VOLUME 32, NUMBER 5
©2016 Law Bulletin Publishing Co.
May 2016
Four benchmarks for evaluating new hotel projects by John Petrovski
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New study shows that co-working, flexible office space is on the rise by Dan Rafter
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.S. office buildings are more frequently offering tenants co-working space today, office space that employees from several different companies share as a way to save on the cost of space and equipment.
According to the 2016 Flexible Workspace Review released in May by The Instant Group, co-working grew more than 10 percent across the United States last year. Office buildings offering co-working space and executive suites — offices that independent contractors or other workers can Space to page 16
he hospitality sector is in the sixth year of a bull run after the 2009-2010 economic downturn. Most markets across the country are enjoying recordhigh occupancies, while daily room rates and top-line revenue growth have been strong. It’s been exciting times and all good news, but there’s more downside risk today than there was a few years ago. Now, greater deal selectivity is prudent, and the best developers and operators will outshine the competition. Petrovski In the midst of a boom market, it’s easy to believe that the market can only continue to grow. That may be leading some developers to be overly aggressive in entering new markets and pursuing new hotel developments. But considering that the typical upcycle for the hospitality industry is about three to five years, the current bull market is bound to run out of steam sooner rather than later. Depending on the conditions specific to a particular market, developers could be better served by Hotels to page 18
Associated Bank’s Schmidt: People matter when it comes to commercial financing by Dan Rafter
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innesota Real Estate Journal spoke with Paul Schmidt, head of commercial real estate in the Minneapolis office of Associated Bank, about what it takes for investors and developers to qualify for commercial financing today. The key, Schmidt says, is the people behind the financing requests. Minnesota Real Estate Journal: For years now, the multifamily sector has been red hot. Are you still
seeing an abundance of financing requests from customers looking to buy or build apartment buildings throughout the Midwest? Paul Schmidt: We are still seeing a lot of requests for multifamily financing. We really hit the peak about a year ago. Back then, it seemed that was all we were lookSchmidt ing at. It has started to slow a bit, though. In a lot of the markets, the low-hanging fruit has already been developed. Developers and investors
are now being a bit more selective. That said, the multifamily market continues to be strong. The market fundamentals continue to be strong in terms of the number of people wanting to rent versus buy. The country is seeing solid job growth. We have to find places for all these people to live, and renting remains a top choice for many. MREJ: You mentioned that a year ago, it seemed that the vast majority of your lending requests were Schmidt to page 20
Topics Include: Brainerd Lakes Area State of the Market/Way of Life Residential Real Estate Market Update Commercial Real Estate Market Update Business Park & Industrial Park Development & Opportunities
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May 2016
Minnesota Real Estate Journal
Contents
1
MAY 2016 • VOLUME 32, NUMBER 5
NEW STUDY SHOWS THAT CO-WORKING, FLEXIBLE OFFICE SPACE IS ON THE RISE FOUR BENCHMARKS FOR EVALUATING NEW HOTEL PROJECTS ASSOCIATED BANK’S SCHMIDT: PEOPLE MATTER WHEN IT COMES TO COMMERCIAL FINANCING
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THE EVOLUTION OF OFFICE SPACE: GOODBYE BOXY, HELLO ARTSY
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5 WAYS TO WORK SMARTER
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Departments PEOPLE
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NEWS
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Minnesota Real Estate Journal (ISSN 08932255) Copyright © 2016 by the Minnesota Real Estate Journal is published for $85 a year at 12 times per year by Jeff Johnson, 13700 83rd Way North, Suite 206, Maple Grove, MN 55369. Monthly Business and Editorial Offices: 13700 83rd Way North, Maple Grove, MN 55369 Accounting and Circulation Offices: Jeff Johnson, 13700 83rd Way North, Maple Grove, MN 55369 Call 952-885-0815 to subscribe. Application to mail at Periodicals postage at Maple Grove, MN, and additional mailing offices (if applicable). For more information call: 952885-0815. ©2016 Law Bulletin Publishing Co. No part of this publication may be reproduced without the written permission of the publisher.
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Minnesota Real Estate Journal
May 2016
People a division of Law Bulletin Publishing Co.
