KBS REIT III Buys Downtown Minneapolis Office Building for $118M

KBS Real Estate Investment Trust III has acquired the RBC Plaza, a 678,045-square-foot, mixed-use office building in downtown Minneapolis, from Brookfield Office Properties for $118 million.

KBS Real Estate Investment Trust III has acquired the RBC Plaza, a 678,045-square-foot, mixed-use office building in downtown Minneapolis from Brookfield Office Properties for $118.1 million.

The Newport Beach, Calif.-based REIT plans to turn between 50,000 and 60,000 square feet of the existing retail space at the 40-story Class A tower into offices. The property, which is currently 83 percent leased to 34 tenants, has 609,368 square feet of office space and 68,677 square feet of retail space above an underground parking garage. The current average weighted lease is 6.9 years and the tenants are paying a total of $8.6 million a year in rent or about $16.08 per square foot, according to a KBS filing with the U.S. Securities and Exchange Commission.

Built in 1991, the mixed-use property is located in Minneapolis’s financial district along Nicollet Mall, a popular downtown shopping area and connected via the city’s Skyway to a multi-building retail complex that occupies two city blocks. KBS plans to renovate the third and fourth floor of what is currently the Graviidae Common II into office space.

The REIT also plans to upgrade the office amenities, conference rooms, fitness facility and to renovate the lobby, Rodney Richerson, KBS regional president, said in a prepared statement. In all, the planned renovations are expected to cost around $3.8 million.

“Brookfield, the seller, has done a wonderful job of running the asset, however the pending closing of one of the anchor retailers provides an exciting opportunity to rethink the four-story retail section of this project,” Richerson said in the release.

Giovanni Cordoves, vice president of asset management at KBS Capital Advisors, told Commercial Property Executive that the plan is to create a large block of open office on the third and fourth floors of the retail portion of the project.

“Although it could be built out as a more traditional office space and multi-tenant, it will likely attract large open floor plan users who are looking for a unique urban setting, with more visibility and exposure than your typical office space,” he said. “The proximity to the streetscape coupled with a Nicollet Mall address, provides an urban vibrancy at what should be a very competitive rental rate. Based on our market research, we anticipate that this 50,000- to 60,000 square feet will be the largest available contiguous block of office space on Nicollet Mall.”

Cordoves added that the goal for future retail tenants is “to create a tenant mix that caters to the office tenants of RBC Plaza and the general downtown office population.” He said the plan would include fast casual restaurants, white tablecloth dining and service retail offerings.

Cordoves is the REIT’s advisor who will oversee management of the property. KBS has hired Cushman & Wakefield/Northmarq to manage and lease the asset. Sonja Dusil will be in charge of leasing and Theresa Elveru will lead the property management team.

Brookfield was represented in the deal by Tom O’Brian and Terry Kingston of Cushman & Wakefield/Northmarq and Mike Winn and Tom Richey of Cushman & Wakefield/Denver.

Late last year, Brookfield sold another of its Minneapolis assets – the Minneapolis City Center at 33 South 6th Street – to Shorenstein Properties L.LC. for $202.5 million. The 50-story mixed-use complex is located near the RBC Plaza. It occupies a block bounded by Nicollet Mall, Hennepin Avenue and 6th and 7th streets. That 1.6 million-square-foot property also contained four stories of retail along with 1.1 million square feet of Class A office space. Brookfield stated in a Nov. 20, 2012, news release that it had netted approximately $106 million in the sale of the non-core asset. Brookfield, based in Toronto, has been focusing most of its efforts on New York City, Washington, D.C., Houston, Los Angeles, Denver, Boston and Seattle.

Companies affiliated with KBS already own two other properties in the greater Minneapolis area: the 288,458-square-foot Tower at Carlson in Minnetonka, Minn., and Watertower Apartments, a 228-unit, mixed-use apartment community in Eden Prairie, Minn.

For KBS REIT II, its plan to convert part of the RBC Plaza’s retail area into Class A office space is probably a wise move. The Twin Cities office market, which includes St. Paul, Minn., is “in the best shape since 2007,” according to a report in the January edition of The Compass published by Cushman & Wakefield/Northmarq. The report notes that the office market posted nearly 1 million square feet of positive absorption in 2012 and “is poised for accelerated growth in 2013.” With an overall vacancy of 9.7 percent for Class A office space and “few options for large space users” in the Minneapolis CBD last year, the CRE services firm expects rents to rise this year.