Office Bargains Attract
Investors to Twin Cities

Investors tired of high-price coastal markets are helping to push up the volume of office properties sold in the Twin Cities region.

Office buildings valued at about $1.9 billion were sold in the Minneapolis-St. Paul area during the 12 months through May, up about 65% from the year-earlier period. The Minneapolis area was the second most active office market in the Midwest after Chicago, where buyers plowed some $13.4 billion into office deals, according to a survey of 54 major U.S. markets by Property & Portfolio Research Inc., a Boston-based real-estate research firm, based on data compiled by Real Capital Analytics Inc. The third most active Midwestern market was St. Louis, which recorded about $1.1 billion in transactions.

Investors are picking up trophy addresses in downtown Minneapolis as well as office properties in such southwestern suburbs as Eden Prairie and Edina. The downtown St. Paul submarket, still saddled with higher vacancy rates, has seen less interest.

Inland American Real Estate Trust Inc., part of Oak Brook, Ill.-based Inland Real Estate Group of Cos., signed one of the biggest deals last year with its purchase of the IDS Center, designed by Philip Johnson, which contains the city's tallest office tower and a smaller retail building. Inland paid $277 million, or less than $200 a square foot. "You cannot do that in a lot of other cities," says Joe Cosenza, vice chairman of Inland Real Estate Group, which also owns more than 4.5 million square feet of retail space in the area and is looking to buy more office properties.

The uptick in office sales comes as many investors are attracted to the Minneapolis region's improving office market, which offers relative bargains despite modest rent-growth prospects of 2% annually going forward, below the 3.6% national average, according to Property & Portfolio Research.

Investors also like the range of corporations based in the region, including retail giant Target Corp. and insurer UnitedHealth Group Inc., which have helped to push median annual household income to $64,000, or 29% above the national average. The area, home to about 3.2 million people, also enjoys a cachet in the Upper Midwest because of lakes popular with sports enthusiasts, a wealth of restaurants and such cultural institutions as the Walker Arts Center. Construction is slated to get under way this summer on a ballpark for the Minnesota Twins baseball team, which is expected to spark more development in the Minneapolis warehouse district.

Those draws and steady job growth have helped to keep the population rising at an annual average rate of about 1% from 2003 to 2006. That is above the Midwest average of 0.5% and a stark contrast to such lagging Midwest markets as Cleveland, which suffered a 0.4% drop in population over the period, according to Moody's Economy.com.

The region's commercial real-estate leasing market has largely below-average rents and above-average vacancies compared with national levels, though apartment vacancies and warehouse rents are stronger. The retail market is weakening with a slowing housing market. Wickes Furniture Co., of Wheeling, Ill., announced last month it would close five furniture showrooms in Minnesota as well as a suburban Minneapolis distribution center to focus on higher-growth markets such as California, Las Vegas and Chicago.

An affiliate of Canadian-based Triple Five Group, owner of the Mall of America in suburban Bloomington, is still pushing for its plans to more than double the size of the shopping center, already one of the country's largest. Minnesota Gov. Tim Pawlenty rejected legislation late last month that would have included a tax subsidy for a $181 million parking structure, but Triple Five is hopeful the state might reconsider its position in a special session, says Bill Griffith, an attorney for the mall. Brian McClung, a spokesman for the governor, says it is unlikely a special session will be scheduled, though the mall matter could be taken up again next year.

The estimated $2 billion expansion would complement rather than compete with the existing shops by providing more entertainment-oriented options such as a Bass Pro Shops superstore, a dinner theater and an ice rink, Mr. Griffith says. "The tenants are ready to go and the lenders are ready to go," he says. "The final piece of the puzzle is the state funding."

Email your comments to rjeditor@dowjones.com.