Piecing Together the Dayton’s Project
Rarely have guys from New York cared so much about downtown Minneapolis.
For a few months this summer, New York City-based interests were fighting for control of the long-running redevelopment of the former Dayton’s department store on Nicollet Mall. After acquiring it more than four years ago, New York-based 601W Cos. still owned a largely empty building with 1 million square feet of commercial space in the middle of downtown Minneapolis. New York-based Monarch Alternative Capital, which swept in to acquire the project’s mezzanine loan earlier this year, was threatening to hold a foreclosure sale and auction the property to a new owner.
The companies fought it out for two months this summer in Hennepin County District Court. 601W was current on its loan but in technical default after failing to meet leasing criteria outlined in the loan documents.
The company beat back the challenge by pulling a rabbit out of the hat: It secured $250 million in new financing and kicked in another $18 million in equity for what remains a huge building that’s only about 10 percent leased.
Mark Karasick founded the 601W Cos. and is one of the firm’s three managing members. He makes it clear that the company was in dire straits amid the legal battle. In its legal filings, 601W characterized Monarch as a “vulture capitalist” that only wanted to reap a quick, potentially large profit from auctioning off the Dayton’s Project.
“We had our backs against the wall. We understood that the only way that we were going to be able to survive was to be able to bring in a new lender,” says Karasick. “We actually worked around the clock with our lenders, and we were able to put a new loan in place miraculously in a seven- to 10-day period.”
601W still has loans to pay and the pace of leasing is slow. But a secret to its potential success is buried in the new loan documents. 601W has until Nov. 1, 2023, to lease 400,000 square feet of space. It doesn’t need to get a deal done today, tomorrow, this week, or even by the end of the year. It has two years of breathing room.
“It’s nice to have two to three years of runway here to get past whatever Covid and civil unrest has done to downtown,” says Jim Vos, a principal with the local office of Washington, D.C.-based Cresa, a tenant representation firm.
On the flip side, the new leasing hurdles have a series of deadlines in 2024 for 601W to lease up the remaining 525,000 square feet by October 2024.
Karasick says that new leases are already in the works. Discussions are underway for approximately 100,000 square feet of office space, which he insists is a clear sign that business is picking up.
“Four months ago … there was nothing happening,” says Karasick. “We did, and do, believe that the market will come back. We think, overall, people will come back to working in the office environment.”
So much vacancy
What does the Dayton’s Project have going for it? For starters, it has a prime, central location in the heart of downtown Minneapolis. Several office brokers say the redevelopment has created a standout package of amenities, including a rooftop deck, a 10,000-square-foot fitness room, a bar and lounge on the seventh floor, and a quiet retreat space called The Library. The exterior is lined with big windows, which had been covered or blacked out from inside during its department store days.
What’s working against it? Chicago-based Cushman & Wakefield reported downtown Minneapolis office vacancy at 24 percent at the end of the second quarter. That’s higher than anyone can remember. Plus, that metric excludes the 985,000 square feet of space covering 37 floors in the City Center tower that Target Corp. is looking to sublease; that alone would add another 3.4 percent to the vacancy rate.
Chicago-based Cushman & Wakefield reported downtown Minneapolis office vacancy at 24 percent at the end of the second quarter. That’s higher than anyone can remember.
Downtown offices are still thinly populated, as Covid grinds on and many employees continue to work from home. As of mid-September, the Minneapolis Downtown Council estimated that just 35.9 percent of workers had returned to the central business district. The Dayton’s Project team is seeking rents of $24 to $26 per square foot, a steep tariff on par with the priciest properties downtown.
“With the range of available options downtown, they’re still going to have a lot of competition,” says Vos. “I think that uncertainty prevails. … There is no question that everybody is looking around trying to figure out what everybody else is doing.”
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But one broker confirms that the Dayton’s Project is drawing fresh interest.
