MREJ August 2020 by REjournals

October 1st at

Rejournals.com/mnawards

Minnesota Commercial Real Estate Forecast Summit: Change the only constant in office market By Dan Rafter, Editor

he top CRE pros in the Minneapolis/St. Paul market headed to the Radisson Blu Mall of America hotel in Bloomington, Minnesota, earlier this month for Minnesota Real Estate Journals’ Commercial Real Estate Forecast Summit. And, yes, this was an unusual summit. Some speakers and attendees viewed the event virtually. Others attend-

ed in person, wearing masks and social distancing from each other. The summit itself focused on COVID-19 and its effect on the Minneapolis/St. Paul commercial real estate market. This isn’t surprising: The pandemic has upended what was a soaring CRE market heading into 2020.

But the takeaway from the conference was a positive one. Yes, Minnesota’s CRE market faces challenges today thanks to the pandemic and the resulting economic disruption. But there is also hope. The CRE market in St. Paul and Minneapolis was booming before the pandemic hit. Summit speakers said that the strength of the market will help it withstand the COVID-related challenges it will now face. FORECAST (continued on page 14)

A big retail deal during COVID-19? NAI Legacy meets the challenge By Dan Rafter, Editor

inneapolis’ NAI Legacy is proving that big deals, and big retail deals in particular, can get done today, even in the age of COVID19.

The Minneapolis brokerage and property management company yesterday announced that it has acquired the Restoration Hardware| Minneapolis – Gallery property located in Edina, Minnesota. The RH store, one of the crown jewels of the city of Edina’s Greater Southdale District Plan, opened in 2019 at 6801

France Ave. South. The 58,000-square-foot three-story RH Gallery features a wine vault, showrooms filled with the brand’s furniture and a rooftop restaurant. 6801 France DST, a Delaware Statutory Trust controlled by NAI Legacy, acquired the property directly from RH in a sale and leaseback transaction that included a 20year absolute net lease. The combination of the store’s quality and its desirable location made the acquisition too good to pass up, said

Michael Houge, managing partner of NAI Legacy and head of its net-leased division. This didn’t mean, though, that NAI Legacy officials didn’t worry about closing such a big deal during a pandemic that has decimated the retail industry. Houge said that NAI Legacy was ready to close this deal in March. Then COVID-19 hit. This caused NAI Legacy to pause the transaction. DEALS (continued on page 16)

AU G U S T 2 0 2 0

O N

M I N N E S O TA R E A L E S TAT E J O U R NA L

AUGUST 2020

MINNESOTA REAL ESTATE JOURNAL

BERKADIA POLL OFFERS A MIX OF HOPE AND REALITY: Berkadia’s 2020

Mid-Year Powerhouse Poll gives some indication of when CRE pros expect the market to regain its footing. Poll respondents said that while the CRE industry is surviving the pandemic better than they first expected, transaction activity probably won’t return to at least a version of normal until sometime in 2021.

10 MINNEAPOLIS REMAINS A TECH HUB

: Minneapolis ranked as the top Midwest city in CBRE’s Scoring Tech Talent report, which ranks 50 North American markets according to their ability to attract and grow tech talent.

12 INDUSTRIAL STILL CHUGGING ALONG:

A new CBRE survey finds that the industrial market remains strong in Minnesota, despite COVID-19. What is this industry’s secret?

MEETING THE COVID CHALLENGES IN MINNESOTA: The top CRE pros in

the Minneapolis/St. Paul market headed to the Radisson Blu Mall of America hotel in Bloomington earlier this month for Minnesota Real Estate Journals’ Commercial Real Estate Forecast Summit. And, yes, the summit focused on the challenges brought by COVID 19. But the takeaway from the conference was a positive one. Yes, Minnesota’s CRE market faces challenges today thanks to the pandemic and the resulting economic disruption. But there is also hope.

NAI LEGACY STILL GETTING DEALS DONE, EVEN IN THE PANDEMIC:

REASONS FOR HOPE? THEY’RE STILL OUT THERE: It can be hard to

With its purchase of the Restoration Hardware| Minneapolis – Gallery in Edina, Minneapolis’ NAI Legacy is proving that big deals, and big retail deals in particular, can get done today, even in the age of COVID-19. find hope amid the mass of headlines focusing on COVID outbursts, debate over how or if to reopen schools and threats from governors to force bars and restaurants to shut down again. But hope is out there in the commercial real estate industry.

17 NAIOP SURVEY FINDS THAT NORMALCY IS STILL A WAYS AWAY:

Commercial real estate professionals aren’t hoping for miracles these days. A recent survey by NAIOP found that plenty of the association’s members expect COVID-19 to impact their businesses for a long time.

18 A RETURN TO THE OFFICE? THAT MIGHT TAKE A WHILE:

Joe Learner, vice chairman, director and Midwest Region Lead for Savills, knows the office market. And he knows that this market is on the verge of big changes thanks to the COVID-19 pandemic. But what are those changes? What will offices look like in the future as the world continues to work through the pandemic?

Minnesota Real Estate Journal (ISSN 08932255) Copyright © 2020 by the Minnesota Real Estate Journal is published bi-monthly for $85 a year by Jeff Johnson, 7767 Elm Creek Boulevard, Suite 210, Maple Grove, MN 55369. Monthly Business and Editorial Offices: 7767 Elm Creek Boulevard, Suite 210, Maple Grove, MN 55369 Accounting and Circulation Offices: Jeff Johnson, 7767 Elm Creek Boulevard, Suite 210, Maple Grove, MN 55369. Call 952-885-0815 to subscribe. For more information call: 952-885-0815. Periodical postage paid at Maple Grove and additional mailing offices. POSTMASTER: Send address changes to Minnesota Real Estate Journal, 7767 Elm Creek Boulevard, Suite 210, Maple Grove, MN 55369 ©2020 Real Estate Publishing Corporation. No part of this publication may be reproduced without the written permission of the publisher.

WHY WASHINGTON COUNTY?

