Target Corp.'s decision to vacate its City Center offices in downtown Minneapolis jolted the Twin Cities commercial real estate industry Thursday as building managers brace for more upsets and other tenants big and small consider "remote work" models that will shrink office space needs.
Target informed the City Center's general manager — Minneapolis-based Ryan Cos. — early Thursday that it planned to permanently use a hybrid remote work model for 3,500 workers and would no longer need the 985,000 square feet of offices it rents in the 51-story tower. The decision comes a decade before Target's lease expires in 2031.
Its impact reaches beyond a single office complex to every corner of a downtown business district largely vacated since the pandemic darkened workplaces and started a high-tech revolution for how and where work gets done.
"This could become a signaling event to other companies. That if Target is doing this, then maybe we should think about this, too. That's probably causing heartburn to property managers and owners downtown," said Jim Vos, principal of the Cresa commercial real estate services firm that advises hundreds of office and industrial tenants in the Minneapolis area.
Jeremy Jacobs, managing director for Colliers International and chairman of the Urban Land Institute Minnesota, said that industry insiders long considered Target's huge presence in Minneapolis and were anticipating its decision about what it would do with its downtown real estate.
Thursday's announcement marks "a change, and it will reverberate throughout the community," Jacobs said.
The transformation of the workplace reaches far beyond Minneapolis. A recent Cushman & Wakefield (C & W) national survey revealed that 81% of employers across 35 markets expect to embrace a hybrid office and work-from-home model post-COVID.
"More people will be working remotely in 2022 than in 2019 on any given day so how do you make that work?" asked David C. Smith, Cushman & Wakefield's global head of Occupier Research.
New "remote work" dynamics post-COVID will lower U.S. office tenant absorption rates by up to 18%, its research suggests. In the Twin Cities, Prime Therapeutics has already announced it will give up its Bloomington office lease and relocate 700 workers into its Eagan headquarters as it adopts a hybrid work model.
Other firms with smaller footprints also shrunk office space in Minneapolis, but being small, it was not front-page news, said Vos at Cresa.
According to C & W, about 22% of Minneapolis' core business district's 28.4 million square feet of office space sits vacant.
Vos noted that Target's decision to leave City Center could benefit other businesses looking for attractive and convenient downtown space that is close to public transportation, parking and area highways. Vos said he believes Target got a great deal on its City Center rent, so it could potentially pass its savings along should it decide to sublease its old space to new tenants.
But prospective tenants aside, many in the marketplace won't view Target's decision as good news. Downtown's former Macy's store that reopened in September as a converted Dayton's Project office complex is still hunting for tenants for the 1.2 million-square-foot tower. "This [Target move] puts another million square feet in competition right next door," Vos said. "It's unfortunate."
Pam McCrea, chairwoman of the Downtown Minneapolis Neighborhood Association said Target's hybrid remote work model means there will be more employees "who are out of the city, who won't be patronizing our restaurants and skyway stores and food trucks" five days a week, she said. "More employers are going to [embrace] work-from-home [options] and won't invest in downtowns like they have in the past," she said.
The loss of Target in the City Center "does hurt," said Ryan Cos. Director of Real Estate Development Carl Runck. But he insisted the city has been here before, when Pillsbury was bought by General Mills in 2001 and suddenly no longer needed its downtown headquarters tower on 3rd Avenue and 5th Street.
"We survived and bounced back then and refilled the space. And we will continue to evolve now," Runck said.
Several historic downtown office buildings such as the Foshay, the Rand Tower, and the Plymouth Building were converted into hotels while other vacated buildings also found new lives after losing major tenants in recent decades, Runck said.
But the future of hotels is now also in question due to COVID's impact on travel. Separately, the City Center's spatial planning may not bode well as a hotel-redevelopment project anyway. Still, there are other possible uses, Runck said, noting that some firms such as Deluxe Corp. and Principal Financial decided to relocate their headquarters offices from the suburbs to downtown Minneapolis. Others may follow suit.
"Just because an office building is vacant doesn't mean it can't be repurposed," Runck said. "There is always more to these stories than doom and gloom. There is renewal."
Brent Wittenberg, vice president at Marquette Advisors, a research firm that tracks the residential rental market, said that before the Target move, the downtown Minneapolis apartment vacancy rate was expected to remain elevated, likely in the 10 to 11% range this year. It's too soon to predict how Target's decision will affect that figure.
The biggest effect is likely to be on apartment buildings that are within the central business district that surrounds City Center, he said. Apartment buildings in peripheral neighborhoods such as the North Loop and Mill District are less likely to be less affected.
There's evidence that it's not just jobs that brings renters to the area. During 2020, when most downtown offices were shuttered, the area absorbed about 1,200 new apartment rentals.
"That had nothing to do with jobs, that has everything to do with the lifestyle opportunity," he said. "I'm encouraged by that."
Staff writer Jim Buchta contributed to this story.
Dee DePass • 612-673-7725