Minneapolis-based developer Ryan Companies US Inc. has begun early planning for a new office tower in downtown Minneapolis. "We have begun initial planning for what we believe will be our next downtown office tower at the corner of Eighth Street and Marquette Avenue," said Rick Collins, vice president of development for Ryan. The site is home to the TCF Bank Building, 801 Marquette Ave.
Ryan paid $8 million for the building last November. The building's footprint is four-fifths of an acre, per Hennepin County property tax records. But the project is still a long-range proposition and would probably not open until 2011 - at the earliest.
"I think it's unlikely that we'd break ground any earlier than the next 24 months, and it's probably a two-year delivery, so it's probably four years out at a reasonable minimum," Collins said.
The site is kitty-corner from IDS Center, which is considered to be the heart of downtown Minneapolis. Ryan effectively controls the entire downtown block containing the TCF Bank Building. The company paid $28 million in June 2005 for the adjacent TCF Tower. Last month, Ryan and partner Ralph Burnet closed on the purchase of the Foshay Tower, which will be redeveloped into a W Hotel. Ryan is currently renovating the common areas of the Class B TCF Tower, which Collins said will stay put. Collins said it remains too early to talk about the potential square footage of the new tower.
"We're still considering whether it's an office-only building, or whether it might have some other components," Collins said.
Still, Ryan's early planning constitutes the most concrete plan to date for a major new office tower in downtown Minneapolis. Finance and Commerce recently reported that developer Larry Abdo has a contract to purchase 1016 Marquette Ave. and develop a small boutique office building with 48,000 square feet of space.
While new suburban office construction is under way, downtown Minneapolis has the highest vacancy in the market outside of downtown St. Paul. The most recent market data from United Properties shows an overall direct office vacancy rate of 16.8 percent in downtown Minneapolis, but Class A space is the tightest with a direct vacancy rate of 14.3 percent. Market observers generally consider 10 percent vacancy to be equilibrium in the market. As the rate approaches 10 percent, that's when developers start rolling up their sleeves. But the general consensus is that the market is not quite ready for new downtown development.
"The market's coming back a little bit from a vacancy standpoint and from a rental rate standpoint, but the cost for new construction is going to be X, which means to be able to pay for the cost of constructing a new building, rental rates need to be Y. And rental rates aren't at Y yet," said Brent Erickson, a vice president with United Properties. "Right now there just isn't the number of large tenants who have leases expiring in the next few years who could be anchors or co-anchors of a new building," Erickson said.
The likely development suspects concur. "We have three sites downtown that we own outright, all three of which have certain aspects that make them attractive for residential or office or hotel or some combination thereof," said Dave Menke, vice president of development with Opus Northwest. Two of those Opus sites are at the north end of Nicollet Mall. One site has a surface parking lot across from the central Minneapolis Public Library, while the other is the so-called "Powers Block," once home to the Powers Department Store. Opus also owns a site at 701 Third Ave. S. that measures just over an acre and sits on the same block as the Accenture Tower.
"I think office continues to remain fairly soft. There isn't any real immediate demand or market to support that kind of development," Menke said. Menke noted that Opus is also interested in future downtown residential projects; Opus was part of the team that developed Grant Park and The Carlyle. Houston-based Hines Interests is another major player in the downtown Minneapolis market. "We are a developer, so we're always interested in looking at opportunities to put together a new development. As to the when, that's probably anybody's guess at this point in time," said Bob Pfefferle, marketing manager with the local office of Hines. "I think we're a ways off yet before we get to that point that economics justify new construction."
Hines is developing Twinsville, a project that will be anchored by a new baseball stadium and could include potential office development.
"We are and have seen some unsolicited interest from some suburban users around the Twinsville site as part of a mixed-use development," Pfefferle said. "That's relatively new. " Pfefferle said the inquiries came from "larger users."
Hines is also part of the development team at The Nicollet, a planned downtown condo tower. There's been some speculation in downtown real estate circles that the project could go commercial instead, but Pfefferle dismisses those rumors. "We're still committed to making that a residential project," he said.