VOLUME 35, NUMBER 1
©2019 Real Estate Publishing Corporation
By Liz Wolf
unusually long cycle, challenges, key issues and how each sector may perform.
M
How much longer can this extended cycle continue?
any Twin Cities commercial real estate experts are bullish going into 2019, as 2018 turned out to be another solid year for the market. However, there are challenges facing the industry including increasing construction costs, rising interest rates, the labor shortage and political uncertainty. MREJ asked leading local professionals what the year could bring including where we are in this
“We’ve been hearing that we’re in the last innings of this baseball game for several years now,” says Mike Ohmes, managing principal of the Minneapolis-St. Paul office of Cushman & Wakefield. “I heard five years ago, we were in the seventh inning. So what inning are we in now? Are we in extra innings?” Ohmes says 2018 finished strong.
January 2019
At year-end, the market’s multitenant properties reported a 10.9 percent vacancy rate, up slightly from 10.6 percent six months prior, according to Cushman & Wakefield’s Compass Report. Just over 1 million square feet was absorbed across office, industrial and retail properties in the second half, significantly more than what Cushman & Wakefield projected for the six-month period. The year ended with 2.78 million square feet of absorption -- the market’s best year for absorption Forecast to page 10
Everyone’s Watching the Yield Curve, Are You? By Nick Place, Chief Lending Officer, Bridgewater Bank
S
ome interesting things have been happening with the yield curve lately. First, to back up and give some background about what the yield curve actually is. The yield curve is simply a line graph of the interest rates paid on treasuries with varying maturities. During most “normal” economic environments, the yield curve generally
slopes up as the maturities extend out longer. This makes basic sense as one would expect to earn a higher rate of return if you were fixing your rate for a longer period of time. The typical difference, or spread, between short-term (say 2 years) and long-term (say 10 years) treasuries is around 1%. However, this relationship where there is a wide margin between short-term and long-term rates has recently changed. First, the spread between the 2Year and 10-Year treasuries has shrunk drastically, currently sitting at 0.17%. This takes slopes out of
the yield curve, essentially flattening it out. Second, in a few points along this line graph the rates have become lower as you move out to a longer Yield Curve to page 8
INSIDE - Page 14: Southwest LRT (METRO Green Line Extension)
January 2019
Minnesota Real Estate Journal
Featured Stories
JANUARY 2019 • VOLUME 35, NUMBER 1
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Departments PEOPLE ON THE MOVE 4 BREAKING GROUND CLOSINGS
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COMMERCIAL REAL ESTATE FORECAST EVERYONE’S WATCHING THE YIELD CURVE, ARE YOU?
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THE ST. CROIX CROSSING BRIDGE IS MAKING EASTERN WASHINGTON COUNTY EVEN MORE ATTRACTIVE FOR DEVELOPERS
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THE SOUTHWEST LIGHT RAIL TRANSIT
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FINDING SKILLED PEOPLE IS PROPERTY MANAGEMENT’S NUMBER ONE CHALLENGE
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Minnesota Real Estate Journal (ISSN 08932255) Copyright © 2019 by the Minnesota Real Estate Journal is published monthly except combined in March & April 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 ©2019 Real Estate Publishing Corporation. No part of this publication may be reproduced without the written permission of the publisher.
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Minnesota Real Estate Journal
7767 Elm Creek Boulevard, Suite 210 Maple Grove, MN 55369 For information call 952-885-0815
President | Publisher Jeff Johnson jeff.johnson@resummits.com Vice President | Publisher Jay Kodytek jay.kodytek@resummits.com Chief Financial Officer Todd Phillips todd.phillips@resummits.com Consulting Editor Dr. Tom Musil tamusil@stthomas.edu
SPARKS RECEIVES DESIGNATION OF CERTIFIED ECONOMIC DEVELOPER Erin Sparks, economic developer at Great River Energy, recently earned the designation of Certified Economic Developer (CEcD), a national recognition that denotes a mastery of skills in economic development, professional attainment and a commitment to personal and professional growth.
Conference Manager | Art Director | Graphic Designer | CE Specialist Alan Davis alan.davis@resummits.com
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
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development profession improves the wellbeing, quality of life and opportunities for individuals, business and communities. Sparks joins a contingent of more than 1,100 active CEcDs in the United States.
Industry Veteran, Claire J. Roberts, SIOR Joins Colliers International | MinneapolisSt. Paul as Vice President Roberts brings over 20 years of commercial real estate experience to the Colliers MSP office brokerage team Colliers International | MinneapolisSt. Paul is pleased to announce the recent addition of Claire Roberts to the brokerage services team. Roberts will work with the Colliers MSP office brokerage teams to identify optimal tenant focused, occupier solutions for a wide range of Colliers MSP clients and prospects.
Erin Sparks This designation recognizes qualified and dedicated practitioners in the economic development field and sets the standard of excellence within the profession. Candidates must pass a comprehensive examination, which has three parts and spans two days. The exam tests a practitioner’s knowledge, proficiency and judgement in the following key areas of economic development: • Business retention and expansion • Finance and credit analysis • Marketing and attraction • Strategic planning • Entrepreneurial and small business development • Managing economic development organizations • Neighborhood development strategies • Real estate development and reuse • Technology-led economic development • Workforce development strategies CEcDs work with public officials, business leaders and community members to create leadership to build upon and maximize the economic development sector. Excellence in the economic
Claire J. Roberts Roberts began her CRE career in 1995 in South East Michigan where she worked as a landlord representative and tenant representative, primarily focused on office product. She relocated to the Twin Cities in March of 2007 and shifted her focus to primarily tenant representation, working with Fortune 500 and Fortune 1000 Companies. During her career her client list has included organizations such as Chase Manhattan Mortgage, Ralston Purina, Carter Burgess, Old Republic Title Insurance and the General Services Administration (GSA). Claire joined Marcus & Millichap in 2014 and focused on acquisitions and dispositions of office and industrial assets, most recently representing a client on the purchase of a 260,000 square foot industrial property in Hazelwood, Missouri a submarket of
January 2019
St. Louis. “I’m excited to be joining Colliers MSP because of it’s local and international presence. This presence and the enhanced resources it affords me, will help me provide optimized solutions for my clients” states Roberts. “We are thrilled to have Claire join us at Colliers MSP. Her leadership, market knowledge and energy will add great value to our entire team” says Bill Wardwell, Managing Director of Brokerage Services and Executive Vice President with Colliers International | Minneapolis-St. Paul. Roberts is currently the immediate past president of the MN Chapter of SIOR, a past president of MNCREW and just finished serving a two year term on the CREW Network Board of Directors. Welcome Claire!