LOCATION ADVANTAGES

• 15-minutes from the MSP International Airport • 10-minutes to downtown St. Paul with lots of land • 4-Hours to Madison & Des Moines, 6-Hours to Chicago • Centrally located within the US. Easy access to Canada and the rest of the United States

CONTACT

Christopher Eng Washington County CDA Director of Economic Development 7645 Currell Boulevard Woodbury, MN 55125 (651) 202-2814 ChrisE@washingtoncountycda.org

For more information, visit www.EastMetroMSP.org

M I N N E S O TA R E A L E S TAT E J O U R NA L

AU G U S T 2 0 2 0

President | Publisher Jeff Johnson jeff.johnson@rejournals.com Vice President | Publisher Jay Kodytek jay.kodytek@rejournals.com Chief Financial Officer Todd Phillips todd.phillips@rejournals.com Consulting Editor Dr. Tom Musil tamusil@stthomas.edu Art Director | Graphic Designer Alan Davis alan.davis@rejournals.com Conference Coodinator | CE Specialist Katie Bidinger katie.bidinger@rejournals.com

7767 Elm Creek Boulevard, Suite 210 Maple Grove, MN 55369 For information call 952-885-0815

EDITORIAL ADVISORY BOARD JOHN ALLEN JEFF EATON MARK EVENSON PATRICIA GNETZ TOM GUMP CHAD JOHNSON BILL WARDWELL JEFFREY LAFAVRE WADE LAU JIM LOCKHART DUANE LUND CLINT MILLER DR. THOMAS MUSIL WHITNEY PEYTON MIKE SALMEN

Reasons for hope in the age of COVID-19? They still exist in the commercial real estate business By Dan Rafter, Editor

t’s now been more than five months since the COVID-19 pandemic forced governors across the country to issue shelter-in-place orders and shut down restaurants, businesses, bars and theaters. Since then, several states have reopened their economies and others are shutting them back down in response to increases in COVID-19 cases. It can be hard to find hope amid the mass of headlines focusing on COVID outbursts, debate over how or if to reopen schools in the fall and threats from governors to force bars and restaurants to shut down again. But hope is out there in the commercial real estate industry. While it’s true that many sectors, including hospitality, entertainment and retail, have been decimated by the pandemic and business shutdowns, it’s also true that other sectors remain strong. Some have even seen an increase in demand.

@Rejournals

-- which includes Welliver, Ryan Watts, Sonja Dusil, Bentley Smith and Tom Holtz -- had closed three industrial sale transactions during the 30 days before this phone interview , transactions that totaled more than 500,000 square feet and more than $48 million in volume.

The reason? An increase in online shopping has only spurred demand for more warehouses across the country. Many consumers are still worried about shopping in brick-and-mortar stores, so they’re ordering more products online.

This begs the question: When the COVID19 pandemic first swept through the country and states began shutting down businesses and ordering non-essential workers home, was Welliver worried that the Minneapolis-area industrial market would take a bigger hit?

Judd Welliver, executive vice president in the Minneapolis office of CBRE, said that the industrial market in the Minneapolis/ St. Paul area is an example, with activity in this sector remaining strong throughout the pandemic.

This has been a boon in the Twin Cities region even before the COVID-19 pandemic hit. “One of the key drivers for Minneapolis is that we are still in the early innings from a distribution standpoint,” Welliver said. “We are still undersupplied relative to the demand.”

There’s also hope on the vaccine front. A coronavirus vaccine made by biotech firm Moderna is the first tested in humans and has shown promise in early tests. In early trials, it has provoked what experts are calling a promising immune response against the virus.

The Minneapolis area also boasts a diverse set of businesses, with no single industry making up more than 20 percent of the market. This helps the area weather a slowdown in any one particular industry; there are plenty of other industries in the region that can help boost those that are sagging.

And Moderna is far from the only entrant in the vaccine sweepstakes. Several companies are developing their own vaccines, all in an effort to control the COVID-19 pandemic.

At the same time, developers in the Minneapolis/St. Paul area have remained cautious when planning new industrial projects. This means there hasn’t been an oversupply of commercial space in the area.

There are reasons to be hopeful, then. And two commercial real estate professionals interviewed for this story say they have found plenty of reasons to be optimistic even today when gloomy headlines dominate.

“We never overbuilt,” Welliver said. “Our demand has outpaced our supply during the last eight years coming out of the Great Recession. When COVID hit, our industrial market stayed strong. Investors have recognized its strength. They have looked at Minnesota as a very strong, stable market to invest in.

Why? They are working in CRE markets that are holding steady and are poised for big rebounds. www.rejournals.com

INDUSTRIAL STILL A STALWART

An example of the busy market? The CBRE Minneapolis Institutional Properties team

“I was not worried about the strength of the market,” Welliver said. “My bigger concern was whether pricing would hold up and would the debt markets support commercial real estate. For the first 30 days of this, the debt markets kind of froze up. There wasn’t a lot of clarity out there. There were concerns about deals. Where they going to proceed and get done? But since then, the debt markets have loosened up and have had a preference toward industrial. And pricing has held strong with it. Liquidity and pricing have both held up.” Like other commercial real estate professionals, Welliver has adjusted to the temporary new normal brought about by the pandemic. He has been working at home since the middle of March. He’s now learned how to be productive from his home office. “For the first 30 days I was pulling my hair out and going nuts,” Welliver said. “But I’ve adjusted, like everyone else. Today, I am very busy. And I’m busy working on execution, versus during the first 30 days. Back then, I was busy putting out fires and talking through how we would deal with the challenges. Now I am working on execution and advising clients. I’ve adjusted HOPE (continued on page 8)

WHEN THE WORLD TURNS UPSIDE DOWN,

IT’S TIME TO REDRAW THE MAP

In times of disruption, tried-and-true solutions won’t do. You need more — more innovation, broader perspective, keener foresight. We’ve learned this in our three decades of service to the real estate community. Through ups and downs. In good times and hard times. We’re ready to put our experience to the test again and help you find the way forward.

Visit us at: MMBLawFirm.com

M I N N E S O TA R E A L E S TAT E J O U R NA L

AU G U S T 2 0 2 0

A return to normal? That might take a while, according to Berkadia poll By Dan Rafter, Editor

he COVID-19 pandemic has thrown the world of commercial real estate into disarray. Industrial is thriving and multifamily is holding steady. But the other sectors are facing challenges, with retail, hospitality and entertainment especially struggling. The question, then, is a big one: When will the commercial real estate industry return to at least something approaching normal? Berkadia’s 2020 Mid-Year Powerhouse Poll gives some indication of when CRE pros expect the market to regain its footing. Poll respondents said that while the CRE industry is surviving the pandemic better than they first expected, transaction activity probably won’t return to at least a version of normal until sometime in 2021. The poll, conducted in early July, collected insights from nearly 150 Berkadia investment sales brokers and mortgage bankers across 60 offices to assess the impact COVID-19 has had and will continue to have. Despite early concerns, 55 percent of Berkadia professionals said that current market activity is better than expected compared to how they initially thought COVID-19 would impact the industry. Thirty-four percent say the current market is in line with their expectations. “COVID-19 continues to have a profound impact on our economy, and while no industry is immune, we have been buoyed by the resiliency of commercial real estate, including steady rent collections and continued deal activity,” said Ernie Katai, executive vice president and head of production at Berkadia. In a bit of good news, 69 percent of Powerhouse Poll respondents said they felt confident that capital conditions will return to normal in 2021. Berkadia professionals’ sense of the timeline of recovery aligns with that of investors, too. The firm’s Apartment Investor Sentiment Survey shows increased confidence in the multifamily market over time. When initially surveyed in April, 47 percent of investors agreed that recovery from current capital conditions by 2021 was likely. The same survey conducted in June saw that number rise to 55 percent.

