Downtown Minneapolis’ Dayton’s Project still vastly vacant, with food hall plans dashed

Five years after COVID-19 crushed its opening plans, the Dayton’s Project still houses several vacant and unfinished floors, driving the downtown Minneapolis office building’s ongoing financial struggles.

The $375 million redevelopment of the landmark department store was heralded as a boon to the central business district, promising a burst of vitality particularly for Nicollet Mall. But after the pandemic crippled its launch, expectations for the Dayton’s Project became delayed and dimmed.

Last fall, the court appointed a receiver to take on management of the 12-story building after lenders claimed the owners defaulted on a $200 million loan. Shortly after, plans for a food hall curated by celebrity chef Andrew Zimmern were canceled. Lenders advanced more than $6 million through the past six months to cover maintenance, tenant improvements and other costs.

“The property continues to operate at a significant loss,” according to a March 21 report from receiver Lighthouse Management Group.

Office buildings across the country have suffered since the pandemic decreased demand for space, but the Dayton’s Project’s timing was extraordinarily unlucky, real estate experts said. It introduced 1.2 million square feet of new office and retail space to the Twin Cities market — almost as much as the 57-story IDS Center across the street — just as employees started working from home in 2020.

Even before the pandemic, the project was ambitious. Investors made a bet the building’s nostalgic appeal and top-of-the-line amenities would be a winning combination. But the scale of their investment “created a very high hurdle,” Hempel Real Estate CEO Josh Krsnak said in an email.

“Even in a strong market, that kind of capital stack would require careful execution and substantial leasing velocity,” Krsnak wrote. “The pandemic didn’t cause the issues alone, but it magnified everything.”

He’s one of many rooting for the Dayton’s Project to succeed. Hempel owns multiple nearby properties, including the LaSalle Plaza, where the company just announced plans for a food hall with the team behind the Market at Malcolm Yards.

“Revitalizing Dayton’s is in everyone’s best interest,” Krsnak wrote. “As for what it’ll take: It starts with momentum. There needs to be a clear vision, curated tenant mix and perhaps, most importantly, a few catalytic leases that signal confidence to the market.

“These kinds of assets can’t afford to sit idle — activation is everything.“

Samuel Sigelman, director and general counsel for Lighthouse Management Group, said the receiver’s reports speak for themselves. The group’s initial memo, filed in late October, estimated the Dayton’s Project was 11% occupied.

In a statement, Zimmern said he and his partners, which included the team behind the Gansevoort Market food hall in New York City, had for years been “on the sideline waiting” for a certain percentage of the building to lease.

“I don’t have many regrets in life, but that deal was one I really look back on with a level of true missed opportunity,” he said. “I believe we need to return employees to work downtown and do anything we can to grow our city centers. If we don’t, I believe we will be looking at less, not more, of a reason for visitors or businesses to take part in what our great city has to offer.”

The building’s manager and leasing teams did not respond to requests for comments, but the latest receiver’s report noted a few recent wins, including the signing of a seven-year, 17,500-square-foot lease with a new office tenant.

“The tenant will be the first on that floor, and the signing represents significant progress in the project’s path to, hopefully, financial stability and shows there is trust in the long-term vision of the property,” the report read.

An attorney for New York-based owner 601W Cos. declined a request for comment, while an attorney for the lender, New York-based Fortress Investment Group, did not respond. The property isn’t in foreclosure, indicating the parties still may be working to figure out how to move forward together.

601W refinanced the building with Fortress in 2021 after suing to block a threatened foreclosure from a former financier, who the owners accused of predatory lending amid COVID-fueled leasing delays.

Since refinancing, major companies such as Ernst & Young LLP and Prudential Financial have moved their Minneapolis offices into the Dayton’s Project, citing the indoor-outdoor rooftop terrace, fitness room and other luxury common spaces as part of the draw.

The Dayton’s Project is not alone in its leasing woes. Few companies made moves in the pandemic’s early days as the future of work remained uncertain. In the wake of George Floyd’s murder and subsequent civil unrest, Minneapolis’ safety reputation took a hit.

As more employers implement in-person policies, the Twin Cities office market is showing signs of stabilization and increased demand, especially from smaller tenants, according to a quarterly report from brokerage firm Colliers.

Newly constructed office buildings such as the North Loop Green and RBC Gateway also have posed formidable competition to the Dayton’s Project. Prospective tenants have to weigh the less-ideal aspects of the remodel.

Brokers have said the former department store has lower ceilings, lots of columns and huge floor plates, meaning less natural light reaches the center of building. Much of its space would need to undergo construction before anyone moves in, adding time and expenses.

Minneapolis-based Sezzle, a fintech company, moved into a prebuilt suite in 2023 partly because of the Dayton’s Project’s central downtown location. The company, which does not require its workers to come into the office, was downsizing from its former space in the North Loop, spokeswoman Erin Foran said.

“At first it felt a little bit like a ghost town, but it definitely is feeling more like it’s coming to life,” said Foran, who added that the Dayton’s Project’s events and programming have been attractive to some employees. “I think they’ve done a good job of making people want to come work there.”

Dayton’s Project brokers have given tours to a handful of prospective retail tenants in the past six months, reports show, including Earl Giles Distillery and Jester Concepts, the hospitality company behind Borough, Parlour and other local restaurants. The former JB Hudson Jewelers space has long been designated for an upscale restaurant.

Jesse Held, co-founder and partner for Earl Giles, confirmed in an email the northeast Minneapolis restaurant passed on the space shortly after its initial tour.

“Although the timing for this project just didn’t work out for our team, we recognized instantly once downtown comes back to pre-pandemic levels, the operator of the space will be in the premiere spot of downtown,” Held wrote.

The property’s lone retail tenant at the moment is Gray Fox Coffee, which opened last summer after the Dayton’s Project approached the cafe, owner Chris Bjorling said.

The landlords paid for most of the construction needed to build the skyway-level shop and charge monthly rent based on a percentage of Gray Fox’s sales. That kind of arrangement has become increasingly common among downtown buildings competing to woo office tenants, Bjorling said.

Gray Fox Coffee has three other downtown spots, but its Dayton’s Project space has the advantage of a central location and ample seating, which is somewhat of a rarity in the skyways.

“The sense on the ground I have is a lot of positive feedback,” Bjorling said. “The building is beautiful. There’s a lot of great amenities. It’s in the heart of downtown.

“I think there is a lot of promise,” he added. “It’s probably just going to be a little bit ... for it to get fully populated.”