Shanna Strowbridge Joins Schafer Richardson and SR Realty Trust as General Counsel Shanna Strowbridge serves as General Counsel for Schafer Richardson and SR Realty Trust. Shanna has nearly twenty years of experience in commercial real estate transactions and leasing matters in both the private practice and in-house counsel settings. She represents our development and acquisition teams in the purchase, sale, development, financing and structuring of master-planned communities and projects. She enjoys working in-house where her business perspective and acumen can be used to identify, understand and assist in resolving the company’s legal and business concerns, as well as provide advisory services to the organizations’ Board of Directors. Her extensive experience within the Twin Cities real estate industry is a valued asset to Schafer Richardson as is her expertise in handling entitlement of projects, property management matters and drafting construction contracts. Shanna received her Bachelor of Arts and Juris Doctorate from the University of Minnesota-Twin Cities.
People to page 19
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The Opus Group® Announced the Completion and First Tenant at Beacon Bluff Business Center The Opus Group (Opus) announced today the completion of an 86,632square-foot industrial building in the Saint Paul Port Authority’s (SPPA) Beacon Bluff Business Center. Terracon Consultants Inc. (Terracon), a multi-disciplinary engineering consulting firm, will occupy 15,300 square feet of the building beginning early this year. “It was a privilege to collaborate with the SPPA in transforming this former brownfield property into a vibrant new industrial development for the dynamic St. Paul market,” said Phil Cattanach, senior director, Opus Development Company, L.L.C. “This site offers Terracon, and other future tenants, a modern and functional industrial option that will meet the expanding business needs we’re seeing throughout the competitive
Minnesota Real Estate Journal
industrial market.” The building features 24-foot clear height, an exposed aggregate precast exterior with generous amounts of vision glass for daylight in both the office and warehouse spaces. Terracon will begin occupying the building in this month, which will support their continued growth and make it more convenient to serve their clients throughout the greater St. Paul area. An additional 71,332 square feet of space remains available for lease. “We’re excited to move to St. Paul and the renovated Beacon Bluff Business Center,” said David Wolfgram, office manager, Terracon Consultants Inc. “This new location is closer to several of our clients and provides easy access to anywhere in the Twin Cities via Interstate 35E.” The Beacon Bluff Business Center is an office and industrial redevelopment, covering 11 parcels on nearly 40 acres
of formerly contaminated land. The Business Center is located off Phalen Boulevard, near Interstates 35E and 94 as well as the Minneapolis-St. Paul International Airport. The site offers reduced utility and energy costs through a partnership with Xcel Energy. “We’re pleased to welcome Terracon to the Beacon Bluff Business Center and to have worked with Opus on this project,” said Lee Krueger, president, Saint Paul Port Authority. “Through our collaboration with Opus, we were able to successfully bring jobs and tax base to the former 3M campus through this new, state-of-the-art industrial building.” Opus Development Company, L.L.C. was the developer on the project, Opus Design Build, L.L.C. was the designbuilder and Opus AE Group, L.L.C. was the architect and structural engineer of record.
January 2019
Trails Edge of Maplewood Breaking Ground Trails Edge of Maplewood is a new apartment development within the City of Maplewood scheduled to commence construction January 21, 2019 of a 152unit market rate, upscale apartment project on 5.67 acres of land. INH Properties and Kelco Services are the co-developers and Ebert Construction is the General Contractor. It is anticipated this apartment community will be open for occupancy by May of 2020. INH Property Management, Inc. headquartered in St. Cloud, MN will be the leasing and management agent. Trails Edge aims to be Maplewood’s premier luxury apartment community. The units will offer a variety of studio, 1, 2, and 3 bedroom floor plans. The building will be wood-framed, four stories with two convenient central elevators News to page 14
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Minnesota Real Estate Journal
Yield Curve From page 1
maturity. This can be seen currently where the 1-Year treasury is at 2.57%, the 2-Year treasury is at 2.50% and the 3-Year treasury is at 2.47%. This phenomenon of shortterm rates being higher than longterm rates is called inversion. One might ask ‘Why is this important to me?’. The yield curve does not meaningfully impact any one specific metric in the economy, but it can be a gauge for and indicator of the market’s expectation of what will happen in the future. When the yield curve is inverted (the technical definition is where the 2-Year treasury has a higher rate than the 10-Year treasury), it can be a signal that an economic slowdown or a recession is on the horizon. In fact, an inverted yield curve has correctly predicted the last 9 recessions and has only had one false positive. Now a few things to note, an inverted yield curve does not cause a recession, and most importantly, the yield curve has not fully inverted yet. The other large impact this may have on you is that the yield curve is directly related to what borrowers
Nick Place will pay on money lent to them from banks. Banks will typically base their interest rates off a spread to the current treasury rates or a similar index. Variable interest rates on loans have increased substantially over the last 2 years as the Federal Reserve has begun to gradually increase the Fed Funds Target. This rate directly impacts the Prime Rate, which is a common rate used by banks to price variable rate loans. The Federal Reserve has increased these rates by 2% in the last 2 years, so many bor-
rowers with variable rate loans have seen their interest costs increase over this time frame. Regarding fixed rate loans, in a normal rate environment a bank may offer a 2-year interest rate at a much lower rate than they would a 10-year rate. However, since the spread between these rates have become much lower over the last year (currently only 17bps), it may only cost you a little bit more in interest to fix your rate for a longer period of time. This has resulted in many borrowers using this flat yield curve as an opportunity to fix the interest rates on their loans for longer periods of time than they typically would. As we look out into 2019 there is a lot of uncertainty as to what may happen with interest rates. Many have been predicting rates will continue to rise as the economy is firing on all cylinders with low unemployment, recent wage increases, favorable tax environment and strong corporate earnings. However, recent economic metrics have caused some to worry if these trends will continue. The stock market was down roughly 5% in 2018 and is down 15% from its peak, entering correction territory. Trade concerns, the government shutdown and a slowing global
January 2019
economy bring additional uncertainty regarding the likelihood that an economic expansion will continue. These concerns create uncertainty which ultimately will cause volatility in the interest rate environment. This volatility has been seen recently with the 10-year treasury reaching a high of 3.24% in November 2018, dropping all the way down to 2.69% by the end of the year. Things to remember: watch the yield curve – it is very flat right now and IF it inverts, it could be an indicator that a recession may be on the horizon (treasury.gov lists its rates every day); variable rates have moved up, if you’ve been floating your interest rates your interest costs have increased quite a bit; long-term rates are attractive compared to shortterm rates and this could be the time to fix your interest rate; lastly, nearly every economist polled in December 2006 predicted continued economic expansion between 2007 and 2008, so even the ‘smart’ guys don’t know what will happen down the road. Stick to your gut and try to make the best decision you can when working on any one transaction. Rates can only go up, go down, or stay the same; so you’ll always have at least a 33% chance of being right.
