects in the metro.
While there's plenty of demand for housing, demand for traditional office space is weak and the future of the sector remains uncertain, brokers say.
An estimated 18 to 25 % of all office space in the Twin Cities is empty and the situation is likely to worsen as leases expire and companies downsize, leaving vacancy rates elevated for the "foreseeable future," according to a new report from Jones Lang LaSalle (JLL)
The group said the average vacancy rate for offices across the metro has increased slightly since the beginning of the year, rising to 18% during the second quarter.
"Large tenants are still hunkered down and figuring out how and what hybrid work means," said Jon Dahl, a managing director in Minneapolis for JLL.
He said smaller companies are having an easier time determining their future space needs because they have a better handle on what works and what doesn't. Most of the active shoppers are in the market for spaces with 2,000 to 10,000 square feet. A few companies, Dahl said, are on hunt for 30,000 to 40,000 square feet.
"Small tenants are wanting new space and moving into new buildings," he said. "But there's a lot more movement than there normally would be."
Dahl said that in a normal market, there's a 75% probability of a tenant renewing, but those odds are now below 50%. Still, Dahl thinks the vacancy rate in downtown is close to leveling out.
Cushman Wakefield's estimates are even more dour. The company's second-quarter report shows that the average office vacancy rate across the metro was closer to 25% after hovering at around 18% for the three years prior to the pandemic.
The group said that leasing activity across the metro has remained relatively steady over the past several quarters. But for the eighth consecutive quarter, more office space has been vacated than occupied.
Excluding the massive vacancy at City Center after Target Corp. left the building, absorption during the second quarter was slightly positive given that several companies have signed leases and there have been several high-profile move-ins, especially in downtown Minneapolis.
Those recently signed deals included Fox Rothschild, which is taking nearly 40,000 square feet of that former Target space. ESG Architecture & Design said it will take 20,000 square feet at the new North Loop Green. In both cases, however, those new leases are downsizings from previous offices, creating a net increase in available space.
During the second quarter, Agiliti and HelpSystems moved into One Southwest Crossing, and the Pohlad Cos. and JLL moved into their new office space at the RBC Gateway tower.
Demand has been especially strong in the North Loop, which is now back to pre-pandemic leasing levels. The buildings in that area, he said, have the kinds of amenities and features that many companies want. Canteen One, for example, announced a move from the suburbs to a more than 40,000-square-foot space in the North Loop.
"Companies are not shying away from quality space," Paul Donovan, executive director at Cushman Wakefield, said. "They just want less of it."
With more than 2.3 million square feet of "active office requirements" (companies looking for space), JLL says leasing activity might increase slightly in the second half of 2022. If so, that could push some new speculative office development forward in downtown Minneapolis and St. Louis Park's West End.
Though the future of the office sector is uncertain, many investors are still shopping for and buying office properties, especially those with the best amenities and in the best locations.
There have been several notable deals this year, including the recent sale of the 1.7 million-square-foot Normandale Lake Office Park to Opal Holdings, its first acquisition in the Minneapolis-St. Paul market.
That property, which was nearly fully leased, quickly found a buyer after being marketed but it closed for slightly less than the $369 million the seller paid in 2014.
Overall, though, investment sales have been relatively slow since the beginning of the pandemic. Higher interest rates have put downward pressure on prices and rising construction costs have only made such deals more challenging.
Still, higher vacancy rates aren't necessarily leading to bargains for redevelopment sites. Koch said that when he first contacted Prudential to see if it would be willing to sell even a portion of its property in Plymouth, he expected a deal. That wasn't the case.
"We thought we'd see a fire sale for office properties," Koch said. "We thought we'd get this for pennies on the dollar."
Koch said that even at market prices it still made sense to do the acquisition. He'd long seen opportunity in the rolling hills and ponds on the Prudential property, which he passed on his daily commute.
So just after the start of the pandemic, thinking the company might be looking to downsize its holdings, he made the call. His timing was perfect. The company said it was willing to sell the entire property.
Since closing at the end of August, the development process has just begun. Land preparation is expected to begin in 2023 and it'll take about five years to fully redevelop the site into retail, medical office buildings, multifamily residential and a business park.
"This is going to be a vibrant new destination for the community," Scannell said. "Where people can live, work, shop, eat and gather."