“The professional service firms are generally coming back to downtown. … They’re definitely looking at the Dayton’s Project. When people look at the building, the amenities are tremendous,” says Chris Rohrer, co-founder of Minneapolis-based Rokos Advisors, a tenant representation firm.
The lease rates, however, present a hurdle for some companies.
“I think they’ve got to find a way to be very competitive in this Class A market,” says Rohrer. “They’re trying to compete with trophy Class A [properties].”
Vos notes that if companies now need less space because of hybrid work models, they might be willing to pay more per square foot for top-notch space.
“It’s not so much the price per square foot,” says Vos. “Now it’s more the total overhead and the total experience they’re offering their workforce. I think Dayton’s wants to offer that total experience.”
Brian Whiting, president of Chicago-based Telos Group, does not have patience for project naysayers. “I work in markets all over the country that have high vacancy,” he says.
But he’s a tad biased—Telos is one of the development partners on the Dayton’s Project and also serves as a marketing and redevelopment consultant for 601W, with whom he has worked for more than a decade.
The Dayton’s Project “plays very well to what progressive employers are looking for right now, which is something that helps them build community and build culture,” he says. “Coming out of Covid … companies are telling us that they like the product because it gives people a reason to come into the office, and they want people to come back to the office.”
Whiting says that when prospective tenants get a full picture of everything the building offers, they don’t blanch at the lease rates. “It’s not for everybody,” acknowledges Whiting. “What it’s for is people who are predominantly using open collaborative space.”
Mike Gelfman, senior vice president with the local office of Toronto-based Colliers International, focuses on leasing suburban office space. He says that Minneapolis has issues beyond the real estate market: races for mayor and the City Council, as well as a ballot referendum on whether the Minneapolis Police Department should be replaced. “It’s just creating more uncertainty in that market.”
But he says that the Dayton’s Project will lease up—eventually. It’s “a spectacular project. … It’s going to take years. There’s just too much vacancy in downtown Minneapolis.”
Big, old, and promising
To the average citizen, this Dayton’s Project may still look like an impossible dream—spending untold millions to buy and renovate what was a hulking, creaking, vacant old department store, then convincing office and retail tenants that they need to be there because it’s the coolest place in town.
But that’s 601W’s business model—acquiring vintage, distressed buildings that were once great, bringing them back from the dead, and often selling the properties for a sizable profit. The company favors big, audacious deals and heavy investments in upgrading spaces and adding amenities. They’re often looking to create destination properties.
The company takes its name from the Starrett-Lehigh Building in New York at 601 W. 26th St. in Manhattan. Karasick and company acquired the building for $151.5 million in 1998 and sold it for $950 million in 2011.
He says it’s “totally accurate” to say that the company has never faced a series of challenges like those in Minneapolis: the triple threat of the pandemic, social unrest, and a mezzanine lender trying to gain control of the property. It’s also the first time the firm has tackled a redevelopment in this market.
601W bought the building for $59 million in early 2017, just weeks before the Macy’s store there shut down. It has so far spent $350 million on the overhaul. The financing includes about $90 million in state and federal historic tax credits. There is not a dime from the City of Minneapolis in the deal.
As big as the Dayton’s Project is in Minneapolis, it’s small compared to many of 601W’s projects, such as the Old Post Office in Chicago. That vintage building was on the verge of being condemned when 601W acquired it in 2016. The property, on the western edge of downtown, is three city blocks long and one block wide.
“It was totally overrun by vermin,” says Karasick.
601W has spent $800 million to overhaul 2 million square feet of space there. Uber signed a lease for 463,000 square feet. Other tenants include Walgreens, PepsiCo, and Cisco Systems. The building is now 92 percent leased.
Karasick says that 601W saw parallels between Dayton’s and the Old Post Office.
“By the time we finish, we will be in for a total of about $1.1 billion,” says Karasick of 601W’s costs on the Old Post Office. “We saw Dayton’s having a similar potential.”