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Minnesota Real Estate Journal
Forecast From page 1
since 2015. “As we were starting 2018, we were feeling like, ‘OK, we’re getting to the top end of this cycle, and we’re not quite sure how strong it will be,’ but not only was it a very strong year, it got stronger as the year went on,” Ohmes says. Then he says the dialogue focused on what’s going to happen in 2019? Is the market going to turn? Is it going to continue? “Certainly, what we’re seeing in the first part of the year is it looks very strong as well,” Ohmes says, adding that investors and occupiers are making plans to execute in 2019. “It doesn’t mean that they’re not being a little more cautious maybe than they were in 2017 or 2018, but it hasn’t sidelined them,” he says. “Now there’s some noise out there and a lot of dialogue around the trade wars and what’s going to happen with interest rates in 2019. Can the economy continue to grow? The stock market showed a lot of volatility in the fourth quarter. “So that’s the noise that’s out there, but in terms of what’s happening on the street, it’s still very active and it looks like 2019 is shaping up to be a strong
Matt Rauenhorst
Bill Katter
year, certainly in the first half,” Ohmes says.
that rolls into the challenges in 2019. I think about global, U.S. trade issues, the partial government shutdown… The global and national climate plays into all of this, because trade does impact our state.” The shortage of skilled labor in sectors like construction and technology is also a concern. “As employers, it’s hard to find skilled talent to do certain roles, so that impacts job growth and business,” Kane says. “That’s why I’m moderating my viewpoint.”
Potential challenges the market faces “I think we’re going to continue to see a strong market, but I just think it’s going to moderate in some sectors,” says Jean Kane, CEO of Colliers International | Minneapolis-St. Paul. “We’re still in a good market because, in general, things are going well. Households are still consuming. Businesses are still investing. Manufacturers are still producing. So that makes me feel good, but
January 2019
Bill Katter, president and chief investment officer of United Properties Development, says the biggest challenge by far is the rapidly rising construction costs. “And as the labor pool diminishes -- to build the number of projects being planned or underway -- has created schedule challenges,” he says. “Projects are taking longer to build, because there’s not as much skilled labor to build them.” These are major issues, Katter adds. “They go directly at the profitability of the development and that’s going to continue to be the story in 2019. Can contractors continue to get reasonable costs and deliver projects on time? It’s causing consternation everywhere.” The No. 1 challenge is construction costs, agrees Matt Rauenhorst, vice president and general manager of Opus Development Co. “They keep going up and it’s a function maybe more so of material costs and that’s not just Chinese tariffs. It’s across the board. We have tariffs on lumber today. We have tariffs on steel, and we have tariffs on things coming from China. That matters. And then just a long-extended real estate cycle has given the ability to those suppliers to push rates. And some is due to labor cost increases.” Rauenhorst says the shortage of labor is leverage for that labor to be Forecast to next page
January 2019
Minnesota Real Estate Journal
“We’re continuing to look at opportunities for adaptive reuse of existing office space,” Rauenhorst says.
more expensive as well. “Rising interest rates is something we’re watching, but I don’t think that’s going to be as limiting as construction costs,” he adds.
Co-working trend will continue
Office transactions expected to be solid Several notable office properties are expected to sell in downtown Minneapolis in 2019. SPS Tower, formerly 333 South Seventh Street, is on the market as is Campbell Mithun Tower and a number of other buildings. “There will be half a dozen assets or so that will trade in downtown Minneapolis in 2019, and likely the first part of 2019,” Ohmes says. And it’s not just the CBD seeing office transaction activity. Investors are expanding to the suburbs seeking more attractive yields. Investors continue looking at suburban hot spots with urban characteristics like the West End and I-494/France Ave.
Office development will continue There’s demand for new office space, because it’s an opportunity for companies to advance their culture and how they work internally, and also express their brand and interact with their client base externally, Katter explains.
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Jean Kane
Mike Ohmes
He says while companies use new office space to attract talent it’s also about driving efficiency. “Companies are typically shrinking their footprint when they relocate,” Katter says. “They’re typically getting more efficient while making their culture better and their brand more prominent.” Several office developments are in the works. For example, United Properties plans to break ground on the Gateway mixed-use development in downtown Minneapolis in May, in
which RBC Wealth Management will be the anchor. The development will also include a five-star Four Seasons Hotel.
