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Why MSP's Amenity-Rich Downtowns are Prime Spots for Relocating Businesses

Downtown St. Paul

Three Deep Marketing's Staff

One of Cray's products

Arctic Cat's Chris Metz

Minneapolis’ North Loop is one of MSP’s hippest neighborhoods—a haven for techies, artists and upwardly mobile young professionals. Newcomers are more likely to spend Saturday afternoons sampling Nordic appetizers at the Bachelor Farmer or perusing high-end handmade fashions at Filson and Shinola than speeding through the Northwoods on a Minnesota-made ATV or snowmobile.
So why is Arctic Cat, a (soon-to-be formerly) Plymouth-based power-sports manufacturer, packing up its suburban headquarters and relocating to a 107-year-old warehouse space just around the corner from Target Field?
“People are realizing that for us to be able to grow and compete on a global basis, we need a more global footprint that allows us to attract diverse business, and a diverse workforce,” CEO Christopher Metz told the Star Tribune recently. “We think this is a step in that direction.”
Beginning in mid-2016, Arctic Cat plans to bring up to 200 employees—product developers, creatives and senior leadership—to its new 55,000-square-foot location. The company is completely renovating the structure (at a total cost of $5 to $7 million, according to the Strib) and adding two glass-heavy top floors, bringing the total floor count to six.
The goal is to remake the building in Arctic Cat’s image, even as Arctic Cat reinvents that image. Though Arctic Cat’s core demographic is more NRA than Mia, there’s still nothing like a cosmopolitan address to draw the sorts of talented young professionals who might otherwise flock to Target, Field Nation or Olson.
Arctic Cat’s reasoning resonates with a growing cohort of corporations that, until now, have been perfectly content with rural or suburban perches. Though precise motivations vary, most see a clear link between location and competitiveness: Suburban office parks and small-town campuses might be cheaper in the short term, but MSP’s increasingly amenity-rich downtowns offer irresistible quality-of-life benefits that help firms attract and retain top talent.
Here’s a closer look at a few of the companies moving to the core downtowns of Minneapolis and St. Paul, what’s drawing them, and why they could be on the leading edge of a much bigger wave of downtown relocations.
Not just the usual suspects
About 10 miles from the North Loop, digital marketing firm Three Deep Marketing is celebrating more than half a decade in St. Paul’s Lowertown district. Originally located in a North St. Paul office park, the growing firm began looking for larger digs in the late naughts.
“We looked at office parks in Roseville and along the 280-35W office cluster [on the outskirts of Minneapolis],” says VP of sales Dan Derosier. “We didn’t need a gleaming, high-rent tower, just more space.”
The team took a close look at downtown St. Paul. Rents were collapsing in the aftermath of the global financial crisis, but “downtown still would have been tens of thousands of dollars more expensive annually,” says Derosier.
So Three Deep approached St. Paul and asked, basically, “What can you do for us?” The answer, it turned out, was “a lot.” The city gave Three Deep a grant out of its Strategic Investment Fund, created to attract businesses downtown, on a promise that the then-25-person company would maintain or increase staffing levels over the subsequent five years.
“We now have nearly 50 employees,” says Derosier, “all of whom eat lunch downtown every day. That’s a good deal for the city.”
“Literally none of our employees had worked downtown previously,” he adds, “and they just love it: the skyway access, restaurant options, bank branches nearby, shops in Lowertown, public transit and everything else happening here.”
Three Deep is still growing, so it’s moving again—but not as far this time. According to Derosier, the company is finalizing the purchase of a “commercial condo” in the renovated Market House building.
“Our intention is to make a permanent home in downtown St. Paul,” Derosier says. “We can scale to 85 employees in Market House. If we grow beyond that, we’ll probably open satellite offices in other cities” rather than find even bigger digs in MSP.”
Though Derosier is quick to point out that Three Deep is “more metrics-driven than some other marketing firms,” the company undeniably plays in a creative space, and is therefore a natural fit for Lowertown’s creative, hip, increasingly affluent denizens.
Three Deep is part of a “creative migration to downtown St. Paul, joined by the likes of software marketing/loyalty firm Augeo (recently relocated from Midway) and fast-growing workforce software developer When I Work (currently located in the downtown-adjacent West Side Flats, but shopping for additional space in the heart of downtown).
On the other hand, many recently relocated firms operate in sectors perceived (fairly or not) as stodgy or boring.
