The past year has marked a pivotal shift in office real estate. Looking back at the top sales of the year, the $225 million sale of RBC Gateway blew every other sale out of the water.

United Properties sold part of its 1.2 million-square-foot tower to San Francisco-based Spear Street Capital in July. Spear Street Capital bought 525,000 square feet of office space, a ground-floor office lobby, and 296 below-grade parking spaces, according to a July news release by CBRE, which arranged the transaction. The deal did not include the building’s hotel and condo units, some of the most expensive condos in the Cities.

But the RBC Gateway sale did include what industry folks call “Class A” office space. As employers adjust to continuing hybrid and remote work, many have sought a smaller footprint that offers more amenities to entice workers back. About 99% of the RBS Gateway office space that was sold is occupied. This is not the case for many other office spaces in the region.

In contrast, the LaSalle Plaza – the Cities metro’s second largest sale of the year – sold for $46 million in June. This sale price was below the building’s estimated market value, which was at $76.4 million at the time of the sale, according to Hennepin County property records. The building’s market value had dipped from its peak of $103 million in 2021.

Around 40 tenants in the building filled about 70% of the tower at the time of the sale. Notably, the LaSalle tower also included Class A office space. However, the purchase of the building by Eden Prairie-based Hempel Real Estate was largely opportunistic and driven by the lowered price tag on the building. The sale marked the first time Hempel reentered Downtown Minneapolis since 2015.

That’s all to say, lots of reshuffling is happening in the MSP office market. Here’s a look at the top five office sales of the year, according to data compiled by St. Louis Park-based commercial real estate company Avison Young:

1. RBC Gateway, 250 Nicollet Mall, Minneapolis – $225 million, July
2. LaSalle Plaza, 800 LaSalle Ave, Minneapolis – $46 million, June
3. 445 Lake Building, 445 Lake St East, Wayzata  – $25.7 million, March
4. City Centre Professional Building, 1625 Radio Drive, Woodbury – $13.1 million, February 
5. Riverpoint Office Center, 1715 Yankee Doodle Rd, Eagan – $12.45 million, March

A deeper look at sales 

An Avison Young third-quarter report noted that 83% of all area commercial real estate sales came from just two purchases: RBC Gateway and the Landmark Towers in St. Paul, which was bought by Sherman Associates.

Total sale dollar amounts are down across the board in the Twin Cities metro, according to Joseph Stockman, marketing intelligence analyst for Avison Young. Sales volume (dollar amount of total sales) across all property types this year was only about 48% of the sales volume in 2022. This is not a Twin Cities-specific trend; it’s happening across the nation.

The downward trend is not only because of Covid. Rising interest rates coupled with plummeting property values and continued building vacancy have left many property owners in a bind. But year-over-year data doesn’t fully represent the larger picture. Sales actually increased in the first few years following the pandemic, so when comparing the difference between sales volume in 2023 and average sales between 2015-2019, sales were at about 71.6% this year compared to what they were on average pre-pandemic.

Newer buildings built after 2010 are actively drawing the most tenant interest, Stockman said. This follows tenant attraction to buildings like RBC Gateway, which opened in 2022. It also follows the popular buzzword “flight to quality,” Stockman noted, adding that a building’s location also plays a role in desirability. “Many of these major sales are located in suburban areas following that flight away from urban central business district sectors.”

With building prices falling during economic uncertainty, in some cases, advantageous investors purchase discounted underperforming or at-risk properties this year, Stockman said. Large discounts can indicate the property has the potential for a larger redevelopment or conversion. “On the flip side of that, there’s also the avenue that these discounted sale prices can leave money in the pocket of these investors to channel back into the properties to heighten building quality and get that building to a point where it can attract and hold tenants,” Stockman said.

Examples of this include the LaSalle Plaza. The over-30-year-old building sold for about a third of the price of its 2011 sale when it was purchased for $155 million. Other examples include the Old Republic Title building, which sold at 32% of its market value based on Hennepin County property records. Also, North Star East, an office-to-apartment conversion, sold at about 23% of the price it was sold for last in 2007.

A look to the future, sale to sublease 

Office sales this year reflect a continued shift driven largely by hybrid and remote work models.

In its third-quarter commercial real estate report, Avison Young noted that area office availability remains above its five-year average. Notably, lease size in the Twin Cities’ central business district has fallen 35.1% compared to the average lease size from 2016-2019. However, area submarkets, including suburban locations, lease size averages have increased by almost 10%.

As companies have continued to reevaluate hybrid and remote work models, this year also saw a record-high amount of sublet space available in the region in the second quarter of this year, though this evened out in the second half of the year as employers shifted spaces, Stockman noted. One example of this was Thompson Reuters’ move to Prime Therapeutics office in Eagan.

“We’re seeing, like with retail, different property types that rely upon that accessible and active customer base – they’re following the leader,” Stockman said. “They’re recalibrating and following the customer base, which is very reliant upon office workers being in the office.”