Adaptive reuse is growing trend Opus Development Co., for example, acquired the former Target West Campus building at 3701 Wayzata Blvd. in Minneapolis and is revamping it converting it into a modern, multitenant office building. Tactile Medical will anchor the project.
At the beginning of 2018, co-working represented 1 to 1.5 percent of the Twin Cities multitenant office market; however, co-working concepts continue expanding. “As we get into the end of 2019, it could double to the 2.5 to 3 percent range, but it’s still a very small portion of the overall multitenant universe,” Ohmes points out. However, it has a niche. Co-working is a fundamental way in which some companies are changing the way they do business, as they look toward flexibility, Kane says. Both startups and corporate users are showing a growing demand for coworking space. For example, Syngenta will move 200 employees from Minnetonka to WeWork’s Uptown location.
Industrial will remain hot Industrial was the first product that recovered out of the recession. “It really started cranking up early and sustained itself even through Forecast to next page
Page 12 Forecast from previous page
today,” Ohmes says. The first part of that recovery was tied around build-to-suits, but now there will likely be a number of more speculative developments built in the western suburbs, and perhaps, even in the eastern part of town, Ohmes notes. “Industrial development has been measured throughout this whole recovery,” Ohmes says. “Nobody has gotten out over their skis and delivered a bunch of space to a far larger degree than what the market can absorb. It’s been one successful project after another. I think we still have some legs where we’re going to see some new multitenant product being delivered that’s not tied to a build-to-suit.” “I’m still bullish on industrial,” Kane adds. “I think there’s still demand.” And she says investment dollars continue chasing the product. As e-commerce continues to boom — including more home deliveries and efficient distribution models -- demand for industrial space continues to grow, Rauenhorst points out. “Industrial is certainly the darling of the capital markets and tenants continue to look for efficient, new, well-laid out space,” he says. “We’ll continue to see strong demand for industrial space in 2019 and going forward.”
Minnesota Real Estate Journal
Retail development slowed Retail development opportunities are few and far between. “There aren’t a lot of new, emerging anchor retail concepts, principally because of a trend toward internet sales, so there hasn’t been a lot of new demand,” Katter says. It’s become more about mixed-use including ground-floor retail with apartments or office built on top. “Municipalities want to see retail integrated into something more significant for the community,” Katter says.” Mixed-use is the preference of cities, and it’s certainly becoming a requirement for downtown Minneapolis where land values have escalated and you need to stack uses to make sense of land value.”
Retail investment activity could pick up Investors have become more cautious and pulled back on retail; however, Ohmes says several properties could trade in the first half. The top-performing retail assets will continue trading, but investors are more careful in evaluating even the once-coveted grocery-anchored centers since the grocery sector is going through a transition itself. “I hear from my investment sales folks that there are some funds looking for certain kinds of retail in Minnesota in 2019,” Kane says.
Medical office will continue evolving There’s demand for medical office but not a lot of product is for sale, Kane says. She also says healthcare systems that have put in place some new strategies will likely begin to execute them this year, which will impact their real estate. “There will also probably continue to be consolidation of some independent practices as part of that strategy,” she adds. A few on-campus facilities were built and consolidation has occurred, Ohmes notes. “But medical users are trying to reorient where their presence should be,” he adds. More health systems and clinics are building and leasing space in retail centers or retail-type locations to be closer to the consumer. “They want better visibility, access and parking than older medical office buildings can offer,” Ohmes says. That’s leaving older medical office/flex buildings vulnerable.
Multifamily hot streak continues Multifamily investment sales remain hot, approaching $2 billion in 2018, and investors continue chasing product. Despite the number of new units delivered over the past six years, metroarea vacancy rates only ticked up slightly. Even accounting for new buildings undergoing lease-up, vacancies remain well below the national average at 3.3%, Compass reports. “However, there’s been a lot of new Class A, highly amenitized projects delivered,” Ohmes says. And more units will be delivered over the next 12 to 18 months. “I think people expect that there may be a little slower lease-up with the new product that’s still coming,” Ohmes says. “Maybe there’s going to be a little more incentive that owners need to give renters to entice them to move into their project. But the overall vacancy rates are still very healthy – even if there’s going to be a little bit of softness on the high end just because so many thousands of units have been delivered. “Nobody expects that the market is going to tip over,” he adds. “But I do think if people are looking out they’re asking how many more new high-end
January 2019
units can be delivered in these most active submarkets. I think it’s going to be more measured after this next wave gets delivered.” Katter also believes multifamily development will cool down. “There’s the perception that we need to pause,” he says, adding that the last round of units delivered didn’t absorb as quickly. “There are pockets like 50th and France – a highly desirable area where you just can’t find a newer multifamily solution -- those projects will go and do well.” Rauenhorst says Opus is focused on multifamily development in urban and densely populated areas where there are barriers to entry and a live/work/play environment. He says the well-positioned and well-located properties continue to lease up. He says Opus will continue focusing on downtown Minneapolis and the North Loop. They’re also closely watching the job growth.
Demand for senior housing accelerates There’s an accelerated demand for senior housing as a huge segment of the population is aging. “They call it the silver tsunami, of course, so we’ve been very busy,” Katter says.” We’re experiencing rapid absorption of that space.” United Properties has been developing senior co-op communities for years and is also building assisted-living communities. “From the 30,000-foot view, we’re just starting to get to that wave of baby boomers looking at senior-living options,” Rauenhorst adds. “We think we’re really early in that space, and we’re taking a measured approach to submarkets that have demand that exists today.” Opus has one senior-living project underway and two planned.
