Spec of a Deal

Spec of a Deal

Ryan Cos., Excelsior Group have begun building 10 West End – an office building with no committed tenants.

A generation ago, it was not uncommon to see developers building “spec” office buildings – speculative projects with no committed tenants. But those go-go days are long gone. Today it’s a rare project that can land financing with no signed leases in hand.

But Minneapolis-based Ryan Cos. US Inc. and St. Louis Park-based Excelsior Group have now begun building 10 West End, a 343,000-square-foot, 11-story office building in St. Louis Park. A groundbreaking ceremony was held last Thursday. The building is slated for completion in early 2021. New York-based ACORE Capital provided project financing.

Historically, when office vacancy rates fall below 10 percent, developers start eyeing new construction. The overall Twin Cities market is nowhere near that number. According to data from Cushman & Wakefield Minneapolis-St. Paul, metro-wide office vacancy stood at 16.4 percent. In downtown Minneapolis it was even higher at 19.3 percent.

But in the western suburban market, C&W reported Class A office space vacancy at 8.6 percent at the end of the second quarter. The total western suburban market – counting Class B and Class C space – had a vacancy rate of 9.5 percent.

Those are the lowest office vacancy rates in the Twin Cities by a wide margin.

Mike Honsa, a principal with the Minneapolis office of Houston-based Transwestern, is leading the leasing effort for 10 West End.

“There is a huge need for new Class A space right in that area,” said Honsa.

He said that if you zero in on the West End “micro-market” within the larger western suburban office market, Class A office space vacancy rates are in the range of 4.5 percent to 6 percent.

“I think the new building will do really well,” said Jim Damiani, executive managing director of the Minneapolis office of New York-based commercial real estate services firm Newmark Knight Frank.

But Honsa said it’s tough to lease space on the basis of a project rendering. Potential tenants were wary to commit to leases given the uncertainty about whether or not the project would move forward.

“That was biggest hurdle or question mark we were dealing with when we are trying to pre-lease,” said Honsa. “Now with it under construction, it’s a real thing.”

It’s been a long road to get to this point. The project was first discussed at a neighborhood meeting in May 2016.

In a unique twist, the project actually sits in two cities. The office tower will be in St. Louis Park, but the building’s parking ramp will sit in Golden Valley.

If the building is successful, there is the potential for a second phase – 20 West End – which would be to the south of the building now under construction.