AN INCREASED FOCUS ON AFFORDABLE HOUSING

When asked to rank housing types based on their ability to maintain success through a prolonged economic slowdown, Berkadia experts noted Class-B (85 percent), true affordable (81 percent) and Class-A (69 percent) housing as most likely to sustain.

Multifamily continues to perform well even during the COVID-19 pandemic.

“COVID-19 continues to have a profound impact on our economy, and while no industry is immune, we have been buoyed by the resiliency of commercial real estate.” – Ernie Katai, Berkadia

The current economic slowdown is causing housing experts to focus on the lack of affordable housing in the country. Because of this, investor interest in multifamily properties for low-income residents continues to rise. Eighty-one percent of Berkadia professionals agree that investors will be more interested in affordable housing properties than before as a result of COVID-19’s economic impact. “Housing instability has been exacerbated by the economic downturn and increased unemployment, but a renewed focus on affordable housing could be a silver lining of this challenging time. This pandemic has demonstrated how vital safe, reliable housing is for the stability and well-being of our communities,” said Katai. “While the affordable housing market has been impacted by COVID-19, it has performed better than other asset classes and is comparatively well positioned for recovery.” When asked to identify three potential solutions for improving the affordable housing crisis, modifying tax credit policy (76 percent), local and state government intervention (61 percent) and regulatory

changes for GSEs (43 percent) were cited most frequently by Berkadia respondents.

ADAPTING TO THE NEW MARKET

When asked how investors’ actions changed since the onset of COVID-19, Powerhouse Poll respondents cited seeking immediate financing on currently owned properties (64 percent); focusing on business operations rather than deals (55 percent); pausing all activity in their portfolio (46 percent); and seeking advice and recommendations on how to react to the market (45 percent) as the most common trends. Despite commercial real estate being a predominantly in-person business, quick adaptation of technologies and remote working practices have kept operations and communication in motion. Ninety-two percent of respondents agree that the adaptations and improvements made as a result of COVID-19 and social distancing requirements will persist and the commercial real estate industry will continue to advise clients remotely in certain situations in the future.

As we continue to see technology transform all aspects of commercial real estate—during this time and beyond—respondents cited streamlining and enhancing deal processes (60 percent), enhancing investment decisions (56 percent) and increased flexibility around deal closings through innovations like virtual property tours (52 percent) as ways technology will have the greatest impact on the industry during the next five years.

TAKING THE LONG VIEW

It’s grabbing all the headlines today, but COVID-19 is not the only thing about which CRE professionals are concerned. “While it’s easy to get caught up in the near-term impacts of the pandemic, we cannot lose sight of the significant events on the horizon—the election, the LIBOR to SOFR transition, potential GSE reform—that will inform the direction of our industry in the coming months and years,” said Katai. “It is incredibly important to take the long-view when it comes to the commercial real estate industry. The industry has weathered periods of significant transition before, and we are confident in our ability to work through this one just as we have done in the past and will face again in the future.” From mortgage banker respondents, interest rates (86 percent), the 2020 election (49 percent) and debt underwriting and willingness to underwrite new income (25 percent) were cited as some of the top trends on their radar looking ahead. The election (59 percent), debt underwriting and willingness to underwrite new income (50 percent) and institutional investors (30 percent) similarly ranked at the top for investment sales advisor respondents.

A STATE FULL OF RESOURCES. A FULL-SERVICE RESOURCE TEAM READY TO HELP.

From data centers to agribusiness, our economic development team specializes in helping businesses start and expand here. Get started with our cost-free services:

Letâ&#x20AC;&#x2122;s grow your business. econdev.greatriverenergy.com

M I N N E S O TA R E A L E S TAT E J O U R NA L

HOPE (continued from page 4)

to the climate of working from home, and I’ve certainly enjoyed spending more time with my family.”

REASONS FOR OPTIMISM IN MULTIFAMILY

George Tikijian, executive managing director in the Indianapolis office of Cushman & Wakefield, has found plenty of reason for optimism, too, in the commercial sector in which he specializes, multifamily. This isn’t surprising. Along with industrial, multifamily real estate has been holding its own even during the most challenging days of the pandemic. Tikijian said that a large majority of renters continue to pay their rents on time. At the same time, fewer people are moving from their current apartments. This has boosted retention rates at Indianapolis-area apartment buildings, Tikijian said. “Not only are people sheltering in place, they’re not moving as much,” Tikijian said. “This has been especially evident during the spring and summer, which are traditionally busy times for apartment moves. April through July are the peak months for moving. We have seen a lot fewer people doing this.”

AU G U S T 2 0 2 0

“People were no longer sitting on their hands and waiting to see how bad it was going to

“When it became clear that most properties were doing far better than expected that also stabilized the market,” Tikijian said. “People were no longer sitting on their hands and waiting to see how bad it was going to be. From the middle of May through now, buyers have come back and each week we are seeing more people who are actively looking to buy. There isn’t that much for sale in the market, but what is for sale is getting good activity.”

be. From the middle of May through now, buyers have come back and each week we are seeing more people who are actively looking to buy.” – George Tikijian, Cushman & Wakefield

The majority of apartment buildings throughout the Indianapolis area, then, remain highly occupied, Tikijian said. Most apartment owners haven’t had to turn to concessions to keep their residents. The sales side of the Indianapolis apartment market has evolved since the COVID-19 pandemic first hit, Tikijian said. From the middle of March to the middle of April, multifamily sales came to a near shutdown, he said. “People didn’t know what to do,” Tikijian said. “People didn’t know what was going to happen. The capital markets were all over the board. The stock market was

ADVOCATE. ADVISER. ALLY.

dence of multifamily owners and investors. This new confidence has resulted in sales once again opening up in the multifamily market.

dropping. Fannie and Freddie changed their underwriting to become more conservative. All of these factors shut down sales for a while.” Then things started to change. First, the federal government flooded the market with money, providing enhanced unemployment benefits and sending out stimulus checks. That helped stabilize the stock market, capital markets and bond market, Tikijian said. Fannie Mae and Freddie Mac stabilized their underwriting guidelines. And, just as importantly, rent collections remained strong throughout April and May. That had a major impact in the confi-

Tikijian said that he is grateful to work in a market like Indianapolis. Before the pandemic hit, the Indianapolis commercial market was strong. It didn’t experience the big ups or severe lows of other markets. Stable and steady is the best way to describe the commercial real estate market here. This stable nature continues to attract investors, even today, Tikijian said. “We have always had a stream of East Coast buyers here, but that has picked up in the last three months,” Tikijian said. “We saw very minimal price declines in our market. There were larger price declines in markets where the prices were so much higher before the pandemic. In Indianapolis and other parts of the Midwest, the price dislocation was fairly minimal.”

