Apr 15, 2024 - News

Minneapolis office towers could be demolished as vacancy remains above 30%

The Ameriprise tower

Ameriprise Financial Center. Photo: Nick Halter/Axios

As Ameriprise Financial emploees relocate from the company's longtime headquarters, what comes next for the tower will tell a lot about where downtown Minneapolis is going

Why it matters: While there are high hopes for turning office towers into apartments, a more bleak possibility is being discussed for a handful of distressed downtown properties: Tearing them down.

Catch up fast: The Minneapolis-based philanthropic organization GHR Foundation recently took control of the glassy 31-story Ameriprise Financial Center at 707 2nd Avenue S.

  • That's because the estate of the late Opus founder and real estate mogul Gerry Rauenhorst financed the $200 million sale of the building to two out-of-state firms in 2016. Rauenhorst founded the GHR Foundation.

Yes, but: Here's the conundrum that GHR is facing, according to multiple sources:

  • All 850,000 square feet of space in the tower will be vacant in 17 months.
  • More than 31% of all downtown Minneapolis office space is vacant, according to a recent Cushman & Wakefield report. That's due to companies going to hybrid work models and downsizing their offices β€” which is what Ameriprise is doing by consolidating its workers to a nearby building.

Follow the money: It could cost $10 million to make the necessary improvements to turn the property into a competitive multi-tenant building that could attract companies looking for space, according to one source.

  • GHR Foundation would be placing an expensive bet that the building could lease back up in a highly competitive market.
  • Meanwhile, the owner of the tower, which is now assessed at $71 million by the city, will have to pay millions annually in property taxes, energy costs, and maintenance while trying to attract tenants.

What we're hearing: Three real estate sources unaffiliated with one another told Axios that someone associated with the building had gotten a bid for how much it would cost to demolish the tower.

The other side: GHR chief investment officer Jason Matz denied that his organization and any of its advisers received such bids and that demolition "would not be one of the options we are considering."

  • Matz said the best use for the building is to remain an office tower, but the foundation is also weighing selling or converting it to something else.
  • "We plan to be a very good steward of this building," he added.

The conversion question

In a perfect world, developers would transform vacant office towers into apartments, which would help replace lost corporate workers with residents.

Yes, but: Doing so is expensive and tricky.

Between the lines: That's why there are three building owners downtown who have discussed demolishing their towers, according to several sources who asked not to be named to protect business relationships.

What they're saying: "Some folks are asking what is the highest and best use for the land (where the towers sit)," JLL adviser Erin Fitzgerald said, speaking broadly about the state of downtown, not any specific tower. "Is it being able to develop something new on that land that serves the community's needs today, as opposed to 20-30 years ago?"

Zoom in: Developer Ari Parritz is working on a project to transform an office building into residential space where the North Loop and Warehouse District meet.

  • Developing new apartments typically costs $250,000 to $350,000 per unit. His conversion project – he declined to identify the exact location β€” would cost $600,000 per unit.

The latest: A Minnesota Senate committee on April 4 discussed a bill that would increase the tax credits for converting office buildings, but given the tight budget, it faces an uphill battle this session.

The bottom line: Tax credits might help small projects like Parritz's, but much larger towers might need more than that.

  • "I've thought for a while now that people won't realize how bad the problem is until the first skyscraper gets torn down," Parritz told Axios.
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