13700 83rd Way N, STE 206 Maple Grove, MN 55369 For information call 952-885-0815
Publisher | Managing Editor Jeff Johnson jjohnson@recg.com Associate Publisher Jay Kodytek jkodytek@recg.com Consulting Editor Dr. Tom Musil tamusil@stthomas.edu Conference Manager | Art Director | Graphic Designer | CE Specialist Alan Davis adavis@recg.com
EDITORIAL ADVISORY BOARD JOHN ALLEN Industrial Equities ROBERT ANGLESON Navigator Real Estate RICK COLLINS Ryan Cos. US Inc. JEFF EATON Cushman & Wakefield/NorthMarq MARK EVENSON ULG Equis PATRICIA GNETZ US Bank TOM GUMP TAG Consulting JON HEMPEL Hempel Properties DAVID JELLISON Liberty Property Trust CHAD JOHNSON Hellmuth & Johnson BILL WARDWELL Colliers International GEORGE KLUEMPKE Braun Intertec JEFFREY LAFAVRE CBC Griffin Companies WADE LAU Founders Properties MIKE LE JEUNE Fabcon JIM LOCKHART WIPFLI DUANE LUND Exchange Realty PATRICK MASCIA Duke Realty Corp. CLINT MILLER Cushman & Wakefield/NorthMarq DR. THOMAS MUSIL University of St. Thomas WILLIAM M. OSTLUND CBC Griffin Companies WHITNEY PEYTON CB Richard Ellis MIKE SALMEN Transwestern STEWART STENDER Stewart Capital Partners
a division of Law Bulletin Publishing Co. 13700 83rd Way N, STE 206 Maple Grove, MN 55369 For information call 952-885-0815
STEVEN SCOTT MANAGEMENT NAMES MARK JENSEN CEO AND PRESIDENT Steven Scott Management, Inc., a locally owned, St. Louis-Park-based rental property management company, today named Mark Jensen CEO and President, effective June 1, 2016. Jensen succeeds Barbara Halverson who is retiring after 44 years; she will consult with company management for a two-year period. Jensen, who joined Steven Scott 28 years ago, is currently chief operating officer (COO) and chief financial officer (CFO). In these roles, he oversees the operations of more than 9,000 rental units, and the financial functions of the company. “We are grateful for the outstanding contributions Barbara has made and for the strong foundation she leaves us with as we move forward,” said Scott Bader, Steven Scott principal. “Under her leadership, Steven Scott has become one of Minnesota’s leading property management companies. Mark knows our company and industry well, and with a strong employee team in place, we are in a great position to build on our reputation for excellent service and forwardlooking innovation in property management.” “I am honored to accept this new role and to build on the growth that we have achieved, which can be attributed to Barbara’s leadership and our employees and their commitment to delivering optimal results for our clients,” said Jensen
Ann Duginske Joins Ryan Companies US, Inc. as Healthcare Development Manager Ryan Companies US, Inc. announced Ann Duginske joined the Ryan team as Healthcare Development Manager. In this position, Ann works closely with health systems, hospitals, and independent physician groups across the nation facilitating their growth strategies through strategic planning, facility acquisition, design and construction acquisitions and property management solutions. “Ann’s skillset is a great advantage to Ryan as we grow our healthcare sector
and we’re thrilled to have her filling an important role in our development team,” said Erwin Effler III, Ryan’s Vice President of Development, Healthcare . “She will be instrumental in helping healthcare providers evaluate, plan and execute real estate solutions in the ever-changing healthcare marketplace.” Previously, Ann served as Director of Marketing & Development for New North, Inc., an 18-county regional economic development organization in Northeastern Wisconsin. With specialties in economic development and site selection, Ann built partnerships with businesses locally, regionally, and nationally to attract and execute business development projects for the New North region of Northeast Wisconsin. This work helped to recruit new real estate investment and new jobs to the region. Ann received a Bachelor of Business Administration in Marketing with a Minor in Public Relations and Journalism from the University of Wisconsin, Oshkosh and is currently pursuing her M.B.A. in Real Estate and Finance from the University of St. Thomas, Minneapolis. In addition, she is completing her Economic Development Finance Professional (EDFP) Certification from the National Development Council (NDC). She is very active in community and industry organizations, among them CoreNet Global, International Economic Development Corporation, and Rotary International. She has served as a Board Member for the University of Wisconsin-Oshkosh Alumni Association since 2012 and regularly volunteers as a Small Business & Financial Advisor to entrepreneurs at Women Venture in Minneapolis, MN. “Ryan is a company that is not only exceptional at what they do, but has integrity and values lasting customer relationships,” said Duginske. “I’m thrilled to join such a strong team of experts who care so deeply about their work. I look forward to offering my real estate and business development perspective as well as the opportunity to connect closely to our customers.”