PATRICK

DAN

Regional Managing Director

Managing Director

JAMES

MICHAEL

Sr. Vice President

Vice President

ANDREW

BILL

Vice President

MINEA

HOOPES

TREBIL

PADILLA

OUR UNMATCHED NETWORK OF BUYERS, SELLERS, AND CAPITAL SOURCES HELP US PROVIDE CERTAINTY OF EXECUTION IN ANY MARKET CONDITIONS. We’re the largest independently owned capital markets firm – known for our long relationships and strong results. While you can count on us as your advocate, adviser, and ally, we are your partner long after closing a specific transaction. With our unmatched network of buyers, sellers, and capital sources, we provide certainty of execution and protection of your investments.

952.356.0100 northmarq.com/minneapolis

FINN

MORK

COMMERCIAL REAL ESTATE DEBT & EQUITY | INVESTMENT SALES | LOAN SERVICING

Introducing Minnesota Brownfields Annual ReScape Awards Event November 5, 2020 This annual event proudly recognizes the best of the Brownfield Redevelopment Community across the state of minnesota. Some of the state’s most impactful projects have been past Rescape Award Winners. Nominations are now open. Seeking nominations in the following categories: Community Impact Award Economic Impact Award

Environmental Impact Award Promising Project Award

For Sponsorship information please visit www.mnbrownfields.org/2020awards or call 612.710.0160

700 Central – 2017 Community impact Award Winner

CHS Field – 2015 Environmental Impact Award Winner

Capitol Region Watershed District Office – 2019 Community Impact Award Winner

Pier B – 2016 Environmental Impact Award Winner

Nordhaus – 2018 Environmental Impact Award Winner

Regional Acceleration Center – 2018 Economic Impact Award Winner

M I N N E S O TA R E A L E S TAT E J O U R NA L

CBRE report: Midwest cities becoming bigger draws for tech talent

inneapolis and Columbus both ranked among the nation’s top tech markets, according to the latest Scoring Tech Talent Report from CBRE. Minneapolis ranked as the top Midwest city in CBRE’s report, which ranks 50 North American markets according to their ability to attract and grow tech talent. Columbus ranked 24th in the report. But this city was the top-ranked small tech market in the country. CBRE’s Tech Talent Scorecard is determined based on 13 metrics. These include tech talent supply, growth, concentration, cost, completed tech degrees, industry outlook for job growth and market outlook for both office and apartment rent cost growth. This year’s report also focuses on how tech-talent jobs are poised to weather COVID-19, state-ordered business shutdowns and an economic recession. According to the report, companies across all industries need the technical skills that this talent base possesses. Tech products such as streaming, remote communications and social media are in higher demand as more people work from home and follow social-distancing practices. “We expect that most tech-talent markets and professions will thrive after the pandemic subsides, and many that facilitate remote work and tech services such as e-commerce, social media and streaming services may have even greater growth opportunities accelerated by the COVID-19 disruption,” said Colin Yasukochi, executive director of CBRE’s Tech

Insights Center. “Markets that have strong innovation infrastructure – leading universities and high concentrations of tech jobs – will lead the next growth cycle.” Minneapolis ranked 17th in CBRE’s tech talent report, with an overall score of 51.72. The city ranked first among all Midwest markets. Columbus ranked 24th with a score of 46.13, the third-highest ranking of any Midwest city, behind Minneapolis and 23rd-ranked Chicago, and the top ranking of any small tech market. CBRE defines smaller tech markets as those with a tech labor pool under 50,000. Tech labor concentration, the percentage of total employment dedicated to tech jobs, is an important factor in how tech-centric a market is. CBRE reported that Minneapolis has a tech talent labor pool of 92,830, or 4.7 percent of its total employment. That is higher than the national average of 3.7 percent. Minneapolis is also the seventh-most concentrated Millennial market, with this age group making up 21.3 percent of its populaton. “From focused education to a thriving start-up scene to ongoing corporate support, our community continues to benefit from its investment in the people creating the tech ecosystem of Minneapolis,” said Dan Peterson vice president in the Minneapolis office of CBRE. Minneapolis’ tech talent labor pool has increased by 13.2 percent during the last five years, growing to 92,830, according to CBRE. Non-tech occupations in Minneapolis grew by a smaller 5.1 percent during the same period.

AU G U S T 2 0 2 0

By Dan Rafter, Editor

“We expect that most tech-talent markets and professions will thrive after the pandemic subsides” – Colin Yasukochi, CBRE

With a rate of 50.8 percent, Minneapolis ranked seventh among the top cities for educational attainment. Columbus also enjoyed several positive tech-centric rankings in CBRE’s report. The city’s tech-talent labor pool is at 48,930 workers, a 14.2 percent increase that amounts to a healthy 4.6 percent of the overall workforce. Columbus’ millennial population concentration aged 22 to 36 is 10th in the nation at 27.2 percent and increased by 11.3 percent from 2014-2018. Columbus offers affordable living for tech-talent workers, with the average annual apartment rent amounting to 12.9 percent of the average tech-talent wage. That ranks third-lowest among the 50 largest tech-talent markets. Overall, Columbus ranks in the middle of the pack when it comes to the expenses of operating a tech company. The average

one-year cost for operating a 500-employee tech company occupying 75,000 square feet in Columbus amounts to $40.2 million. That ranks as the 24th least expensive among the top 50 tech-talent markets. Omaha, Nebraska, also scored well on the Scoring Tech Talent Reoprt. This city ranked third on CBRE’s list of upand-coming North American tech-talent markets. According to CBRE, Omaha’s tech-talent labor force grew by 21 percent during the last five years. Its tech wages increased by 11 percent during this same period. The report’s up-and-coming markets are separate from the 50 larger tech markets that CBRE’s report ranks. The Next 25 markets are ranked by a narrower set of criteria than the top 50, including tech-talent supply, wages, tech-talent concentration and recent tech-talent growth rates. “Omaha has found success with landing and birthing startups due to its intentional public and private initiatives to attract companies and grow tech talent,” said Kellee Mikuls, vice president with CBRE’s Omaha office. Mikuls points to the significant investment of the Omaha Downtown revitalization project, where a group of philanthropists are investing in making Omaha’s downtown a destination for tech companies. “There is also significant funding through grants and city incentives that we help bring to our clients’ attention as they grow or look to office in Omaha,” Mikuls said. “It’s a huge priority for the chamber to be a tech hub and it’s apparent we are on our way there.”

M I N N E S O TA R E A L E S TAT E J O U R NA L

AU G U S T 2 0 2 0 The North Star Distribution Center at 19730 S. Diamond Lake Road in Rogers, Minnesota, was one of the industrial properties included in CSM’s big sale.

Shakopee, Minnesota, and the 205,920-square-foot Lexington Logistics Center in Eagan, Minnesota. In leasing activity, Kurita/U.S. Water leased 156,000 square feet during the quarter, consolidating three locations into a new headquarters facility as part of a buildto-suit in Brooklyn Park, Minnesota. And FCA (Fiat Chrysler) signed a lease for 155,000 square feet at 3440 Winpark, while Strategic Warehouse signed a 101,440-square-foot lease at Carmen Distribution Center.