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! ies 18 ntr Feb r E ue You s D mit sion Sub mis Sub All
2019 Minnesota Real Estate Awards April 11, 2019 Radisson Blu Mall of America 4:30 Cocktail Reception | 5:30 Program
Project Awards:
Company Awards:
People Awards:
Urban Multifamily (Market Rate, incl. condo)
General Contractor of the Year
Executive of the Year
Suburban Multifamily (Market Rate, incl. condo)
Developer of the Year
Broker of the Year
Affordable Housing
Property Management Firm of the Year
Mortgage Broker / Banker of the Year
Industrial / Manufacturing / Science
City / Municipality of the Year
Woman of the Year
Senior Housing
Emerging Leader of the Year
Retail / Restaurant
Transaction Awards:
Lifetime Achievement (Announced in Advance)
Hospitality
Most Significant Lease Transaction
Real Estate Lawyer of the Year
Medical Property
Most Significant Sale Transaction
Architect / Engineer of the Year
Redevelopment / Reuse / Historic Greater Minnesota
Contact
Interior Design – Retail / Restaurant / Hospitality Interior Design – Office / Industrial / Corporate
Jeff Johnson
Jay Kodytek
952-405-7780 jeff.johnson@resummits.com
952-405-7781 jay.kodytek@resummits.com
www.mrej.com/2019awards Event Information Submission Entries Due February 18 Sponsorship Information #mrejawards
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Minnesota Real Estate Journal
January 2019
The St. Croix Crossing Bridge is Making Eastern Washington County Even More Attractive for Developers Written by John Hagedorn There’s still room in Washington County–even in two of its most developed cities. The opening of the St. Croix Crossing bridge in August 2017 has brought notable changes to the cities along the river. And despite appearances, there is room in the cities near the new bridge for developers wishing to tap into the region’s appealing location and demographics.
Oak Park Heights: A Retail Destination “Our city is thought to be at full build-out,” said Eric Johnson, city administrator for one of those cities, Oak Park Heights. With the river on the east, with Bayport and Lake Elmo to the south, and Stillwater to the north, Johnson’s city does appear to be landlocked. And the city’s biggest employer, Andersen Windows, already owns a good percent of that land. “However, within our current borders, in various pieces, there are 40-plus acres of land that could still be developed within the corridor,” Johnson adds. That “corridor” is Minnesota Highway 36, which connects with the St. Croix Crossing.
Both sides of Highway 36 seem at capacity with retail and restaurants. But appearances are a little deceiving. In fact, there’s been plenty of new development and redevelopment along the corridor. That includes the rehabilitation of the Stillwater Crossing retail mall—which, despite its name, is actually in Oak Park Heights. “These aren’t large square-footage developments,” Johnson notes. “But they’re on quality locations with excellent exposure, and they’ve always been ripe for redevelopment.” One of those locations is at the intersection of Highway 36 and Norell Avenue. The Washington County CDA provided a grant to the City of Oak Park Heights for a redevelopment study of the southwest corner. That study helped the city with its redevelopment planning efforts to improve the area where Plymouthbased TOLD Development Co. is building its first regional project. The corner was close to “a lot of existing national retailers whom we do a lot of business with,” TOLD vice president Trent Mayberry says. But it was new Bridge to page 20
Photo: Brian Hart
2019 Minnesota Real Estate Awards
Gary Holmes Lifetime Achievement Award Gary Holmes started selling light bulbs door-to-door in Minneapolis at the age of 12. A young entrepreneur, Gary enlisted his Boy Scout troop as a sales force. By age 14, he had earned enough from his light bulb sales to buy his first real estate asset: a set of Minneapolis duplexes. The rest is his legacy. Be there on April 11 when Gary is presented the prestigious lifetime achievement award.
2019 Minnesota Real Estate Awards April 11, 2019 Radisson Blu Mall of America 4:30 Cocktail Reception | 5:30 Program
www.mrej.com/2019Awards
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Minnesota Real Estate Journal
January 2019
The Southwest Light Rail Transit The Southwest Light Rail Transit, otherwise known as the Metro Green Line Extension, is expanding 14.5 miles from downtown Minneapolis. According to metrocouncil.org the new stops will extend from downtown Minneapolis through St. Louis Park, Hopkins, Minnetonka, and Eden Prairie. Royalston Avenue/ Farmers Market
Downtown Hopkins
Royalston Avenue/ Farmers Market station will be the first new stop in the new line. It will be within walking distance of Target Field, the Minneapolis Farmers Market, and the Hennepin Theater District. There’s an industrial backdrop in the surrounding area, which will be an ideal location for commercial and residential development.
The first stop going westbound into Hopkins is in close proximity to Cargill’s corporate headquarters. The surrounding area has sufficient rental housing and several large employers, and Blake School’s campus is located nearby. The following stops will be in downtown Hopkins and Shady Oak, which will have a park and ride.
Bassett Creek Valley
Opus station
The Bassett Creek Valley station will be located close to Van White Memorial Boulevard. There is a lot of potential for the area surrounding it, since it’s 75 acres of undeveloped property. Urban redevelopment is prime and potentially imminent around this location. Nearby is the Walker Art Center, Dunwoody College, Lowry Hill, and the Bryn Mawr neighborhood and athletic fields.
The first and only proposed stop going into Minnetonka is the Opus station, which is considered a major regional employment center of many different industries and 12,000 jobs. The next stop will be in Eden Prairie, located near the corporate campus of Optum Health and eventually the site of 6,500 jobs.
Golden Triangle Bryn Mawr The Bryn Mawr station will be located close to the Cedar Lake Trail, a popular bike route. This station is in a scenic valley and also close to the Minneapolis Chain of Lakes. An elevated pedestrian bridge is proposed be constructed to connect to Penn Ave South and Wayzata Boulevard.
The Golden Triangle station is named after the placement within three separate highways which are 169, 212, and interstate 494. This area has roughly 10 million square feet of office and industrial space, and it’s estimated to have over 20,000 people commuting through the greater Golden Triangle territory on a daily basis.
Beltline Boulevard
Eden Prairie Town Center
Following a couple of stops on West Lake street, the new line will be making stops in St. Louis Park. The first stop will be the Beltline Boulevard station, which is considered a saturated business location. There’s also numerous parks, shops, and restaurants of the Excelsior & Grand area.
The third stop of the region is the Eden Prairie Town Center station, located near the Eden Prairie shopping center and the intersection of I-494 and highway 212. There’s a small community of multi-family residential housing in the area.