Knutson Construction Announces Amy Schilling Promoted to Senior Marketing Coordinator
Knutson Construction, a leading builder in the Twin Cities market, announces Amy Schilling has been promoted to senior marketing coordinator. Schilling started working for Knutson Construction in 2014 as marketing coordinator. Over the past two years, Schilling has played a critical role on many successful business pursuits, and has contributed to further developing and strengthening Knutson’s brand identity and marketing strategies. Schilling is an active member of The Knutson Experience committee bringing a passion for event planning and a dedication to our corporate values to the team. “Amy has demonstrated leadership, dedication, and passion in her work and has gone above and beyond in many areas to help Knutson strengthen our presence in the Midwest Marketplace.” stated Chris Terry, vice president.
Knutson Construction Announces Five New Hires in their Twin Cities Market Knutson Construction, a leading builder in the Twin Cities market, announces Brenda Tresco, Jimmy Soderberg, Dillon Theusch, Hannah Ellingson, and Laura Kownslar have joined the firm as it continues to grow its business in the Twin Cities region. Brenda Tresco brings more than 10 years of industry experience to Knutson’s accounting department. Filling the role of accounts payable in Knutson’s Minneapolis office, Tresco has specialized expertise in electronic accounts payable processing and is responsible for consistently processing 250 vendor payments per week, further enhancing The Knutson Experience for vendors and subcontractors. Jimmy Soderberg joins Knutson from a firm in Indianapolis where he specialized in warehouse construction. Soderberg has a degree in construction management degree from the University of Wisconsin Stout. Soderberg has returned to his hometown and will work on the MSP Airport Terminal 1 Cargo and storage building and Terminal 2 gate expansion projects. Dillon Theusch will be working on the Minnesota Correctional Facility People to page 23
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Minnesota Real Estate Journal
News Knutson awarded Emergency Department Entrance and Triage Renovation Project at Hennepin County Medical Center Knutson Construction has been awarded the contract to remodel the current emergency department at the Hennepin County Medical Center (HCMC), located at 730 S. 8th Street in Minneapolis. The project is estimated at $1.6 million with an anticipated completion date of January 2017. Construction is planned to begin in late June. The project, designed by HGA Architects, consists of a phased renovation to 8,700 square-feet of existing emergency department space at HCMC with the addition of four new fast-track rooms, including: 1 flexible room, 2 new quick assessment rooms, 2 provider care team work areas, and renovated reception and waiting areas. Hennepin County Medical Center is a 484 bed hospital, adult and pediatric Level l Trauma Center,
and system of clinics serving the metro area. “Hennepin County Medical Center is the leading provider of health care services to downtown residents, workers, and visitors and this project will be a key element of the continuum of care they provide patients by streamlining access to emergency care. Knutson Construction welcomes the opportunity to serve HCMC and our community by providing construction management excellence in the planning and execution of this project”, stated Dave Bastyr, Knutson Construction’s executive vice president.
Bridgewater Bank Acquires First National Bank of the Lakes Bridgewater Bank has completed an acquisition of First National Bank of the Lakes, headquartered in Orono, MN, effective May 20, 2016. As a result of this purchase, Bridgewater Bank acquired assets of approximately $75 million; $30 million in loans and $74 million in deposits. In addition, Bridgewater Bank will increase its geographic
presence in the Twin Cities adding three new branches. The acquired branches are located in Uptown, Orono and Richfield. “Although we have had no difficulties growing the bank organically, this acquisition came at the perfect time.” stated Jerry Baack, President and Chief Executive Officer. “Through this acquisition, Bridgewater instantly gains premium branch locations, expands its core deposits and diversifies the Bank’s current loan portfolio, all critical elements of the Bank’s strategic plan to become the prominent commercial bank in the State of Minnesota.”
