Two visions for space near Vikings stadium: One housing, the other a hotel

Two distinctly different visions — a hotel and an apartment tower — emerged this month for a key piece of property in downtown Minneapolis, right in the shadow of the new $1 billion Vikings stadium.

The city of Minneapolis received the pitches from two well-established Minnesota-based developers, Ryan Companies and Mortenson Development, for the space above a 1,610-space parking ramp that is part of a $400 million mixed-use development planned for eastern downtown.

The proposals represent a white-hot apartment market already in full throttle in downtown Minneapolis, as baby boomers and millennials flock to the urban core, as well as improving demand for hotel rooms post-Great Recession.

"It's hard to go wrong with either," said Steve Cramer, president and CEO of the Minneapolis Downtown Council, a business group that is neutral on the proposals. "Both uses will predominate as Downtown East fills out, and set the pace for future development."

Ryan is developing the "Downtown East" project, which includes two office towers housing 5,000 employees for Wells Fargo & Co., 200 apartments, retail shops and restaurants, and a nearly two-block public park. The development will encompass five city blocks near the current Metrodome in an area of the city that has long resisted meaningful development.

Ryan's $104 million idea for the space atop the parking ramp involves a 28-story apartment tower spanning about 344,000 square feet, with an additional 6,000 square feet of restaurant and retail space along S. 4th Street. Construction would begin in May 2015, with completion slated for August 2017.

The competing proposal came from Mortenson Development, whose sister company is building the nearby Vikings stadium. It has pitched a $63 million plan that includes a 300-room hotel dual-branded as AC by Marriott and SpringHill Suites by Marriott. Construction on this project would begin in January 2016, with completion expected by January 2017.

The city will pick a proposal by early March. Newly elected Mayor Betsy Hodges declined through a spokeswoman to say which option she favors, preferring to learn more about the ideas before deciding.

Councilman Jacob Frey, who represents the area, said he's "fairly agnostic" on both the proposals. As the Downtown East project moves forward, he said his main concern is "getting additional eyes on the park. You have a two-and-a-half-block, and if it's not vibrant, it can be dangerous."

But once the proposals were made public, much of the discussion involved whether downtown Minneapolis can handle another influx of apartments. Experts say there's room for more, especially in a corner of the city that's become the target of so much new development, and where there's currently very little housing.

"They'll be creating a whole new submarket over there," said Julie Lux, associate vice president with Cassidy Turley, a national commercial real estate company. "Excitement in the area surrounding the stadium will definitely help drive demand, and you'll have a ton of new office space and hopefully the proper kind of retail mix that will support a healthy rental housing submarket.

Last year in downtown Minneapolis, nearly 1,500 new apartments were added to the rental pool, and 1,312 more are under construction and on their way to market this year, according to Maxfield Research Inc. That doesn't include the thousands of apartments that are planned for other city neighborhoods, including the Uptown neighborhood and near the University of Minnesota campus.

In downtown alone, the average vacancy rate increased slightly from the third to fourth quarter and is now 4 percent, according to Marquette Advisors.

Job growth fuels demand

In certain submarkets of the city, including Uptown, there is some evidence that supply is outpacing demand. A handful of leasing managers are offering rental concessions, including a month's free rent, but those offerings are few and far between.

Mary Bujold, president of Maxfield Research Inc., and other housing experts say that given current population and job growth estimates, the downtown market is capable of absorbing hundreds of new apartments without pushing the vacancy rate to unhealthy double-digit levels.

A new market report from Cassidy Turley cites an employment forecast that optimistically predicts a gain of 40,000 to 50,000 new jobs over the next three years, and a population increase of more than 30,000 per year through 2017 for the city. It's still unclear how many of those new jobs and new residents will land in downtown, but the potential is there that hundreds of new units will be needed. An untold number of baby boomers and empty-nesters also are expected to move from their big houses in the suburbs to downtown.

There's another important element that will guide the health of the market: the timing of the release of new units. While no one disputes that the market can handle more rental housing, there is some concern that if too many buildings open at the same time, the market could soften very quickly.

For example, the Nic on Fifth and LPM Apartments are both set to be completed by the end of the year with a combined 600-plus luxury apartments that will hit the market about the same time. Yet the 28-story apartment tower proposed by Ryan isn't expected to be completed until 2017.

"Some are cautious, others are still thinking everything is fine," said Bujold. "This year is going to be a telling year as to which way we're going to progress. We'll either fill up all the buildings and continue to move along, or we'll see vacancy rates rise."

Demand for rental housing is also likely to be bolstered by the growing shortage of for-sale condominiums in downtown. At the current sales pace, there are now enough listings to last only two months, according to the Regional Multiple Listing Service, and only one new condo building is under construction. Still a few months away from completion, Stonebridge Lofts in the Mill District is already 75 percent sold out. Facing so few options, many would-be condo buyers will be forced to rent instead.

Hotel construction reviving

As the apartment boom surged, the hotel market began picking up in small, but meaningful, ways. Currently there are 27 hotels in downtown Minneapolis with 7,030 rooms, according to Meet Minneapolis. About 1,338 rooms have been added since 2006.

Construction of new hotels dried up in the economic downturn, but there's evidence now of a resurgence, as several projects take root. Among them is Mortenson's Hampton Inn & Suites project — 211 rooms on what is now a surface parking lot near the First Avenue nightclub. An entity associated with Mortenson recently closed on the purchase of the property for $2.86 million.

An affiliate of Sioux Falls, S.D.-based U.S. Hotel & Resort Management is renovating the former Nate's Clothing building at 401 1st Av. N. in the Warehouse District in a $11 million project. And there's talk of the 12-story Plymouth Building at the corner of S. 6th Street and Hennepin Avenue being renovated by Minneapolis-based Heartland Realty Investors into an upscale Conrad hotel, although the company would not comment.

Talk that surfaced about a year ago regarding a 1,000-room hotel near the convention center on the Century Plaza site, now owned by Hennepin County, has not been revived, said David Lawless, director of budget and finance for the county. First, the county must move employees out of the building, he said.

One issue with the Downtown East area from a hotel standpoint is that it is relatively remote from the city's core, although it will be connected by skyway.

"It is far afield for a certain type of demand — it's a long ways from the convention center, and a pretty good distance from office core," said Steve Sherf, president of Hospitality Consulting Group in Excelsior. "I'm a little concerned that it's far from the action, although it will do well during days when there are events."

Hotel occupancy rates have recovered downtown since the recession when they had dipped to about 59 percent — in 2013, they were 71.8 percent, according to Smith Travel Research.

"Another 300 rooms is not huge, but it's still a substantial amount, especially given growth down there," Sherf said.

Janet Moore • 612-673-7752 Jim Buchta • 612-673-7376