Amid office urban flight, some companies trade suburbs for downtown Minneapolis

Before the pandemic, Todd Dale was stuck behind the wheel of his car every weekday, commuting to and from his house in Minneapolis to his consulting job in a strip mall office in Eden Prairie.

Grabbing lunch, going on a coffee run or meeting with a client required jumping right back in the car. The routine was tiring, he said, and didn't exactly make him want to rush back after remote work eased post-pandemic.

"We were very isolated," he said. "That aspect of isolation put a damper on the culture."

So when the lease expired and his manager polled employees about where to locate the next office, he replied the same as all 20 of his colleagues: downtown Minneapolis.

When Pepper Foster Consulting moved into its new space in the central business district this spring, it became one of a handful of companies to reverse the current by fleeing the suburbs for the city. While these moves are barely making a dent in the millions of square feet of vacant office space downtown amid the hybrid work era, these companies are, in at least a small way, helping repopulate the skyways, parking garages and restaurants that have eked their way through the pandemic.

"This signifies an important shift post-pandemic where clients are looking to be surrounded by the energy of the city and the desirable amenities that it affords," said Brent Robertson, managing director and Twin Cities market lead for JLL.

Robertson helped Pepper Foster find its new space on the sixth floor of the glassy Forum 900 tower on 2nd Avenue S. The new office is three times the size of the Eden Prairie location, meaning economics wasn't driving the decision to move. Though office vacancies downtown are higher than in the suburbs, downtown offices aren't necessarily less expensive than those in the suburbs.

"They wanted space where they could all come together and have access to mass transit and amenities and a vibrant office experience," he said. "This one was a no-brainer."

The new space has a tenant lounge with a catering kitchen and bar, plus bike storage and a fitness center. And the building is connected to nearly 10 miles of skyway.

"I really enjoy coming to the office as opposed to dreading the car drive to and from," said Dale, who now commutes by foot and light rail. "All that wear and tear on me is a thing of the past."

Upsizing and downsizing

Demand for office space hasn't flatlined, but the pattern is changing in ways that will forever alter downtowns across the country. Tenants in the Twin Cities are on the hunt for about 2.5 million square feet of office space right now, but most want less than 25,000 square feet, according to new data from JLL. Companies that have decided to remain downtown but in a downsized space are bloating current office vacancies.

In the suburbs and both Twin Cities' downtowns, moves to smaller spaces are making it difficult to offset the openings downsizing large companies are leaving. Cargill recently vacated the 260,000 square feet it leased along the I-394 corridor. If not for that office space returning to the market, the Twin Cities would have seen a nearly 50,000-square-foot gain in new leases, including many like Pepper Foster making the suburban-to-urban shift.

The latest data shows office vacancy rates across the metro and in downtown Minneapolis showed signs of stabilization during the first quarter, according to Colliers, which tracks office buildings with at least 10,000 square feet. Across the metro, the office vacancy rate held steady at 13.8% compared with 21% in the city's central business district. Those figures are significantly higher than four years ago but comparable to the previous quarter.

For buildings with more than 20,000 square feet, the office vacancy rate exceeds 30%, according to Cushman & Wakefield, another Twin Cities-based commercial brokerage.

"It's a super-dynamic situation," said John Breitinger, executive managing director at Cushman & Wakefield.

He said there's growing evidence that many workers are craving more time in the office, especially young professionals. There's a particular irony to that trend, he said, because those younger workers tend to be "digital natives," who were also those most resistant to returning to offices in the earlier days of the pandemic. But those younger workers, he said, miss the interaction and mentoring that comes with having colleagues nearby.

"They're used to being with friends virtually and online, but increasingly, that's the group that is the most pressing for opportunities to be back in the office," Breitinger said.

The cohort not as interested in returning to the office is likely already living in the suburbs and raising families and would "benefit the most from the flexibility" of hybrid work.

"They also have a big influence on setting policy," Breitinger added. "And they don't want to come back."

Flock together

Pepper Foster isn't alone in its flight back to the heart of the metro.

In April, YardStik, an employment screening tech company, moved to a 14,000-square-foot office in downtown Minneapolis that's more than double the size of the startup's previous space at Pentagon Park in Edina. The company's new office is on a lower floor of the 100 Washington Square tower, which has underground parking, a fitness center and a food hall.

Kansas City-based HNTB, a civil engineering firm, made a similar move, transferring about 50 employees from the Colonnade office building in Golden Valley into more than 15,000 square feet in a 40-story tower along Nicollet Mall.

Sara Hage, HNTB's Minnesota office leader and associate vice president, said in a statement access to transit played into the decision, and since the move, the team has grown by 35%. A quarter of the staff also now participate in the Metropass commuter card program, "highlighting the tangible impact" of the company's "strategic and prime location," she said.

In March, First Resource Bank said it was moving corporate headquarters from Stillwater into the lower level of an apartment building near U.S. Bank Stadium in the Mill District.

Gains from those moves don't include a growing roster of small firms already downtown that have expanded their space. That includes Husch Blackwell, which more than doubled its space in the IDS Center, and the McKnight Foundation, which will move from a rented space in a renovated riverfront building into a much larger building closer to the central business district that includes more space for gatherings and is in the midst of a complete renovation.

For Pepper Foster and other downtown lessors, however, size has nothing on location.

Jamie Kissell, director of business development for Pepper Foster, said even though he lives in Maple Grove, he didn't think twice about voting for a move downtown.

"I had never worked downtown, and it's very exciting to get down here," he said

Because the consulting company relies heavily on face-to-face contact with current and future clients, its offices in Eden Prairie forced consultants to be more intentional about their efforts to network.

"That building sucked the energy out of you when you walked into it. It was like a ghost town surrounded by roundabouts," said Nate Caskey, the manager who led the move, adding he's already randomly crossed paths with current and future clients in just two months downtown.

"It's amazing," he said. "I kick myself every day. It's that different."