The developers betting big money on a downtown Minneapolis rebound
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LaSalle Plaza. Photo: Nick Halter/Axios
A local developer has turned heads after buying two downtown Minneapolis office buildings and a parking ramp in the past four months. And it might not be done yet.
The intrigue: When Nick reached Hempel Cos. CEO Josh Krsnak to find out why his firm bought 700,000 square feet of office space when there's 8.7 million square feet of vacant space in the city center, he said he's so bullish about downtown that his company has offers out to buy three more buildings.
Why it matters: Hempel's bold bet on a downtown rebound will tell other investors if the city is a good place to buy and improve buildings or if downtown's real estate market will further deteriorate.
Details: Since June, Hempel has acquired three buildings within a block of each other.
- LaSalle Plaza, the 30-story tower at 800 LaSalle Ave. for $46 million
- A skyway-connected parking ramp at 811 La Salle Ave. for just under $10 million
- The historic Pence office building at 800 Hennepin Ave. for $3.6 million
Between the lines: Hempel bought these buildings at a massive discount because remote work has devalued office properties downtown and beyond.
- It paid about $75 per square foot for LaSalle Plaza, which Krsnak said is well below the $200 per square foot other investors have paid for high-end downtown office space before the pandemic.
- Since the developer paid a lower price, it's offering rents that are below its competitors.
Reality check: It's not clear yet if buying a high-class office building at $75 per square foot is going to look like a good deal in a couple of years.
- "They're betting that the market will improve, at least somewhat," said Russ Nelson, a longtime real estate broker who recently hosted a panel discussion with Hempel.
- "Look at how much (office values) have dropped already. There's no magic law that says that's as far as it can go. That's the roll of the dice."
What they're saying: Krsnak acknowledged that office values could further decline, but he's got an ace up his sleeve. By buying a skyway-connected parking ramp, Hempel can offer something almost nobody else is offering downtown: free parking for tenants who sign new leases.
- As companies try to lure employees back into the office, he believes free parking will be a huge asset, particularly when it comes to early-career employees who aren't making a lot of money, are back to paying their student loans, and don't want to pay $10 to $20 a day for parking.
- "It becomes an economic burden to get your entry-level and administrative staff downtown," Krsnak said.
Of note: Downtown is still served by light rail, numerous bus routes, and bike lanes.
The latest: Krsnak said tenants have already signed leases for 25,000 square feet in LaSalle Plaza and he's working on deals for another 60,000.
What we're watching: How Hempel keeps piecing its buildings together. Krsnak didn't rule out converting the Pence Building to housing, which would create more of a 24/7 feel to the area.