Selling downtown Minneapolis skyscrapers a tall order these days

Only a handful of downtown Minneapolis office buildings have changed hands in recent years, as the advent of remote work and rising interest rates made for an extraordinarily challenging commercial real estate market.

Almost every high-profile transaction that did happen involved Ryan Watts and Harrison Wagenseil of CBRE’s Minneapolis institutional properties team.

The team brokered the sale of the newly constructed RBC Gateway in 2023, a $225 million deal that was one of the biggest office sales in the country at the time. In the last year, they sold the Forum office towers, Wells Fargo Center and Ameriprise Financial Center — transactions that garnered national attention for their deeply discounted prices.

The two sat down to describe the current market in this interview edited for length and clarity.

Watts: When you think about the office market, there’s never one easy answer. Simplifying it, there’s really two sides to it. There’s the user side, which is the tenants leasing space in the buildings. And there’s the capital markets side of it, that’s the debt and the equity.

Those two things aren’t always in alignment. If you talk to most of our leasing folks, they would tell you they think that market bottomed last year on the tenant user side.

A year ago, people were still trying to figure out: Are they coming back to the office? If they are, how often are they coming back? When they do come back, how much space are they going to need? Now, I feel like we’re far enough along into this current cycle that there’s beginning to be more clarity there.

In the capital markets, specific to Minneapolis, Harrison and I feel like we’ve hit the bottom this year. Now it’s important to clarify that just because we think we’re there, doesn’t mean everybody knows it yet — and it doesn’t mean we’re going to bounce back tomorrow.

We’re not sure how long we’re going to be here. But from a pricing standpoint, we feel like we’ve found our bottom. And we are starting to see improvement in other markets, where investors are starting to dip their toes back in.

Watts: We have been slower relative to Sun Belt markets and more primary markets, like a New York. That’s typical of cycles of the past, where, when investors come back, they’ll come back to the primary markets first. Historically speaking, our market has been a steadier growth market — higher lows and lower highs. The major markets tend to have higher highs and lower lows. And investors that want to buy low, sell high, they’re going to gravitate to those markets first.

Wagenseil: I think one of the differences is, pre-COVID, you started to see some real international capital come into the market. There was probably a time when they didn’t really know where Minneapolis was. But given the sort of unique concentration of large companies and the stable economics, it was an opportunity to put out a lot of capital at once.

For international institutions, a big high-rise building was something that was relatively safe, with a 6.5% to 7.5% yield. Those groups, for the most part, are not investing in Minneapolis right now.

Watts: I would say, generally speaking, they’re not investing in the U.S. at the moment. They’ll come back. But they’ll be slower to come back here than New York, L.A., Miami.

Watts: Step one for us is just getting involved with the ownership structure and trying to understand the current situation. Then we try to help people understand what the current values look like. And then from there, we come up with a strategy.

Wagenseil: In particular, it’s understanding: What is the value relative to the debt? Because you’ll begin a conversation for several months with the owner, and then maybe after a bit of discussion, it becomes a conversation better suited for or in concert with their lender.

Watts: That’s a big change. Our clients now are tending to be more lenders — or there’s more lenders involved — than pre-pandemic. It’s become more, for lack of a better term, loss recovery vs. profit maximization.

Watts: Hard to say. I think beginning this year, we definitely were seeing positive metrics on the user side. On the capital markets side, there was hope that interest rates were going to start coming down and that debt would be more available. There’s been a real absence of lenders wanting to loan on anything office.

Not every market is created equal in that recovery timeline. And even within those markets, every building is going to be on its own trajectory. I think some buildings may not ever recover.

People want high-quality, well-located buildings. I think that’s going to help pull us out of this, too. It’s just old-fashioned supply and demand: You get rid of those obsolete buildings, you’ve got a much smaller supply stack that’s going to help the economics of these deals make more sense.

Wagenseil: One of the strengths of the Twin Cities was the concentration of big companies. I think that that’s been a disadvantage of ours more recently because they’re the groups that are maybe a little bit more reluctant to call their people back. There’s public eyes on them. So they’ve been making different space decisions.

Watts: The cost of construction has also gone up a lot. Tenants are asking for more. And we haven’t seen rent increase on a similar level, so that’s created additional pressure. I think something’s going to change there.

Here’s another thing that’s important to understand: We are selling not just a building and a rent roll or an income stream. First, we are selling a market — and that market is Minnesota, and it’s Twin Cities. Our investors have options to go to different markets. We’re competing to get their attention on why they should be in the Twin Cities. It’s a brand. And that brand has gotten harder to sell. We had some brand rebuilding to do.

Watts: They’re curious about crime and safety, which ties into return to work. The common sort of outsider view, right or wrong, is that part of the reason we’re having a hard time getting people back in town is because of the crime and safety. So we’re spending a lot of time defending as best we can. The other thing I would add is that investors don’t like uncertainty. Some of the things that have been proposed by our City Council and taken up for discussion, they create uncertainty.

Wagenseil: I think people want more control over the real estate that they’re buying. There are different approaches from different municipalities. The other thing I’d say is there’s been a lot of job growth and population growth that’s pushed Texas and greater Nashville and the Carolinas in a good direction. That’s not a feature right now of the Twin Cities. We hope it will be.

Watts: We’ve heard the mentality of: We don’t want to help out all these investors that made all this money. We’re way past that. Like I said, this is not about profit maximization. This is about loss recovery. And depending on the extent of loss, that becomes a city problem. And the number one impact, the most immediate impact, we’re already seeing — and that’s the impact of the tax base and what it does to the budget.

In the private sector, returns come via yield and in mathematical investment returns. For public entities, their return is different. It’s lack of blight in your city. It’s safety. It’s creating jobs. It’s creating vitality. It’s creating environments where people want to come to your city. It’s creating a tax base, strengthening your tax base.