For several years while it was in progress, the redevelopment of the former Dayton’s department store on Nicollet Mall was heralded as a game changer for downtown Minneapolis. Then it was finally ready to open its doors in early 2020, right as the COVID pandemic changed the ways people work, shop and spend their free time, and became a victim of unfortunate timing.

The $375 million Dayton’s Project recently landed its first permanent retail tenant, Gray Fox Coffee, but the rest of its skyway-connected retail space is deserted, except when it temporarily hosts an annual holiday market. Meanwhile, a 45,000 square-foot food hall curated by celebrity chef Andrew Zimmern remains in limbo.

“We have been asked by our client on the project to be pencils down for a while now,” Zimmern told Downtown Voices in a recent email.

Apparently, that directive has been in place for the past four years, as the Dayton’s Project has waited for daytime foot traffic to pick up downtown before it moves forward with the food hall.

Office leasing is starting to shift into gear throughout the 1.2 million square-foot property. Two high-profile tenants, fintech company Sezzle and marketing firm The Lacek Group, claimed a combined 35,000 square feet in 2023. Other tenants include accounting firm Ernst & Young, which was the first to open an office there in late 2021, and insurance company Prudential.

But about 80% of the office space throughout the 12-story building hasn't been leased, according to an early 2024 estimate by CoStar Group, a real estate data firm. That’s nearly four times emptier than the average Twin Cities office building when compared to the 21% vacancy rate determined by commercial real estate firm JLL.

Downtown Voices’ attempts to reach leasing agents at The Telos Group, CBRE, and Transwestern were unsuccessful.

Is the Dayton’s Project in trouble?

The leasing challenges come at a critical time for the Dayton’s Project.

Financial troubles began to mount in 2021, as lead developer 601W Companies was entangled in a legal battle with hedge fund lender Monarch Alternative Capital, which purchased a $78 million loan on the Dayton’s Project from another investor and quickly claimed the loan was in default since 601W had failed to lease 20% of the building’s office space. To pay off the debt with Monarch, 601W secured $208 million in new financing, but those loans come due this August, according to mortgage documents recorded with Hennepin County.

It’s unclear what will happen after the upcoming deadline, and whether New York-based 601W is on track to meet the leasing milestones it agreed to in 2021, including 20% office occupancy. According to an October 2021 report by Twin Cities Business, new loan documents revealed that 601W committed to leasing 400,000 square feet in the Dayton’s Project by November 2023 and the remaining 525,000 square feet by October 2024, with two years of breathing room.

Either way, local commercial real estate attorney Brad Williams of Dorsey & Whitney thinks leasing hasn’t picked up enough to satisfy the new mortgage lender.

“I would suspect that the office leasing that has occurred to date has not gotten [the Dayton’s Project] to where the lender would like,” he said.

In that case, the mortgage lender could initiate foreclosure proceedings when the loan matures. But, assuming the loan agreement allows for an extension, the lender is more likely to go that route at first.

“If I had to guess, this property has a greater likelihood of a loan extension than other downtown properties” in financial distress, Williams said. That includes a number of properties that recently hit the auction block, including LaSalle Plaza, 330 South Second St., and the former home of Seven Steakhouse and Sushi.

Few mortgage lenders have the market knowledge or risk appetite to take over a largely vacant property “that is so far from being stabilized,” Williams said. In this case, he suspects the lender will leave it to 601W and leasing partners CBRE, Transwestern, and The Telos Group, despite little to show for their years of effort.

“In this situation, a lender would rather let the people closest to the project…draw on their experience and expertise to finish the job, and hope it’ll just take more time,” Williams said.

He thinks downtown’s prolonged real estate slump could also work in 601W’s favor. With recent downtown property auctions and sales suggesting the market has farther to fall, and newly-built office buildings like RBC Gateway and North Loop Green absorbing demand for high-quality office space, the property is unlikely to fare well in an open sale at this time. Williams said that could give the Dayton’s Project’s leasing teams more time to get its offices and storefronts filled.

In the meantime, Williams thinks recent leasing activity in the Dayton’s Project and other downtown office buildings offer some encouragement that the development’s prospects will improve.

“I don’t see it as a ‘throwing good money after bad’ situation yet,” he said.

A “canary in the coal mine” for downtown

The situation Williams described might never come to pass. In an interview with Downtown Voices, Downtown Council President and CEO Adam Duininck suggested that the City and State could step up to prevent the Dayton’s Project’s failure in a worst-case scenario. 

“Rest assured, given the nature of the building and its importance to downtown, I’m confident that people will understand the importance that this project is supported,” he said. 

Due to the timing of the Dayton’s Project opening, Duininck considers it “a bit of a canary in the coal mine for the downtown leasing market.” He believes continued momentum for the Dayton’s Project would reinforce the narrative that downtown Minneapolis is on the rebound.

Despite its prime location near the heart of the skyway system, the Dayton’s Project “really has no retail tenants to speak of,” Williams said, likely because would-be tenants are holding out for higher office occupancy in the building.

The Dayton’s Project was set in motion in 2017 when 601W purchased the historic building for $59 million. Initial plans for the development’s 200,000-square-foot retail component called for the basement-level food hall, as well as an upscale restaurant in the former JB Hudson Jewelers space, which hasn’t materialized either.

Gray Fox Coffee plans to open a 2,300-square foot cafe on the skyway level of the Dayton’s Project in August. But considering that footprint accounts for only 1% of the building’s total retail component, it will barely make a dent in vacancy throughout the first two floors.

Given the limited progress on the retail front and the broader challenges facing downtown retail, public support might be needed to move things along. Duininck singled out the skyway storefronts in the Dayton’s Project as an “urgent” concern for the Downtown Council’s members.

Earlier this year, Dayton’s Project General Manager Kristin Longhenry told CoStar News that a new leasing brokerage could be announced “in late January” to take over from Mid-America Real Estate Group, but it’s not clear if that has occurred yet or if members of the office leasing team are also involved in retail leasing.

Duininck said the Minneapolis Renaissance Coalition is working with 601W’s local representative, Hightower Initiatives, on a statewide proposal to revitalize ground-floor retail in downtown Minneapolis, including in the Dayton’s Project. He said the bill aims to reduce per-square-foot costs for retail tenants, and if it doesn’t succeed in the Minnesota Legislature, it could be modified for the Minneapolis City Council.

Despite all the uncertainty, Zimmern–the highest-profile player associated with the Dayton’s Project so far–is keeping the faith.

“We can’t wait to get back in there and build out the best food hall in the Midwest,” he told Downtown Voices.