MINNEAPOLIS—In 2013, the Twin Cities became one of the most attractive markets for big investors from coastal cities and the trend has continued in 2014. Shorenstein Properties LLC, a private real estate investment firm with offices in San Francisco and New York, for example, just closed on the purchase of Washington Square, a portfolio including three office buildings, a parking garage and an adjacent parcel in downtown Minneapolis.
The portfolio includes 20 Washington Square, a 6-story office building fully-occupied by a single tenant on a long-term lease; 100 Washington Square, a 22-story multitenant office building which is currently 71% occupied; and 111 Washington Square, a mixed-use building with 15 floors of vacant office space above two floors of below-grade data center space. The portfolio includes a 7-level parking structure with 900 spaces and a 1.25-acre lot currently used as surface parking.
The health of the Twin Cities market should give Shorenstein officials confidence as they make plans for 111 Washington Square. The local unemployment rate, for example, already far below the national average, has continued to drop this year and just hit 4.39%, the lowest rate since 2007, according to Cassidy Turley. And the multitenant office market absorbed 385,000-square-feet in the second quarter, bringing the overall metro office vacancy rate to 15.7%, lower than the historical average of 17.9% and the first time it has been below 16% since the fourth quarter of 2007.
The decline in vacancies was mirrored by rising rental rates. The metro average is now nearly $1-per-square-foot higher than at this time last year. But the big story in the local office market, according to Cassidy Turley researchers, “was undoubtedly the uptick in office sales, and the price they are trading at.”
Shorenstein's new portfolio also sits between the downtown core and the burgeoning North Loop neighborhood. The company also owns 33 South Sixth Street, a 1.6 million-square-foot mixed use office and retail property just four blocks away on the Nicollet Mall that the firm bought in 2012.
“This property provides us with solid income in place as well as the opportunity to add value over the life of our investment by using our in house experience in repositioning and leasing large scale urban environments,” says Douglas W. Shorenstein, president and chief executive officer. “This is a well located asset, fully in the path of growth, that already has significant amenities to appeal to today's tenants,” he added.
100 Washington Square has a state of the art conference facility, full service cafeteria, fitness center and two levels of below-grade parking. 111 Washington Square includes 90,000-square-feet of data center space, which is 64% leased, and is one of few properties in the market able to offer more than 200,000-square-feet of contiguous office space.
Shorenstein made the acquisition on behalf of its tenth real estate investment fund, formed in 2010 with $1.23 billion in committed capital from Shorenstein and its investors.
As reported in GlobeSt.com, this purchase is just the latest of many. KBS REIT II, Inc. just sold 601 Tower at Carlson Center in suburban Minnetonka to Artis REIT for $75 million, a 39% increase over the price KBS paid for the 288,458-square-foot property in 2011. This was one of the highest prices ever paid in terms of per-square-foot value in the Twin Cities, according to Cassidy Turley. And several weeks later, 50 S. 10th St. in the Minneapolis CBD sold for a price of $164.5 million. Its buyer paid more than $365-per-square-foot, by far the most ever in the state.
And these sales were just the continuation of a 2013 trend, when major office properties traded at a pace not seen since before the recession. For example, Florida-based Beacon Investment Properties LLC bought the iconic IDS Center for $253 million. Other major sales included the Oracle Centre, a 20-story building at 900 Second Ave. South, which was sold to a joint venture between Investcorp International and Wildamere Properties, and the 40-story RBC Plaza.
“As we look ahead,” the researchers concluded, “we expect to see more office buildings trade hands at historically high rates.”
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Brian J. Rogal
Brian J. Rogal is a Chicago-based freelance writer with years of experience as an investigative reporter and editor, most notably at The Chicago Reporter, where he concentrated on housing issues. He also has written extensively on alternative energy and the payments card industry for national trade publications.