“Coming out of Covid … companies are telling us that they like the product because it gives people a reason to come into the office, and they want people to come back to the office.”
—Brian Whiting, Telos Group
In its final years of operation as a department store, the constant question in downtown Minneapolis was, “How long can it stay open?” Since the redevelopment began, the question has become, “When the heck is it going to open?”
As a department store, Dayton’s was the apex of downtown shopping. But the Dayton’s Project will be an office building first and a retail destination second. The first public signs of retail life will be a temporary holiday “Maker’s Market” of a few dozen merchants. That will open in mid-November.
There was a big splash when the basement food hall curated by local celebrity chef Andrew Zimmern was announced in 2017. Since then, details have been scant. The food hall is now targeted to open in February with a mix of restaurants, all of which will share a bar, which means that each vendor does not need its own liquor license. Zimmern remains a consultant to the project; the lease for about 57,000 square feet of lower and first-level space is held by New York-based Gansevoort Market.
But for retail to survive and thrive downtown, it needs office workers.
“Today your daytime office population is not there,” says veteran retail broker John Johannson, managing director of retail services with the local office of Houston-based Transwestern. Transwestern is handling office leasing for the Dayton’s Project but has no involvement in retail leasing.
The retail market is so bumpy that most commercial real estate firms with a presence in the Twin Cities have stopped doing market reports. Johannson says that the status of the Dayton’s Project is more a reflection of current events than 601W’s redevelopment prowess.
“I think it’s a matter of unfortunate timing and influences outside the realm of their control,” says Johannson, noting that no firm has had much leasing success over the past 18 months.
Karasick says that office leases have to come first, retail leases second. “As downtown itself becomes more populated, as people are coming back to work … as we see that, then the retail can build on that.”
Looking at 601W’s track record around the U.S., it’s tough to bet against it, despite the clear challenges ahead.
“If we know something works, we’re going to try to repeat it in other locations. You get the right tenants to come in, the other tenants follow them,” says Karasick. “We stand on our own and we’re aggressive in our approach.”
New Leasing Targets
The Dayton’s Project totals 1 million square feet of commercial space. The 601W Cos. plan calls for 750,000 square feet of office space and 250,000 square feet of retail space. As of mid-September, only about 100,000 square feet had been leased:
- Ernst & Young (EY): 30,536 square feet, office
- Gansevoort Market: 57,325 square feet, retail/food hall
- NRG, Energy Center: 14,959 square feet, utilities
The newly assembled financing has a series of leasing targets for 601W:
- By Nov. 1, 2023: 400,000 square feet
- By April 1, 2024: 550,000 square feet
- By Aug. 1, 2024: 750,000 square feet
- By Oct. 1, 2024: 925,000 square feet
Spiffing Up the Neighborhood
The IDS Center and City Center are both across the street from the Dayton’s Project. Both have recently invested in upgrades and are drawing new tenants.
The IDS spent $5 million on an upgrade of the Crystal Court that was completed in July. Its 166,110 square feet of retail is currently 87 percent leased. The new Noa restaurant opens in the former Mission American Kitchen space in November.
City Center spent $3 million on façade upgrades at the corner of Seventh and Nicollet, completed in June. Another $2 million was spent on infrastructure upgrades over the past two years. City Center’s 381,458 square feet of retail is currently 65 percent leased. Bad Axe Throwing opens in October; Tom’s Watch Bar, a national sports bar concept, will open at the corner of Sixth and Hennepin in the first half of 2022.
The Day(ton)s of Our Lives
February 2017: 601W Cos. acquires the property for $59 million.
March 2017: Macy’s closes.
December 2017: Plans for destination food hall announced.
March 2019: Developers announce opening pushed back to 2020.
March 2020: The Covid-19 pandemic and subsequent shutdown put opening plans on hold.
March 2021: First office lease (EY) announced.
June 2021: 601W sues mezzanine lender Monarch Alternative Capital.
August 2021: 601W completes new financing.