Reviving downtown Minneapolis by filling up old buildings

A major hotelier has just given downtown Minneapolis a big vote of confidence.

U.S. Hotel & Resort Management, a Sioux Falls, S.D., company, finalized a deal to pay $2.7 million for the Manufacturer’s Building at 1st Avenue North and 4th Street. The company – OK, it’s not exactly Marriott, but it owns 30 other properties across the nation — plans is to convert it into an “upscale boutique hotel” with a rooftop garden and a fancy-pants restaurant. 

The company failed to return phone calls, so I have no idea how much the renovation will cost nor how many rooms it will produce. But who cares? Almost anything is better than another empty old building. In recent years, the place, which is also called Nate’s Clothing Building, was going to be the site of offices, then luxury apartments. But the projects went nowhere.

Minneapolis’ downtown has been showing some signs of revival in the last year or so. According to the Downtown Council, employment has rebounded to 160,000, only a little less than it was five years ago; and office vacancies dropped to 9.1 percent. This last weekend, the streets were packed with lively crowds, mostly pre-teens stricken with Bieber Fever — and their parents who looked stricken, probably from financing the tickets.

But the announced departure of Neiman Marcus, the closing of Block E, the emptiness of City Center and the shut-down of Chevy’s Fresh Mexican restaurant and Tom Pham’s Wondrous Azian Kitchen cast doubt, at least in my mind, that the central business district is making a comeback — a wobbly one, like the economy in general.

Demand for hotel rooms

The hotel business, while not exactly buoyant, isn’t horrible — at least not across the metro. According to Jan Freitag, senior vice president of STR, a travel research service in Hendersonville, Tenn., the Twin Cities, like many other metropolitan areas, has continued to lose hotel rooms — this year, in our case, 0.9 percent of them.

Unfortunately, demand for rooms dropped too, by about 1.3 percent. The vacancy rate on average in 2012 was 66 percent, which is about as well as metro hotels have done going back to 2006. In the summer months, Twin Cities occupancy rates spiked to nearly 80 percent, which goes to show you that if this global warming thing ever takes hold, we might have a really hopping tourist scene year-round.

Does downtown Minneapolis need more hotel rooms? Freitag laughed. “If you’re developing a hotel, you’ll say, ‘It’s hot, we’ve got to have more rooms.’ If you’ve already got a hotel, you’re going to say there are too many.”

In a press release Tom Biegler, U.S. Hotel’s chief operating officer, said that the future hotel’s proximity to Target Field, Target Center and the light-rail line makes it a promising site. Let’s hope he’s right. To have another downtown building remain empty would be depressing, to say the least. 

Mixed uses or mixed vacancies?

Rental housing has become the hot commodity in new construction. In September, according to the Department of Commerce, there was a 25 percent increase in apartment construction. One explanation for the boom: increased demand from young people who perhaps don’t want to pile mortgage debts on top of their student-loan debts. More important, perhaps, is that rental housing is just about the only thing banks are financing these days.  In fact, you have to wonder whether we’ll all be reading about the apartment glut five years from now.

Now, however, the condo market could get a little boost. The Federal Housing Administration last month relaxed a regulation that restricted mixed-use housing. Previously, homebuyers could get an FHA-backed loan for a condo only if commercial space (for offices and stores) didn’t exceed 25 percent of the total square footage. The new rule allows commercial use for up to 35 percent; and developers who apply for an exemption may qualify for up to 50 percent. 

The old regulation apparently dates from the 1930s when mixed-use buildings were considered high-risk. That seems like a beknighted notion; allowing mixed uses, in theory at least, should lower an owner’s exposure to a collapse in the market. If the housing units don’t sell, s/he could convert some space to another use. Of course, in the recent Great Recession, everything went to hell all at once, housing, retail and office space, so mixed use wasn’t much help.

Boosting the allowed amount of commercial space means that developers (and current condo owners) have a much bigger market from which to draw buyers. While lenders generally require a 20 percent down payment, FHA loans allow buyers to finance with as little as 3.5 percent down. Currently, the rate for an FHA loan from Wells Fargo is 3.875 percent with an APR (that includes fees) of 4.004 percent. Existing condo developments that previously couldn’t qualify for FHA financing will have to apply for certification;  unless the entire project is qualified, no one unit can receive FHA financing. The new standard also allows such mortgages to be resold in the secondary market; so presumably banks will be more willing to make the loans. 

Functional neighborhoods

Beyond broadening the market, there’s another reason to encourage more commercial use in residential buildings: to make more functional neighborhoods where people can walk to the grocery, the dry cleaners, a coffee shop, a dentist’s office or maybe even to work.

The results of mixed-use development around town, however, have been somewhat — you know — mixed. In my travels through the Twin Cities, I’ve seen a lot of empty storefronts. My own condo building had a vacancy for over a year. Finally, a dress shop opened, but I am afraid it’s barely hanging on. And the grocery store is almost always unpopulated. I checked on another building, the Minneapolis Grand, a rental development, on Chicago; it is brand-new but the commercial space is completely empty. The Winnipeg on Rice Street in St. Paul, as far as I can tell, has only a grocery.

“Mixed use buildings are gradually filling up,” says David Phillips, a Minneapolis architect and zoning expert.

One problem, he adds, is the usual hobgoblin — parking. Sometimes there is simply not enough; other buildings don’t always make it clear where their parking is. “They are not inviting to customers,” he adds.

Mixed-use apartment or condo developments have a greater shot at succeeding, he believes, along or near light-rail corridors. However, until those are built out, he says, “people still need parking.”