Blattner Energy Expands Corporate Headquarters to Accommodate Business Growth and Serve Employee Needs In Spring 2015 a design-build team led by Knutson Construction was selected for the Blattner Energy Corporate Headquarters expansion. Knutson served as the project’s design-builder, with AECOM as the base building architect and Studio Hive as interior designer. Now, a year later, the team is
May 2016
excited to unveil the completed project. The two-story, 25,000-square-foot expansion is anchored by a state-of-theart training and conference center, 87 new offices and workstations, and a larger, upgraded employee fitness center. The project also include exterior site improvements. Headquartered in Avon, Minnesota, Blattner is a diversified power generation contractor that employs more than 2,000 people throughout the United States. Built by the same team in 2008, the first phase of Blattner’s headquarters earned LEED® Platinum certification, the highest available through the U.S. Green Building Council. Like the existing building, the addition promotes sustainable design and construction solutions and efficient energy use. New features include electric car charging stations and geothermal HVAC system expansion. Blattner continues to power a portion of its campus with wind and solar energy produced on site. “Blattner Energy is the best company I’ve worked with in 37 years of construction. They’re very responsive and are always moving forward in a positive
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Minnesota Real Estate Journal
way”, stated Jay Augst project superintendent. “We’re excited to be a part of this recent expansion and look forward to continuing our partnership into the future.”
2016 Minnesota Business Ethics Awards Honors ACKERBERG Business leaders gathered at the Nicollet Island Pavilion on Business Ethics Awareness Day in Minnesota to honor three companies with the 17th annual Minnesota Business Ethics Award (MBEA). Ackerberg was honored in the Small Company (under 100 employees) Category. Additional recipients included King Solutions in the MidSized Company category and HealthPartners in the Large Company category. Ackerberg is the only full-service commercial real estate firm to have been recognized with this award. Ackerberg received the award along withstate of Minnesota. “This year’s MBEA recipients have made exemplary strides in creating business cultures that
aspire to achieve high ethical standards,” says Brian Volkmann, MBEA co-chair. “They endeavor to make the best out of any situation while serving the interests of all stakeholders.” In a message to Ackerberg employees, CEO Stuart Ackerberg said, “For me, this recognition is huge as it is a reflection of the entire team members of Ackerberg. It is very different than so many awards for which we are considered that reflect our work — What we “do”, this award reflects "who we are” and "how we operate”! “ The MBEA recognizes Minnesota businesses that exemplify and promote ethical conduct in the workplace, the marketplace and the community. Since its’ founding in 1999, the MBEA has recognized 49 Minnesota-based businesses, ranging in size from less than 10 employees to more than 150,000. The MBEA was founded by the Society of Financial Service Professionals – Twin Cities Chapter and the Center for Ethical Business Cultures (CEBC) at the University of St. Thomas Opus College of Business. Joining these two organi-
zations as a sponsor is the Financial Executives International (FEI) – Twin Cities Chapter. Information about the MBEA and a list of past MBEA recipients can be viewed at www.mnethicsaward.org.
$11.5 MILLION WALGREENS SALE ARRANGED BY MARCUS & MILLICHAP Marcus & Millichap Capital Corp. (MMCC) arranged $5.3 million in acquisition financing. Marcus & Millichap (NYSE: MMI), a leading commercial real estate investment services firm with offices throughout the United States and Canada, announced the sale of a 14,490-square-foot Walgreens drugstore in Sauk Rapids, Minn. The $11,517,857 sales price equates to $795 per square foot. “The buyer is a private 1031-exchange investor,” says Brian Parmacek, a director in Marcus & Millichap’s Net Leased Properties Group. “Our long-term relationships with owners and investors of every major property type allows us to match properties
May 2016
and exchange buyers with speed and efficiency.” Parmacek and Joshua Hergott, an associate in the firm’s Chicago O’Hare office, represented the buyer. Dean Giannakopoulos, associate vice president capital markets in MMCC’s Chicago Downtown office, arranged $5.3 million in acquisition financing. Craig Patterson, regional manager of Marcus & Millichap’s Minneapolis office, is the firm’s broker of record in Minnesota.