Southwest Station Wooddale Avenue Wooddale Avenue station is next in line and has plenty of opportunities featuring residential. There’s nearly 200,000 square feet of retail space located in the area, located close to St. Louis Park High School and other community centers.
Louisiana Avenue Louisiana Avenue station will be expected to be a catalyst to future redevelopment for the area. Located just north of Park Nicollet Methodist Hospital, thousands commute to and from work and this station. The stop will be expected to be busy and provide growth to the neighborhood.
The final stop will be in Eden Prairie at the Southwest Station, which will be a reconfiguration of a current stop for Southwest buses. There are many shops and restaurants in the area, as well as a 200-acre Purgatory Creek conservatory.
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Minnesota Real Estate Journal
January 2019
Finding Skilled People Is Property Management’s Number One Challenge Nancye J. Kirk, Chief Strategy Officer, IREM
T
he number one challenge facing property management companies today is recruiting and retaining a qualified workforce. This was confirmed by a polling of industry leaders last month during the IREM Global Summit. When asked, “what is the single most important problem facing the property management business today?” a whopping 78 percent put “finding enough skilled people” at the top of the list, far outpacing the three other options given: “keeping up with technology” at 16 percent, “changing tenant and resident expectations” at 14 percent, and “energy, the environment, sustainability” at 5 percent. Property management companies are not alone in their quest to find and keep a skilled workforce. The National Federation of Independent Business (NFIB) reported in August that a record 25 percent of small business owners cited the difficulty of finding qualified workers as their single most important business problem. What’s more, 38 percent of all owners reported job
openings they couldn’t fill in the current period—the highest in the 45 years that the NFIB survey has been conducted. With a 3.7 percent unemployment rate, the competition for skilled workers at all levels and in all industries gets more intense. Chip Watts, CPM, CCIM, who is a fourth-generation president of Watts Realty Co., Inc., AMO, in Birmingham, Ala., agrees. Speaking to the Journal of Property Management (JPM), Watts had this to say: “Workforce training is our biggest issue, especially as it relates to bringing new people into our industry. The compression of time for a property manager is critical. You’re always trying to get so many things done in the shortest time possible. Technology can help, but there’s a lot of pressure in this need-itnow society we serve. That’s the longterm issue. How do we address those needs in a compressed time, especially if we don’t have a suitable number of trained people to help in our industry?” The U.S. Labor Department Employment of property, real estate, and community association managers is projected to grow 10 percent from 2016 to 2026. This is a growth rate
faster than the average for all occupations, which stands at 7 percent. This, coupled with the retirement of the baby boomers, suggests that the talent war will only get hotter. And this is not just a U.S. issue. The unemployment rate in Japan, a market where IREM is growing rapidly, stands at 2.3 percent. Speaking from Canada, Cheryl Gray, CPM, executive vice president with QuadReal Property Group in Toronto, told JPM, “Aging demographics are impacting nearly every industry, but in property management, it’s significant. IREM has its biggest opportunity in engaging the next generation and helping young people develop their skills.”
So what can you do? A few suggestions: • Make recruitment an ongoing process, not something that occurs only when a position is open. The ability to hire the best and the brightest is problematic when the recruiting and hiring process only takes place when there’s an opening to be filled. • Make sure new hires get off to a solid, positive start. As noted in the Sep/Oct issue of JPM, onboarding “helps make employees feel they have
said yes to the right company for them. And it guards against the possibility that new hires won’t settle in properly and wind up quitting after just a few months.” • Build from within. Make succession planning a priority—not only for executive-level positions but across the board. Offer current team members plenty of opportunities to learn new skills. Coach and mentor them to take on more responsibilities in line with projected business goals.
8:00 AM Welcome & Introductions
9:30 AM New Developments and Project Overview
Emcee: Andrew Gittleman, Executive Vice President, FirstService Residential
Joe Jablonski, Director of Forward Planning and Entitlements, Lennar Corp Robert Lux, Principal, Alatus
8:05 AM From a City’s Perspective 11:00 AM Apartment Building Conversion Opportunities
Jacob Frey, Mayor, City of Minneapolis
8:30 AM State of the Condominium & Townhome Markets Cynthia Froid, Principal, Cynthia Froid Group Ann Fritz, Partner, ESG Architects Sharry Schmid, President, Edina Realty Herb Tousley, Director of Real Estate, College of St. Thomas Brent Wittenberg, Vice President, Marquette Advisors
Matt Rauenhorst, Vice President & General Manager, Opus Development Tony Barranco, Senior Vice President, Ryan Companies Robert Lux, Principal, Alatus
12:00 PM Adjourn and Networking
Contact Jeff Johnson
Jay Kodytek
952-405-7780 jeff.johnson@resummits.com
952-405-7781 jay.kodytek@resummits.com
www.mrej.com/2019Condo
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territory for one of those clients, Panera Bread. At the same time, he adds, “the co-tenancies Panera looks for were there,” including Walmart and Target. That was just part of the appeal for Panera and TOLD. There are “the large traffic counts on Highway 36,” which provides easy access, not only within Washington County, but also to and from Wisconsin. Plus, Mayberry says, that particular corner has “arguably the best signal-light intersection in Oak Park Heights and Stillwater.” When you add up those advantages, he adds, “you have the recipe for a winning project.” A municipality willing to smooth the road for new development “is icing on the cake,” Mayberry says. The new Panera is opening in the first half of this year; TOLD is marketing an adjacent parcel to other national retailers. Mayberry says that TOLD is now looking for other project possibilities in eastern Washington County.