CBRE: Plenty of hope in the Minneapolis/ St. Paul industrial market By Dan Rafter, Editor

he Minneapolis industrial market wasn’t immune to the negative pull of COVID-19 and the economic slowdown. But this sector, and this city, did show signs of strength in the second

quarter, according to research from CBRE. According to CBRE’s Minneapolis/St. Paul second quarter industrial report, quarter-over-quarter leasing in the re-

gion’s industrial market was down 31 percent. And while the market did see negative absorption in the quarter, a single move-out of nearly 400,000 square feet tipped the overall absorption rate into this territory. According to CBRE, net industrial absorption in the Minneapolis/ St. Paul market was negative 97,241 square feet in the second quarter. Vacancy, though, remained low at just 4.6 percent. The market saw 672,000 square feet of industrial deliveries in the second quarter, including 192,000 square feet of speculative space. Another 2.9 million square feet of industrial space is under construction in the St. Paul and Minneapolis area.

Not all submarkets, of course, performed equally. The Northwest submarket led all submarkets with 43 percent of all completed industrial transactions during the quarter. The South Central submarket recorded 21 percent of all completed transactions. Four of the top five second quarter investment transactions were single-tenant properties, including the 855,000-squarefoot acquisition by MetLife Real Estate Investments of the Amazon facility in Shakopee. Another big investment transaction was King Solutions’ sale/leaseback of 283,788 square feet in Dayton, Minnesota.

“CBRE estimates that for every $1 billion in growth in e-commerce sales, there needs to be an additional 1.25 million square feet of warehouse and distribution space.”

In one of the biggest industrial deals of the quarter, Link Industrial Properties closed on the 63-property, 6-million-square-foot CSM portfolio worth $551 million. This is evidence of continued interest in the Twin Cities’ industrial market, according to CBRE. Industrial space currently under construction includes the 302,644-squarefoot Canterbury Business Center in

As far as the future goes? CBRE is optimistic that industrial will rebound quickly from its COVID-19-inflicted slowdown. CBRE pointed to increased demand for e-commerce as one reason for its optimism. This rising demand will increase the need for additional warehouses across the country. CBRE estimates that for every $1 billion in growth in e-commerce sales, there needs to be an additional 1.25 million square feet of warehouse and distribution space.

The industrial market has also seen a lower drop in unemployment when compared to other sectors. CBRE reports that industrial employment has dropped 8 percent compared with 13 percent for all industries combined.

The Minnesota Real Estate Journal Proudly Announces the 2020 Real Estate Awards! An elegant evening showcasing Minnesotaâ&#x20AC;&#x2122;s top real estate achievements and developments in 2019

October 1st at 4:30 Cocktail Reception | 6:00 Program

For more info: Rejournals.com/mnawards

14 FORECAST (continued from page 1)

And while no one could predict when the market would return to normal -- or to whatever will pass for normal -- panelists did say that despite the challenges deals are still getting done in the Twin Cities. An interesting discussion took place regarding the office market, one of the commercial sectors that is seeing a huge impact from the pandemic. Moderator Tom Hoffman, senior vice president with Colliers International, moderated the panel of office experts, covering everything from what office spaces will look like in the next several years to the state of this market right now. Brent Erickson, senior managing director with Newmark Knight Frank, said that from a historic standpoint the office market in the Twin Cities remains a fairly healthy one. The vacancy rate, for instance, remains in the low teens, which isn’t much of an outlier from recent years. What has stood out, though, is absorption. Since the start of the pandemic, the absorption rate in the Minneapolis/St. Paul market has remained flat, Erickson said. “There haven’t been any big changes up or down,” Erickson said. “There is no submarket that has stood out in terms of high absorption or really low absorption.” The number of office sales is down since the start of the pandemic, too, Erickson said. And this is where COVID-19 has made its greatest impact on the market. “This is the one area that has really been hit by COVID,” Erickson said. “There are not a lot of office sales coming up in the future. The lack of sales is the biggest indicator of how COVID has impacted our office market.” Scott Peterson, vice president with United Properties, agreed that office sales are down. This has been disappointing to those wanting to buy office properties today, as many buyers expected to see a significant drop in sales prices throughout the Twin Cities office market. But Peterson said that that flood of discounted properties hitting the market hasn’t materialized. Owners don’t want to sell their office properties at a big discount if they can instead hold onto these buildings and wait for the market to improve. “What is the motivation for a seller to sell right now?” Peterson asked. “There really isn’t much of one. You haven’t seen the fire sales that buyers wanted. We will see sales in the future, but probably not until the first quarter or second quarter of next year. There is not a lot of sales activity in the office space right now.” That’s a snapshot of the current office market in the Minneapolis/St. Paul area. But what about the future? How will the office market evolve as the state continues

M I N N E S O TA R E A L E S TAT E J O U R NA L

“Working from home works. We have to acknowledge that. But many of us are also going to want to come back to the office. Working from home doesn’t work for everyone. We will see an increase in flexible work schedules in the future.” – Mark Evenson, Avison Young

to deal with COVID-19? And what will the market look like once the pandemic finally fades? Corey Whitbeck, principal with TaTonka Real Estate Advisors, said that companies might need less office space in the future. Many have discovered that their employees are still efficient and productive when working from home. This means that flexibility will be key as office tenants and landlords try to work out what companies’ office space needs will be in the next six to 12 months, Whitbeck said. “It’s critical that landlords and tenants figure out a way to work together for the next six to 12 months,” Whitbeck said. “We are a tenant rep. That’s all we do. We know that the relationship between tenants and owners is like a marriage. Our clients don’t know if they’ll need 40 percent of their office space in the near future. They don’t know how many of their employees will keep working from home. Those landlords that can remain flexible during this time will build stronger relationships with their tenants.” Mark Evenson, managing principal with Avison Young, said that office owners should expect significant long-term changes in the office market because of COVID-19. Companies are learning that they don’t need all their employees in the office at any one time. Flexible work schedules and work-from-home arrangements aren’t new. But the pandemic, which sent so many workers to their home offices at the same time, will accelerate the shift to more flexible working arrangements, Evenson said. “Working from home works. We have to acknowledge that,” Evenson said. “But many of us are also going to want to come back to the office. Working from home doesn’t work for everyone. We will see an increase in flexible work schedules in the future.”

