Stay in the Loop

Arctic Cat said it would close its North Loop office by the end of the year after having moved in in early 2016. The decision to leave came after Providence, Rhode Island, defense contractor Textron Inc. bought Arctic Cat in a $247 million deal in January. (File photo: Bill Klotz)

The hip North Loop of Minneapolis isn’t used to getting the cold shoulder from office tenants.

Last month, snowmobile maker Arctic Cat said it would close its corporate offices in the 109-year-old Western Container Building at 500 N. Third St. by the end of the year after its new owner decided to consolidate staff elsewhere. It was a rare move by an office tenant in a trendy area that has seen an average office vacancy rate of 9 percent since the start of 2015, according to the Minneapolis office of CBRE.

More of the open, creative office space for which the North Loop is known is planned, and new leases are eating up recently opened projects. But blocks of office space being renovated in downtown Minneapolis to offer a similar vibe to the converted warehouses in North Loop could make for more competition.

The North Loop has seen the office vacancy rate spike from 7.6 percent last fall to 16.5 percent in the first quarter of this year. Much of that comes from 310,000 square feet of new space opening, including 224,000 square feet delivered late last year in the new T3 building at 323 Washington Ave. N., according to CBRE. Another 300,000 square feet in new or renovated office space is planned.

Arctic Cat is only the third office tenant to leave the North Loop since 2013, according to a preview of a new study of office tenant migration by the Minneapolis office of CBRE. The study looks at more than two-dozen office buildings in the North Loop with 30,000 square feet of space or more.

The study found that 19 new office tenants moved into the North Loop between 2013 and the end of 2016. The three that have moved out or will move out are Arctic Cat, Eden Prairie-based product designer and engineer Logic PD, and Wayzata-based consultant NightOwl Discovery.

Arctic Cat, the most recent departure, told 60 corporate office employees it would close its North Loop office by the end of the year. Arctic Cat leases the entire 55,000-square-foot Western Container Building, having moved in in early 2016. The decision to leave came after Providence, Rhode Island, defense contractor Textron Inc. bought Arctic Cat in a $247 million deal in January. Workers will move to Arctic Cat’s St. Cloud location or other facilities within the company, said Textron spokesman Brandon Haddock.

Textron and Arctic Cat plan to sublet the space or find a new tenant to lease the building. The property is owned by Minneapolis-based Bloomington Investments, an entity with the same address as developer Ned Abdul and Swervo Development. Abdul did not respond to a request to comment on the loss of Arctic Cat.

Even with the latest departure, the North Loop is seeing many more office users moving in, said Allyn Thorpe, a CBRE research analyst. During CBRE’s three-year tenant migration study, new tenants filled more than 600,000 square feet in the North Loop. CBRE tracks about 30 buildings in the submarket totaling 3.68 million square feet. The study also includes single-tenant office buildings.

Tenants have signed leases for some of the recently opened office space in North Loop, but not all of it is full. CBRE does not list space as occupied until a tenant actually moves in, Thorpe said. That statistical lag has kept the vacancy rate from dropping back down into the single digits.

The space will fill, said David Frank, the city of Minneapolis’ director of economic policy and development and the former president of the North Loop Neighborhood Association.

“I believe that the North Loop continues to be a desirable location for office tenants, for office developers, and the other kinds of development happening in the North Loop,” he said in an interview. “From a developer’s standpoint, we think the market is strong and will continue to be strong.”

Several developers are planning to build new office buildings or add space in the North Loop, including Minneapolis-based United Properties with a proposed 10-story project at 729 Washington Ave. N. Minneapolis-based Schafer Richardson has proposed renovating and adding onto the Zuccaro’s Produce building at 1000 Third St. N. to bring 68,000 square feet of multitenant office space to the market.

The newest office concept is a five-story, mixed-use office building from Minneapolis developer Howard Bergerud at 121 First St. N. That project will bring more than 44,000 square feet of office space to the market.

Some of the new properties could have trouble filling quickly, said Jim Vos, a principal with the tenant representation company Cresa in Minneapolis. North Loop locations near light rail transit lines are popular with office users that want employees to use public transportation to get to work. Projects that are farther away from LRT stations, such as 729 Washington Ave. N. – which rely more heavily on employees who drive to work – are less so, he said. United Properties plans to build a 400-stall parking structure next to its new offices.

The new North Loop buildings also face competition from renovations at the Baker Center at 733 Marquette Ave. S., the TCF Bank building at 801 Marquette Ave. S., and the Dayton’s project at 700 Nicollet Mall. The three projects, all seeking creative office users, will bring more than 1.84 million square feet of office space to market, Finance & Commerce has reported.

Those downtown buildings are close to transit and connected to the Minneapolis skyway system, features that resonate with future tenants and could lure them away from North Loop offerings, Vos said.

“I don’t believe all those new buildings [in North Loop] will get built and filled up in the next 24 months,” he said in an interview.

Conclusions from the CBRE study found that eight of the 19 tenants moving into the North Loop over the study period came from the Interstate 394 corridor. Tenants largely came from three industries. Nine tenants are software companies, three are nonprofits, and three are marketing and public relations agencies. The study will be published this summer.