IDS Center’s loan extension points to office upturn in downtown Minneapolis

The return of thousands of red-shirted Target workers to the company’s corporate headquarters — and longer lines at skyway eateries —aren’t the only confidence boosters in downtown Minneapolis this week.

The owner of the IDS Center, the state’s tallest and most iconic building, said Tuesday it negotiated another critical financial reprieve. This once again averts an unknown-but-likely-catastrophic outcome for the city’s most valuable office tower.

Florida-based Accesso said this week it secured a 12-month extension on its loan, the second such put-off in three years. The company also reported “significant” leasing momentum, with five long-term commitments for nearly 112,000 square feet of space.

That includes a new, full-floor lease for Associated Bank, which is also in the process of opening a new branch on the skyway level of the IDS Crystal Court.

“The good news is that the bank still believes in the building,” said Deb Kolar, general manager of the the 57-story tower. “It shows the commitment we have to the property.”

These wins for IDS come at a time of record office vacancies in downtown Minneapolis and St. Paul, where nearly a third of all offices are vacant.

Midway through the year, the overall office vacancy rate in the central business district (CBD) of downtown Minneapolis was 33.8%, according to Cushman and Wakefield. That’s on par with last year at the same time.

The seems to be the mood among many office brokers, at least.

“We’re not going backwards. We’re going forwards,” said Brent Robertson, market lead and managing director of JLL’s Twin Cities office. “[Leasing] activity is really strong.”

Three factors play into his optimism: More companies, such as Target, have implemented in-office policies, a significant amount of office space is under conversion into other uses, and there’s no new office space coming online, thanks to the high cost of borrowing and building.

“Quality buildings with quality amenities are in high demand,” Robertson said. “I think we’ll look back and say, ‘Q4 of 2024 was when the office bottomed out.’”

The Associated Bank move at IDS is among a handful of significant lease deals in the area. Late last year, Wold Architects & Engineers said it would move about 250 employees from downtown St. Paul to 50 South Sixth, a 29-story office tower along Nicollet Mall. The need for more space is what motivated both Wold and Associated Bank.

That “flight-to-quality” is why demand for the top-class “A” office space in the best locations is outpacing demand for less-desirable buildings.

Still, office owners are grappling with falling values. That, coupled with high vacancy rates, has made refinancing their loans more difficult. At IDS, Kolar said the one-year debt extension gives the leasing team more time to woo more new tenants.

The occupancy rate at IDS has fallen from the mid-to-low 80% range prior to the pandemic to 65-68% today, Kolar said. In today’s capital markets environment, she is aiming to increase the occupancy to 72-74% so Accesso can secure another loan.

Associated Bank, headquartered in Green Bay, Wis., is inching IDS closer to that goal. Its new 25,513 square-foot space on the 43rd floor is more than double what it previously had at another office building along Nicollet Mall.

“Minneapolis is a priority market for us, and we’re excited to play a role in drawing people and energy back into the heart of Minneapolis,” said Phillip Trier, executive vice president and head of corporate and commercial banking, in a statement.

IDS’ struggles aren’t unusual, as office owners scramble to refinance their loans. Unlike houses, which are typically financed with long-term, fixed-rate mortgages, commercial loans are much shorter. They’re typically five years or fewer, and many have floating rates. All that requires owners to find new financing every few years.

That’s been an especially challenging proposition at a time of falling property values. In 2013, Accesso paid $253.5 million for the tower. This year, the assessed value for tax purposes was about $135 million, according to Hennepin County.

At the end of 2023, Accesso negotiated a three-year extension for its $151.7 million loan after missing a balloon payment.

In many cases, after a loan matures — as it did at IDS — the borrower keeps making payments while the owner and/or lender explore options. If a new buyer doesn’t emerge, for example, the lender can hold onto the building until occupancy — or values — increase.

Kolar said Accesso hasn’t yet explored selling IDS.