Evenson cited a a survey by Fortune of the chief executive officers of Fortune 500 companies during the last two weeks of April. Only 27 percent of these company leaders said that they expect their workers to fully return to their usual workplaces in 2020. Only 38.1 percent expected this to happen by June of 2021 and 26.2 percent said they expect their employees to work from home indefinitely. “We are going to see a change in the office market,” Evenson said. “It just remains to be seen whether the extra space we’ll need for social distancing will offset the lower amount of space companies might need because of the smaller population in offices.” Evenson predicted that the amount of office space companies need will drop by about 10 percent to 15 percent on average during the next several years. He also predicted that many employees will want to come back to the office but on a more limited basis, perhaps choosing to come in just two to three days a week. Erin Fitzgerald, principal with Transwestern, said that the majority of office lease transactions today are short-term lease renewals. Companies are hesitant to make bigger long-term decisions, she said. This isn’t surprising. COVID-19 has brought so much uncertainty that most companies are holding off on long-term planning. Many are not ready to invest in new office space until they see how long employees will be working from home and how many will want to return to the office on a full-time basis in the next year. The pandemic might impact, too, the flow of new companies leasing office space in downtown areas, Fitzgerald said. Many that might have moved from the suburbs to downtown St. Paul or Minneapolis might hold off. “The majority of deals are short-term right now,” Fitzgerald said. “Companies are trying to figure out what their workplace strategies are going to be throughout this

AU G U S T 2 0 2 0 pandemic. Some of the companies in the suburbs will decide to stay put. They’ll stay with the building that has wide-open surface parking lots where their workers don’t have to worry about public transportation.” Like others, Fitzgerald emphasized that owners will have to be flexible to maintain good relationships with their tenants. Owners might have been able to secure longer-term leases of five to six years before the pandemic hit. Today, though, many might have to settle for shorter terms of two to three years. The pandemic, of course, won’t last forever. The office market it leaves behind, though, might look different from the one before COVID-19, panelists said. Evenson said that the office might not be the daily destination for a growing number of employees but instead might be reserved more for work that can’t be done from home. “The office will be a place for people to come together to collaborate or to meet a client,” he said. “You might see more meeting spaces and more team spaces but less space for alone work, for the headsdown type of work.” Whitbeck said that creative companies will redesign their office spaces to meet whatever new reality emerges after COVID-19. This long work-from-home experience has taught companies that workers can do many of their tasks from home offices. But it’s also shown that some tasks are still better suited to the office space. “Employees are realizing that taking conference calls in their cars because their kids are running around the house doesn’t work,” Whitbeck said. “It will become, then, about making sure the workplace environment matches the functions we need to accomplish. Some employees might be able to accomplish those functions at home more often. That works. But they might need to come into the office to accomplish other functions. It needs to be about allowing employees to be happier and healthier.” Fitzgerald said that while there will be some changes to the office environment, office work won’t disappear entirely. She pointed to the months and years after 9/11. Back then, people predicted that no one would want to work in high-rise office buildings. They’d instead flock to three-story buildings in the suburbs. That didn’t happen, of course. Yes, Fitzgerald said, there will be some changes to the office sector because of COVID-19. But people will one day resume commuting to work. And they’ll one day return to high-rise buildings in downtown areas. “Ultimately, human beings have very short memories,” Fitzgerald said. “We might see some changes in the short-term. Some companies might go to the suburbs. But people will return to the office.”

IS YOUR OFFICE SPACE SAFE TO RETURN TO? Most office spaces have common areas, elevators, rest rooms and parking ramps accessible by the general public

THERE IS A COVID – SAFE OFFICE ENVIRONMENT SINGLE STORY / FLEX OFFICE SPACE IS THE SAFEST ENVIRONMENT • Individual private entries • Dedicated bathrooms • No common areas • No parking ramps – parking at your front door

• Special HVAC filtered air • Lower RE Taxes and CAM • Custom designed Class A space • Controlled, secure access • No contamination

The smartest, safest choice for office space Locations available throughout the Twin Cities from 5,000 – 75,000 SF Hoyt Properties Inc. is the largest flex developer in the Twin Cities

CONTACT BELOW TO DISCUSS FURTHER HOYT PROPERTIES INC. 612.338.7787 snelson@hoytproperties.com www.hoytproperties.com www.flexspacemn.com

M I N N E S O TA R E A L E S TAT E J O U R NA L

AU G U S T 2 0 2 0

DEALS (continued from page 1)

“We had a good deal lined up,” Houge said. “Then COVID came along. We had to sit back and watch how that would impact our local economy.” The RH-Minneapolis Gallery did close as Minnesota issued a statewide shutdown order. The store has since reopened and has continued to attract shoppers and diners to its restaurant. Houge said that the property remained attractive to NAI Legacy, so the company pulled the trigger on the acquisition. “We don’t think there is ever a time where there is not the potential for additional viruses and pandemics throughout our country,” Houge said. “That is the way of the world. We have to be sure that the companies and facilities that we invest in are doing everything they can to shield themselves from that danger, are doing everything they can to make sure customers and employees are safe.” The Restoration Hardware brand has safeguards against the virus built into the way it operates, Houge said. Customers don’t go to a central counter area to check out. The store is more like a showroom with staffers who help customers make design decisions. The layout of the store’s tables and showroom areas already encourage social distancing. There’s enough space

Top: The rooftop view from RH-Minneapolis|Gallery. Below: The rooftop restaurant is a big draw for RH-Minneapolis|Gallery.

here to avoid forcing customers into clumps. The restaurant, of course, is different. Fortunately, RH-Minneapolis Gallery can follow state guidelines for how many diners can eat inside at one time. The shop’s restaurant also makes up a smaller portion of the facility’s revenues, Houge

said, so limiting diners doesn’t hurt RH’s bottom line too dramatically. The RH-Minneapolis Gallery is part of the RH Luxury Collection of stand-alone stores. The two-acre site sits at the northeast corner of France Avenue and West 69th Street, the gateway to Edina’s luxury retail district. This high-end district includes Southdale Center, The Galleria, The Westin Hotel, COV Edina and Lifetime Edina. Jon Davis, former chief executive officer of Davisco Foods International and an investment partner with NAI Legacy, said that the store’s location played a key role in NAI Legacy’s decision to acquire it.

Minneapolis/St. Paul Low Income Housing Tax Credit Programs: Now with cleaner air! www.mnsmokefreehousing.org Minneapolis/St. Paul updated their 2021 Low Income Housing Tax Credit programs. Now in order to receive a point for your project on the Qualified Allocation Plan (QAP) for having a smoke-free policy, the policy must prohibit e-cigarettes/vaping.

Smoke-free low-income housing offers healthier, cleaner, and safer living for renters as well as cost savings and reduced fire risk for property owners. Contact Live Smoke Free for smoke-free housing assistance. info@mnsmokefreehousing.org \ (651) 646-3005 This work is made possible through grant funding from the Statewide Health Improvement partnership (SHIP) of the Minnesota Department of Health, the Minneapolis Health Department, and Saint Paul — Ramsey County Public Health.

“I have committed to investing in trophy real estate assets in Edina and believe the redevelopment taking place in the greater Southdale area will continue to strengthen and define the entire neighborhood as the luxury epicenter of the Twin Cities,” Davis said. “I believe the long-term outlook for the Southdale corridor is extremely positive and the RH | Minneapolis site is the gateway corner to the high-end district.”