Stillwater Isn’t Keeping Still Just north of Oak Park Heights is Stillwater, the county’s most historic city, and its most charming. With about nine square miles of land within its city limits and a population of a little less
Minnesota Real Estate Journal
than 20,000, “we’re a modest-growth community,” Stillwater city administrator Tom McCarty says. But McCarty also notes that developers and redevelopers still want to be part of Stillwater. The number of visitors hasn’t declined with the closure of the picturesque Lift Bridge. That has meant less car traffic coming directly into downtown Stillwater. But unlike Oak Park Heights, which has benefited from new traffic to and from the new bridge, downtown Stillwater seems to be doing better with less traffic. “If you were to query the businesses up and down Main Street, the response you’d get would be positive,” McCarty says. “Prior to the new bridge’s opening, there were roughly 18,000 vehicles per day coming through downtown. When the bridge was up, cars would stack up at every intersection.” With the opening of St. Croix Crossing, downtown has become “easier to navigate” for the city’s numerous visitors. Local businesses are taking advantage. In October 2018, the historic Water Street Inn broke ground on a 23room expansion, which owner Chuck Dougherty says will be completed this summer. The project will add 23 new rooms to its existing 41, along with an expansion of the inn’s popular pub.
Thanks to the new bridge, downtown Stillwater is calmer, Dougherty says, but without losing its “Main Street feel” and vibrancy. That should add to the city’s already considerable appeal as a destination for weddings and corporate gatherings. With a new bike trail across the old bridge scheduled to open this summer, along with the Brown’s Creek Trail that opened a few years ago, “there seems to me to be a need for more rooms downtown.” Not far from the Water Street Inn, the old Wolf brewery complex has been turned into the hipster-stylish Lora Hotel, with amenities including complementary bicycles and pet accommodations. In the northern part of the city, the 52room Crosby Hotel opened at year’s end. McCarty acknowledges that there are more “redevelopment opportunities” in Stillwater than large green space. Developers looking for, say, 100 acres for an industrial park or a massive new warehouse will need to look elsewhere. That noted, there’s room for new retailers and smaller housing projects. The city is home to several small manufacturers and businesses providing specialized services in the health care sector. For start-ups and other smaller companies looking for space in
January 2019
an area close to amenities and good housing, “there are plenty of opportunities,” McCarty says.
Communities to Connect To The St. Croix Crossing Bridge has enhanced the already substantial advantages of Oak Park Heights, Stillwater, and the entire St. Croix Valley. “It’s no surprise that new residents and businesses alike are moving here,” Washington County Commissioner Gary Kriesel says. “We have access to nature through our trails, waterways, and just by stepping out our front doors. And it will become that much easier to enjoy nature as we continue to connect our communities with new biking and pedestrian paths, and provide added access to the St. Croix through new parks and boat landings. At the same time, we have the smalltown advantage of having every service or shopping need right in the neighborhood. Our schools are second to none, which means that families can be proud to educate their children close to home, and businesses can find qualified workers who live next door.” And the cities of the valley are more than willing to build bridges connecting developers to those demographics.
www.mrej.com/2019CapMarkets
www.mrej.com/2019healthcare
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CBRE Capital Markets has arranged the sale of the 10building Grand Oak Business Park Portfolio to an affiliate of Group RMC. Ryan Watts, Sonja Dusil, Judd Welliver, and Tom Holtz in CBRE’s Minneapolis office represented the seller, an affiliate of Equus Capital Partners, Ltd., based in Philadelphia, who has owned the portfolio for 11 years. Grand Oak Business Park is a premier 550,224-square-foot, 10-building Class A office campus located in Eagan, Minnesota, one of the fastest growing cities in the Minneapolis/St. Paul metro area. Grand Oak is situated in a 98-acre parklike setting featuring lake-side trails, outdoor amenity areas, and an approximate 5.11/1,000 parking ratio. “The city of Eagan has evolved into a thriving suburb of the Minneapolis market which was a big part of the Grand Oak story. Investors were attracted to the continued growth of the area along with the great freeway access and prox-
Minnesota Real Estate Journal
imity to the MSP International Airport, Mall of America, and both Downtowns of the Twin Cities,” said Mrs. Dusil. “These elements really resonated with the buyer, which is a new investor to the Minneapolis market, further demonstrating strong interest from new capital sources in top-performing secondary markets like Minneapolis.” Located a block from Grand Oak Business Park is Viking Lakes, a planned world-class 200-acre destination that includes the 40-acre TCO Performance Center and TCO Stadium. The area also includes the NFL’s Minnesota Vikings new practice facility and team headquarters, which highlights the continued growth and attention to the City of Eagan.
PR Mortgage & Investments and RICHMAC Funding Rebrand as Merchants Capital PR Mortgage & Investments, together with wholly owned subsidiary RICH-
MAC Funding, LLC (“RICHMAC”), a leading national full-service mortgage banking company, announces its rebrand to Merchants Capital. The comprehensive rebrand renews and elevates the company’s commitment to providing and servicing multifamily, senior and student housing. Merchants Capital will continue to offer all existing financial services, while investing further in brand unity and expert support for its clients. Merchants Capital and its affiliates – including Merchants Bank – will remain leaders in multifamily affordable housing finance, offering a full suite of products to affordable multifamily owners, including balance sheet, FHA, Fannie Mae and Freddie Mac. Since its inception in 1990, Merchants Capital has originated and closed more than $11 billion in loans and now services in excess of $8.2 billion. In 2017, the company closed more than $1.7 billion in new loans. As of September 30, 2018, Merchants Capital has
January 2019
generated $1.8 billion in new loan production. In 2017, PR Mortgage & Investments acquired RICHMAC, a national Freddie Mac Targeted Affordable Housing Seller/Servicer, Fannie Mae Multifamily Affordable Housing Lender, approved FHA multifamily lender and Ginnie Mae issuer. The seller was an affiliate of The Richman Group. “We are very proud of our unique expertise that marries the services of a bank with those of a mortgage company, as well as the market momentum and position we’ve created nationally,” said Michael F. Petrie, chairman and cofounder of Merchants Capital. “As our company continues to grow and evolve, we decided it was time for an exciting change, building on the existing Merchants brand recognition and merit.” In 2009, Merchants Capital’s parent company, Merchants Bank, reintroduced the trusted “Merchants” brand back into the financial services market. Merchants continues to be recognized as one of the top performing banks nation-
January 2019
Minnesota Real Estate Journal
ally by S&P Market Intelligence. “We believe there are significant growth opportunities with additional borrowers and partners across the nation. Launching this modern, unified brand signals our intention to the market and positions Merchants Capital to meet these expansion targets,” said Michael R. Dury, president of Merchants Capital. The rebrand will not affect any existing loans or delay any current or future loans in process with Merchants Capital.