Take legal education publisher West Academic, a Thomson Reuters spinoff that in 2013 moved to downtown St. Paul from its former parent’s sprawling Eagan campus. Though legal publishing is somewhat insulated from the macro forces that periodically rock other publishing sectors, the firm sought to build a young, innovative workforce capable of meeting whatever challenges lay ahead.
“We knew moving to St. Paul would help us recruit talented people,” says president & CEO Chris Parton. “People want to work—and be—in city centers again.”
Also a factor in West Academic’s move: the company’s historical ties to downtown St. Paul. As an original component of century-old Thomson Reuters, generations of West employees lived, worked and played in the city’s core.
“Emotionally, we wanted to be in St. Paul,” says Parton.
The transition was smooth. West’s workers enthusiastically supported the downtown move, Parton says, and “the city and Chamber of Commerce could not have been more accommodating.” The company received an $80,000 Strategic Investment Fund grant based on its then-55-person workforce. Two years hence, West’s workforce is 85 strong and growing.
Most of West’s grant went toward a more spacious, open office. The company also holds, and raffles to employees, St. Paul Saints season tickets. According to Parton, the central location is a net positive for West’s far-flung employees. In Eagan, just one person took the bus on a daily basis; today, about a quarter of the company bikes, buses or takes the train to work.
Another recent downtown St. Paul arrival: Cray Inc., a Seattle-based supercomputer and digital storage firm. For years, the company happily ran a major satellite campus in suburban Mendota Heights. But in 2009, the powers-that-be decided that a downtown move was Cray’s ticket to a competitive, millennial-friendly future.
So the firm’s 225 employees picked up and moved to Lowertown’s Galtier Plaza, which was rechristened Cray Plaza in its honor. Cray got a $400,000 Strategic Investment Fund grant in exchange for a promise to keep at least 200 employees in town for five years; a Pioneer Press profile found the firm’s employees loving their new digs a year on. Though most of the work was completed before the move, Cray’s St. Paul engineers put the finishing touches on the XT5 “Jaguar,” the world’s fastest supercomputer.
Amenities, incentives, fulfillment of the live-work-play promise
The allure of a vibrant downtown is to some extent intuitive. Many folks—young professionals, empty nesters and retirees alike—crave action, excitement, options. But what does that look like on the ground in MSP’s twin downtowns?
In Minneapolis, public-private partnerships shine. Since 2009, the nonprofit Downtown Improvement District (DID) has done much to make the city’s core friendlier, safer and more accessible: DID’s green- or blue-clad “ambassadors” provide invaluable advice for visitors and residents alike; the organization is responsible for much of the district’s new greenery, too.
Meanwhile, the Minneapolis Downtown Council (MDC), whose member list is a who’s-who of downtown-based businesses, continues to build momentum around its signature Downtown 2025 Plan.  Both DID and MDC are member-funded and operate in close cooperation with the city of Minneapolis, which runs its own booster programs—notably Meet Minneapolis, the city’s prolific business outreach and tourism arm.
And the past decade has seen a run of high-profile “anchor” projects, designed to spur nearby development, that have thus far worked as intended: North Loop’s Target Field; Mill District’s Guthrie Theater; and Downtown East’s yet-unfinished U.S. Bank Stadium.
In St. Paul, the city’s government and Chamber of Commerce branch take the lead. Since 2009, the St. Paul Strategic Investment Fund has actually exceeded expectations, says Ellen Muller, manager of St. Paul Economic Development: Five recipients have created about 575 jobs between them to date, against a promised 390.
Muller and her team have long focused on “building a sense of place and supporting amenities that attract young people, entrepreneurs and long-term residents,” she says. Since the recession, bold new housing projects like Farmers Market Lofts and the Penfield, and the subsequent arrival of the Green Line, contributed to a sharp rise in the downtown population. Anchors like the St. Paul Saints’ CHS Field and collaborative spaces like COCO St. Paul draw local residents and outsiders alike well into the evening.
“You can predict with 98 percent accuracy when there’s a game on at CHS Field,” says St. Paul Chamber of Commerce president Matt Kramer, “because the streets are filled with pedestrians, local restaurants are full and there’s just a buzz in the air.”
More people, in turn, create new opportunities for local service providers and auxiliary businesses. Notable local restaurants and breweries like the Bulldog, Barrio and Bad Weather Brewing Company have opened St. Paul outposts or relocated entirely, complementing St. Paul originals like Tin Whiskers Brewing Company, Heartland Restaurant (previously relocated from St. Paul’s Mac-Groveland) and Cossetta Alimentari. The area now has a full-service grocery store: the Lunds & Byerlys in the Penfield.