Mortgage financing for 6801 France DST was provided by Edina-based Tradition Capital Bank. “This acquisition is consistent with our focus on providing tax-advantaged real estate solutions to our investors and represents another step in our development of a national DST platform,” said Garrett Farmer, senior director of NAI Legacy and head of its brokerage division. Before acquiring the property, Houge said, NAI Legacy looked carefully at the demographics of the Southdale area. The numbers were impressive and indicated that the entire Southdale region will remain a strong one for higher-end retail properties.

The Restoration Hardware brand is not new to the Edina area. RH was a long-standing tenant at the Galleria for nearly 25 years before acquiring the land adjacent to Southdale and building its own property.

“This location is easy to see and easy to get to,” Houge said. “It is an area that doesn’t have a lot of challenges.”

NAI Legacy structured the ownership entity of the property as a Delaware Statutory Trust, something that provides positive tax attributes to its members. In addition to Davis, its members include Duane Lund and David Buelow, who, along with Davis, are also owners and officers of NAI Legacy.

“We are interested in investing in highend, credit-worthy and financially sound companies,” Houge said. “This company really fit that bill. Restoration Hardware has shown nothing but growth. Their financials during the past few years have shown amazing upward trajectory, other than the drop in March from COVID-19. We are very excited about this company and this property.”

The strength of the Restoration Hardware brand was also attractive, Houge said.

AU G U S T 2 0 2 0

M I N N E S O TA R E A L E S TAT E J O U R NA L

Industrial remains one of the bright spots in commercial real estate, even during the COVID-19 pandemic.

NAIOP survey: Normalcy is a long way away By Dan Rafter, Editor

ommercial real estate professionals aren’t hoping for miracles these days. A recent survey by NAIOP found that plenty of the association’s members expect COVID-19 to impact their businesses for a long time. The survey of 347 NAIOP members released in early August found that exactly half of respondents said that they expect coronavirus to impact their business operations for more than a year. These results, collected in July, show that NAIOP members are less optimistic now than they were earlier in the pandemic. In June, the survey found that 39.7 percent of respondents expected COVID-19 to impact their businesses for longer than a year. In April, only 36.4 percent of respondents felt the same. The NAIOP said that this increase in pessimism might be related to the rapid growth in the number of reported COVID-19 cases across the United States since June. This shift also comes as more developers face a greater number of COVID-related challenges. The NAIOP said that more of these CRE professionals are struggling with delays in acquiring permitting and entitlements, delayed financing, supply shortages and contractors declaring force majeure or filing for bankruptcy. This is a reversal of earlier trends and, according to the NAIOP, is another reason why some developers are now predicting

“The pandemic will transform most types of CRE, including offices, hospitality, rental housing for families and assisted living. Very few sectors won’t be facing transformational pressures caused by the pandemic and its economic impacts.” a longer impact on their businesses from COVID-19. Some of the quotes the NAIOP gathered from survey respondents illustrate the frustrations that CRE professionals feel today. “The optimism we experienced recently when restrictions were somewhat lifted has disappeared,” wrote one respondent. “The pandemic will transform most types of CRE, including offices, hospitality, rental housing for families and assisted living,” wrote another. “Very few sectors won’t be facing transformational pressures caused by the pandemic and its economic impacts.”

There is some good news in the NAIOP survey, with respondents reporting positive growth in industrial, office and multifamily building acquisitions in July. The rise in the number of acquisitions was strongest in the industrial sector, with 92.6 percent of respondents saying that they witnessed such an acquisition during the three weeks before they were surveyed in July. That figure stood at a lower 70.7 percent in NAIOP’s June survey. Reported development activity also increased for industrial, office and multifamily properties in July. This is especially good news for the office sector. The July survey reported the first significant

increase in office property development since NAIOP’s April survey. A total of 16.5 percent of respondents reported new office development in July while only 8.5% did in June. Although increased office activity suggests the sector is improving, these deals remain uncommon in many markets, with a slight majority of respondents -- 52.2 percent-- reporting that they saw no office deals in the last three weeks. And the news for the retail sector remained grim, with 79.6 percent of respondents saying they saw no new retail acquisition or development during the three weeks preceding the survey. “I primarily work the industrial sector and it has been very busy,” wrote one survey respondent. “E-commerce is alive and well.” Rent collections remained strong, too. More than three-quarters of office, multifamily and industrial building owners and operators reported that 90 percent to 100 percent of their tenants had paid their rent in full and on time in July. Retail property rent collection rates did improve in July, but the numbers here remained weak. According to the survey, 51 percent of respondents said that 25 percent or more of their retail tenants had not paid rent in full and on time as of July 15.

M I N N E S O TA R E A L E S TAT E J O U R NA L

AU G U S T 2 0 2 0

Savills’ Learner: A return to the office in a COVID-19 world? It’s going to take a while By Dan Rafter, Editor

oe Learner, vice chairman, director and Midwest Region Lead for Savills, knows the office market. And he knows that this market is on the verge of big changes thanks to the COVID-19 pandemic.

Do you think tenants when negotiating new office leases will fight for clauses that provide them with some form of rent relief if a pandemic hits and they can’t use their office space?

But what are those changes? What will offices look like in the future as the world continues to work through the pandemic?

Learner: It’s complicated. You have tenants who are signing leases as an occupant. You have owners. And then you have lenders. You have to design your leases and contracts with not only the present in mind but also the future. You want protections. There is a fairness aspect to it. A lease is about who takes on the responsibilities for risk. Right now, the tenant is taking full responsibility for the inability to use the office space. That’s how it’s been. But there is nothing that says moving forward that the tenant has to take on the entire responsibility for the risk of not being able to use the space.

Minnesota Real Estate Journal recently spoke to Learner, who is based in Savills’ Chicago office, about the office market. Here is some of what he had to say. Companies are obviously still struggling to determine when to bring their employees back into the office today. But how will the way companies use their office space change in the months, and years, ahead? Joe Learner: Companies have to answer the overriding question of what role the office serves for their organization. Why do you have an office? What is performed in that office that is of value to your organization? The answers will be different for every company. Obviously, the main use of an office is to house people who are performing work. But that might not be the most important use. An office is also a cultural hub, a place where companies recruit and retain people, a place where you develop peer and mentor relationships and manage teams of people. Every company need to explore what the role of the office space is for them. And then they have to determine how their office space is actually being used. Pre-COVID, the office was used for all those reasons. You had the collaborative and innovative side where people are working in groups. Then you had the individual, heads-down, solitary work. That was what the office covered. Now we have COVID-19 and everyone gets sent home. Turns out you can be productive at home. But you can’t be productive in all the ways the office is used. Are companies learning what tasks are better done in the office and which ones can be accomplished from remote settings? Learner: Those activities that are group tasks, most companies believe they are better performed together, not in the virtual world. They are still better in person. Over time, I think you will see a degradation in the productivity of people working virtually. A think productivity will drop as people work from home for a longer period of time. Companies are realizing that the solo work, that solitary work, can be effective at home. Knowing that, it does change how you might design your office, how you might allocate seats within your office. If you as an employee do solo work half of your week, in theory you don’t need to be in the office half of the week. You don’t need your seat half of the time. You