Merchants Capital Secures First-Ever Freddie Mac NonLIHTC Forward Commitment Financing for $19.7M Affordable Housing Community in Minnesota Mortgage banking firm Merchants Capital has secured financing for the development of a $19.7 million mixedincome workforce housing community in Rochester, Minnesota. Merchants Capital secured the loan through the first-ever Freddie Mac Non-LIHTC Forward Commitment on behalf of Real Estate Equities. Dubbed Technology Park Apartments, the 164-unit affordable housing complex will help to ease the city’s affordable housing crisis, as Rochester
News from page 6
accommodating all floors. The parking garage will be constructed of concrete plank and have two access points. Trails Edge will be designed to the highest urban standards for appearance as well as long term maintenance. The combination of brick, stone, steel siding and highquality vinyl windows provide a character befitting of the urban, yet green, setting of this site with its adjacency to Costco and the Bruce Vento Trail. The development team and land owners believe strongly in attractive landscaping. In-suite amenities to include hard surface countertops, stainless steel appliances including microwave and washer/dryer, walk-in closets, raised panel doors and 9 foot ceilings. Trails Edge common area amenities will include a management office, community room, fitness center, theater, automated parcel lockers / mail room, game room, dog park, pet spa and business cen-
was recently ranked one of the lowest metropolitan statistical areas (MSAs) nationally for housing affordability by Nationwide Economics. The project closed on Sept. 5, 2018. “We appreciate the opportunity to assist in the development of this housing community and the chance to help close Rochester’s affordable housing gap,” said Michael R. Dury, president of Merchants Capital. “We were able to simplify the process with our ability to provide the construction financing through our parent company, Merchants Bank, and also offer the Freddie Mac Non-LIHTC Forward Commitment product for the long term permanent financing.” The apartments were financed through a 10-year Freddie Mac NonLIHTC Forward Commitment loan where the interest rate was locked at the closing of the construction loan. NonLIHTC forwards are unfunded, forward commitments for affordable housing developed by nonprofits and subsidized, rent-restricted affordable housing that for-profit developers can use for their new multifamily construction or substantial rehabilitation projects. “We are very excited to be on the forefront of developing a modern workforce housing product that is not heavily
ter. Additional distinctive amenities including a secured bike storage room for bicycles with repair area and access from the building leading to the Bruce Vento Trail, a community deck on the fourth floor over-looking the patio area, and a separate community outdoor facility designed to feel like an up-north cabin with a kitchen, fireplace, and cozy furniture for gatherings. The development site is bounded by Country View Drive on the west and County Road D on the north. The site is bordered by Costco on the south and Bruce Vento Regional Trail on the east. Country View Drive is a local street connecting Beam Avenue on the south to County Road D on the north. Because of the site’s location, Trails Edge will be visible to traffic along all three roadways.
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reliant on government funding sources,” said Alexander Bisanz, director of acquisitions at Real Estate Equities. “Partnering with the Greater Minnesota Housing Fund to provide low-cost, mission-driven equity – as well as structuring attractive financing with Merchants Capital – truly allowed us to get this project off the ground.” Forty percent of Technology Park Apartments will be priced affordably for individuals earning an annual income of $40,000, or 60 percent of the area’s annual median income (AMI). The Greater Minnesota Housing Fund contributed a total of $3.4 million in capital for the development of these units, which will cost renters an estimated $1,150 a month for a two-bedroom apartment. An additional 35 percent of units will be set aside for individuals earning about $55,000 a year, 20 percent below Rochester’s AMI. The remaining units will be priced slightly below the current market value, about $200-300 less than similar apartments in the area. “In all of Greater Minnesota Housing Fund’s work to create and preserve unsubsidized affordable housing, we have struggled to crack the code on the production of new affordable units with-
out reliance on public resources. Now, as an equity partner in Technology Park, we are furthering our mission and innovating ways to increase the funding pie with new financing solutions,” said Rachel Robinson, fund manager with Greater Minnesota Housing Fund. “Going forward, Tech Park, with 164 modestly priced apartments, 66 at reduced, affordable rents, will be a pilot for further innovation in this realm.” Technology Park’s cost-efficient, smart building design achieves sufficient economies of scale to charge modest rents, meeting the needs of a range of household incomes. Today’s market financing tools are working best for luxury apartment construction, and at the other end of the spectrum, affordable apartment developments financed with federal tax credits are limited in supply. Developers have struggled to find ways to finance new construction homes that are in between: achieving modest rents for residents without government subsidy. Freddie Mac’s new Non-LIHTC Forward Commitment achieves this.
People from page 4
CLAY DODD NAMED DIRECTOR OF VALUATION AND ADVISORY SERVICES FOR CBRE IN MINNEAPOLIS Clay Dodd, MAI, ASA, has been named director of Valuation and Advisory Services for CBRE in Minneapolis. Dodd brings more the 25 years of experience to CBRE. His main area of specialty is in agri-business and food processing facilities, with a strong emphasis in the grain industry. Assignments include grain elevators, flour mills, feed mills, oilseed crushing plants, ethanol plants and a wide range of other agri-processing plants. Dodd joins CBRE, a Fortune 500 Company and the world’s largest commercial real estate services and investment firm, to help establish a national agri-business practice. He is one of the few appraisers
Claire J. Roberts nationally to hold both the MAI designation from the Appraisal Institute and the ASA designation in Machinery and Technical Specialties from the American Society of Appraisers. “Clay brings a very unique skill set and expertise to CBRE that will benefit our practice group in Minneapolis and nationally,” said Michael Moynagh, senior managing director for CBRE. “We are excited to have him on board.”