“Business owners aren’t opening in downtown St. Paul because they’re bored or want a challenge,” says Kramer. “They’re opening here because there are actually more people downtown.”
St. Paul’s growing cohort of business owners won’t have to wait long to tap an even bigger pool of prospective customers. The long-awaited Macy’s redevelopment, complete with a rooftop practice facility for the Minnesota Wild, is gathering steam. The Custom House project is poised to inject energy into St. Paul’s high-end housing market next year; it’s fair to assume that many of its inhabitants will seek work within walking distance. Though the details are still sketchy, the ambitious River Balcony project could (literally) turn downtown St. Paul toward the Mississippi River by the end of the decade, boosting the city’s tourism bona fides.
Plenty of room to run
The commercial real estate market is notoriously tricky to predict, but recent occupancy trends suggest that the downtown shift isn’t simply anecdotal. Moreover, the numbers hint that the shift could have real staying power, barring external economic shocks or other unforeseen scenarios.
For starters, both downtowns saw positive absorption (increases in occupied office space) in the 12-month period ending in July. St. Paul’s absorption rate was particularly impressive, shooting up nearly 280,000 square feet in the second quarter alone (per DTZ, a Chicago-based research firm). Minneapolis’s absorption was more modest: just a tick over 10,000 square feet.
Downtown gains were nearly offset by negative absorption in the West/Northwest and Southwest suburban subregions, which collectively lost about 285,000 square feet of occupied space.
Despite the shift, there appears to be plenty of room for downtown growth, particularly in St. Paul. In Q2 2015, St. Paul’s CBD’s headline vacancy rate was 17.4 percent, compared to 14.2 percent for the MSP metro (including suburbs) overall.
With a CBD-wide vacancy rate north of 22 percent in Q2, St. Paul’s Class B office submarket appears particularly underutilized. Class B space isn’t as sought-after as Class A space, which typically has upscale finishes, state-of-the-art building systems and excellent accessibility. But Class B space is ideal for small firms and startups uninterested in (or unwilling to pay for) top-of-the-line square footage.
Higher vacancy rates often translate to lower rents or better lease terms, potentially powerful incentives for suburban and rural firms mulling downtown moves.
The densification trend
A not-unrelated trend toward intra-office “densification”—basically, allocating fewer square feet of office space for each employee—affects the commercial space calculus, too. Office designers “densify” by configuring cubes more efficiently, eliminating separate offices in favor of shared workspaces (a key perk for millennial workers, per Minneapolis-St. Paul Business Journal), and merging non-productive areas (such as break rooms) with productive space.
Last year, Twin Cities Business Magazine flagged densification as a key drag on the MSP region’s office market: According to the magazine’s real estate sources, contemporary guidelines allow as little as 175 square feet per employee, down from 225 to 250 square feet in the pre-digital age.
Since densification allows companies to literally do more with less, it can dampen demand for new space and hamper absorption. On the other hand, densification is cost-effective; at least in theory, it increases productivity per square foot. For firms relocating to expensive commercial markets, such as the North Loop and Minneapolis’ historic downtown business district, redesigning office floorplans for density may partially offset the one-off cost of the move and ease the pain of higher per-square-foot rents.
In other words, by reducing or eliminating the premium firms pay to relocate downtown, the densification trend could augur a long-term shift in the rural-suburban-urban commercial space calculus—especially given the other, non-financial benefits of a central location.
Sticking around for the long haul
Back in the North Loop, Arctic Cat is selling its move as more than a play for its fair share of the urban talent pool. The company’s new headquarters is merely the most visible prong of an ambitious long-term growth strategy.
CEO Metz is aiming to roughly double Arctic Cat’s revenues, to more than $1 billion, by 2020, and significantly grow the firm’s workforce during the same timeframe. Even as the company reinvents itself as MSP’s most urbane powersports manufacturer, it’s investing nearly $30 million to modernize manufacturing facilities in St. Cloud, in central Minnesota, and Thief River Falls in northwestern Minnesota.
Metz clearly hopes Arctic Cat’s plans pan out. Regardless, the company’s lease on the new space isn’t set to expire until the late 2020s. That means a couple hundred Arctic Cat employees will have a great view for the foreseeable future, and the North Loop’s ever-expanding business and real estate communities will have plenty of chances to sell them on downtown living.
Brian Martucci is The Line’s Innovation and Jobs News Editor.
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