can share a seat with someone else. Companies will make decisions on whether an individual should have a shared seat or their own seat. Should they rely on hoteling? As people come in, they assign desks on an ad hoc basis. Some of these issues were being considered by companies before the pandemic. Has COVID-19 simply accelerated the changes that were already coming to the office space? Learner: A lot of companies were hesitant to be a pioneer in this. There have been in the past attempts to do more remote working on a large scale, particularly with sales forces. But those experiments haven’t by and large worked out that well. But of course, the tech wasn’t as good back then, either. The tech has caught up. Now companies have been forced into this experiment. The confluence of factors makes it seem as if it works. Everyone is doing it at the same time. You are not an outlier when you pursue this kind of thought. But it is very difficult to really understand what the intermediate and long-term implications of a drastic change of workplace environment is when you are going through a pandemic. The best time to make decisions isn’t when you are in the middle of the storm. The best time is when you have the ability to gather information and see what things might look like in a normal environment. It’s hard to create a new normal environment with certainty when you are not in a normal environment. If you have to make decisions by necessity, then you make them. You don’t have the luxury of time. If you do have the luxury of time, it is always better to make a decision when you can gather information. As you’ve said, employees can be productive from home. What, then, will companies use their office space for in the future? Learner: The future of a company is its young people. They are important pieces of today and the future leaders of tomorrow. The office environment plays a key role in providing them with mentors, in boosting their career development and in forming their peer-topeer relationships. Their absorption of their company’s culture is critical. Those are some of the primary functions that an office serves. It is much more difficult to do these things remotely. No one is making a best friend from

Zoom. You can make a best friend from the work environment or social environment during the day or after work. The hard-tomeasure but very important benefits that getting people together physically brings are critical to the success of an organization over time. This whole notion that the office is going away, is not something I believe. But the office can change. How do you configure it differently if 40 percent less people are in there every day? Not everyone will have to be in the office at the same time. Instead, you might have people coming in coordinated shifts. You might have the people who need to be collaborating on a project in the office at the same time. So maybe you need more meeting spaces and less heads-down space. How difficult will it be for companies to get their employees back into the office after this long break? Learner: Universally, the first thing out of anybody who is leading the back-to-the-office agenda for a company is a focus on employee safety first. Everything starts with, ‘How do I keep my people safe?’ Safety, of course, is both real and perceived. I think that companies and landlords have done a great job of figuring out programs to get people back into the buildings and the office safely. But they are not at the point where they can accommodate everyone at the same time. That would violate social distancing. There is also perception. How do people get to work? Many do not view public transportation as a safe way of getting there. Other employees still don’t feel comfortable going into an office environment. They might ask, ‘We’re not going to restaurants, so why should we go to the office?’ People have a lot of perceived fears about returning to the office. There are also a lot of people who are high-risk or care for someone or live with someone who is high-risk. Are you going to put yourself in an office environment if you have to care for an elderly person or you have a condition? The practical aspect is not there at this point. In downtown Chicago, occupancy levels in most office buildings are under 10 percent. In some buildings it is at 5 or 6 percent. There are about 95 percent of the workers still not coming back to the office in Chicago.

Now, the landlords could say that they are still providing services. It’s not their fault that companies aren’t using the space. The tenants, though, are saying it’s not their fault, either. They are saying that they have no ability to use their office space right now. So why are we paying you money to use the space? That dynamic might change in the future. There might be an insurance aspect to this. That might be one way to mitigate some of this issue. Any changes will be pushed most aggressively by larger anchor-type tenants. They have the leverage to demand these types of protections. We are already seeing some tenants who are making that claim. There is a fairness perspective. Is it fair that the risk is being 100 percent borne by the tenant while zero percent is borne by the landlord? Often times those zero/100 dynamics find a way of getting off those polar sides of the spectrum. All this being said, do you have any guess on when we might see more employees return to the office? Learner: If you don’t figure out the schools, you will still have a lot of workers who can’t go to the office. These things are tied to one another, which is why you see the Googles of the world keep pushing out the date when they want their employees to come back. Many companies are now looking at this as if there won’t be a widespread use of their office space until we have a vaccine or treatment of some sort. All these other issues, the at-risk people, the schooling, they don’t solve themselves fully until that vaccine or treatment arrives. I wouldn’t be surprised if we aren’t looking at the second half of next year. But things will change. That work-from-home fatigue will change and increase over time. People are going to start bouncing off the walls. We are already seeing this with groups of young people congregating in violation of social-distancing rules. People will return to the office. But it will take some time.

INVESTMENT DESCRIPTION

INVESTMENT HIGHLIGHTS

NAI Legacy is making available this unique opportunity to invest in a Class A+ and newly constructed +/- 58,000 square foot free-standing retail property that was self-developed by Restoration Hardware (NYSE: RH). The Property is located at the corner of France Avenue and West 69th Street adjacent to Southdale Mall in Edina, Minnesota. Edina is a highly desired first-ring suburb just south of downtown Minneapolis boasting some of the Twin Cities' strongest area demographics of wealth and household income. Restoration Hardware, who had previously been located at The Galleria of Edina, has operated in the Edina sub-market for over twenty-five (25) years. This property is the latest upscale "RH Gallery" flagship concept by the chain. RH operates 70 galleries and 30 outlets worldwide and reported +/$2.7B in gross sales.

• 1031 | DST Investment - allowing for multiple investors to participate.

NAI Legacy has structured the investment as a 1031 | Delaware Statutory Trust - allowing for multiple investors to participate in the offering, including those investors seeking to effectuate an IRC Section 1031 tax-deferred exchange. NAI Legacy intends to offer its investors the opportunity to participate in significant Bonus Depreciation relative to the unique nature of the real estate and its improvement classifications.

• Significant potential for Bonus Depreciation (IRC Section 168k) • Solely occupied by Restoration Hardware (NYSE: RH) - $2.7 billion in annual sales. • Absolute NNN Lease (No Landlord Responsibilities). • Credit-Worthy Tenant with Long Standing Operating History in the Edina Market. • Twenty (20) Year Initial Term and 10% Base Rental Rate Increases Every Five (5) Years.

OFFERING SUMMARY Minimum Investment

$50,000

Maximum Investment

$12,000,000

Total Investment Cost

$28,575,000

Leverage

58%

First Year NOI

$1,386,000

First Year Cash on Cash

+/- 6.00%

Anticipated Hold Period

Ten (10) Years

VIEW PROPERTY VIDEO 14525 Highway 7, Suite 305 Minneapolis, MN 55345 612 383 2590 tel nailegacy.com