The sale earlier this month of the Wells Fargo Center in downtown Minneapolis likely represents a value-add opportunity that could have the 57-story tower back on the market in the next few years, according to one market expert.
An entity related to Greenwich, Connecticut-based Starwood Capital Group paid $313.6 million for the 90 Seventh St. S. tower, according to a certificate of real estate value made public on April 5. The sale is the largest of a Minneapolis office building since South Korea-based Samsung paid $320 million last June for the 51-story 33 South Sixth office tower and the City Center retail complex.
The 1.19 million-square-foot Wells Fargo Center was originally built as the Norwest Center in 1988 to replace Norwest Bank’s former headquarters building. That building was demolished after it burned in an arson fire in 1982. Norwest later merged with Wells Fargo.
The Class A Wells Fargo Center takes up about half a block at the northwest corner of Marquette Avenue South and Seventh Street South. It is the third-tallest building in downtown Minneapolis.
The seller is an entity related to Houston-based Hines and New York City-based Blackstone Group, according to CoStar and records on file with the Minnesota Secretary of State’s office.
The transaction, which closed on April 1, works out to $262.20 per square foot of space. Hennepin County values the building at $277 million for tax purposes.
Wells Fargo Center has a 21 percent vacancy rate, CoStar shows. That level of occupancy gives the building “value-add” potential, said Steven Buss, a managing director with the Twin Cities office of JLL.
“With assets with this profile, the appeal to investors is you have income from the existing tenant base and the upside of additional future leasing,” he said in a Tuesday interview.
The overall downtown office vacancy rate is 16.1 percent, according to a Twin Cities office market report JLL released Monday. Vacancy is lower for Class A office space at 11.2 percent.
Current tenants in Wells Fargo Center include Wells Fargo & Co., law firm Faegre Baker Daniels and investment firm Dougherty & Co. The majority of the building’s other tenants are in the financial industry or in the legal field.
Both the buyer and seller declined to comment on the Wells Fargo Center deal. The building is the second major Wells Fargo tower Starwood has purchased in the past two years. The company acquired the 40-story Wells Fargo Center in Portland, Oregon, in late 2017.
Making a big office purchase in downtown Minneapolis work as an investment requires “putting the rent roll in order,” updating and adding tenant amenities and then either refinancing a purchase or putting it on the market, Buss said. Buying an existing office tower, as Starwood did, can be a better investment move in the current market than building new, he said. The cost to build a new office tower is about $400 per square foot, he said.
An investor that buys a downtown Minneapolis office building in need of new tenants and some improvements might take three to five years to put that building back on the market, Buss said. Current building amenities include underground parking and indoor bicycle parking, according to the building’s website.
Hines has done some other recent selling in downtown Minneapolis. Hines Global REIT sold the 29-story 50 South Sixth tower for $258.5 million in December 2017. Buss represented Hines in that deal.
Starwood has been a buyer of late in the Twin Cities office market. The company paid $100 million in 2017 for the 16-story Colonnade at 5500 Wayzata Blvd. in Golden Valley.