STEVENS CONSTRUCTION APPOINTED GENERAL CONTRACTOR FOR THE RISE AT PROSPECT PARK Stevens Construction Corp., a fullservice, Minnesota-based general contractor, has been named the general contractor for a new, 527,155sf multi-use project in the Prospect Park East River Road neighborhood in Minneapolis. The large project includes 186 market-rate apartments, 150 student housing apartments, roof-top amenity deck, dog run (on roof), an array of interior recreation-
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al spaces (golf simulator room, Fitness center, Yoga room, Sauna, and tanning), 30,118sf Fresh Thyme grocery store, 10,240sf of retail/restaurant space, with two levels of underground parking. The student housing apartments, 7-story building will complete in October 2017 followed by the 14story building in March 2018. The project is owned by Harlem Irving Companies and Campus Acquisitions, LLC, and is being designed by Tushie Montgomery Architects of Minneapolis. The project broke ground early May 2016.
Cushman & Wakefield/NorthMarq Completes Sale of Andover Station Shopping Center Cushman & Wakefield/NorthMarq (www.cushwakenm.com) Director Leah Maurer represented owner Andover Station LLC in the sale of Andover Station, a grocery-anchored shopping center located in Andover, Minnesota. Andover Station, at 2218 Bunker
Minnesota Real Estate Journal
Lake Boulevard, was built in 2002 and includes Festival Foods, Dollar Tree, Belli Capelli, Farrell’s Extreme Body Shaping and other tenants. The 75,000 sq. ft. Class A center is 98 percent leased. The sale closed May 2. Many of Andover Station’s core tenants have been in the center since it opened 14 years ago, a strong signal to prospective investors. “Andover Station’s high occupancy provides investors with consistent and durable cash flow,” said Maurer. “Festival Foods has established themselves as the high-end grocer in this market where the average household income within the trade area and a one-mile radius are both over $100,000.”
Three New Gander Mountain Stores To Open In The Fall Nation’s fastest-growing outdoors retailer adding Colorado, Pennsylvania & Texas locations The wait is almost over for many outdoor enthusiasts in Colorado, Pennsylvania and Texas, as new Gander
Mountain stores will be opening in their neighborhoods soon. Finishing touches are being put on a trio of new stores, and grand opening celebrations are being planned for this fall in Parker, CO, Warrington Township, PA, and Frisco, TX, as the nation’s fastestgrowing outdoors retailer’s unprecedented expansion continues. Since 2012, Gander Mountain has added more than 55 new stores between the Atlantic Coast and the Front Range of the Rockies. “We are excited to once again be expanding our reach in great outdoors states like Colorado, Pennsylvania and Texas, and to be bringing Gander Mountain’s top-level expertise, service and selection to more people who enjoy great traditions like hunting, shooting, fishing, camping, archery, hiking and boating,” said Derek Siddons, Gander Mountain’s President. “We are bringing new retail experiences to the people in Parker, Frisco and Warrington Township, and know that Gander Mountain’s top-quality gear and knowledgeable service will be
May 2016
well-received.” The Parker store will be 57,000 square feet and located within the Crown Point development at 18420 Cottonwood Drive, near the northeast corner of E470 and S Parker Road (Colorado 83) in the southeast Denver metro. The Frisco store will be 52,000 square feet and is in the Eldorado Marketplace, near the northeast corner of Eldorado Parkway and Dallas North Tollway in the north Dallas metro. The Warrington Township store will be 52,000 square feet and is located at 100 Easton Road in the Warrington Crossing development, near the junction of County Line Road and Easton Road in the north Philadelphia metro near Horsham Air Guard Station. “We appreciate the great relationships we have with the people and government officials in Parker, Warrington Township and Frisco, and we look forward to the grand opening celebrations for our three newest stores in the fall,” said Eric Jacobsen, Gander Mountain’s News to page 22
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The evolution of office space: Goodbye boxy, hello artsy By Dan Earles, Principal, Earles Architects and Associates
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oday’s office spaces are increasingly being shaped by company culture, as businesses look to incorporate their corporate branding and values. This is a significant shift in mindset and part of the overall evolution of office space seen over the past 25 years since EAA first started working with landlords and tenants in Chicago. The overly-structured, boxy corporate offices of the 1990s have evolved to become highly customized spaces that reflect each company’s goals for team interaction and company image. This means plenty of open space, flexible workspace arrangements, and comfortable furniture groupings that help convey a company’s image and values. In essence, the workplace has become an extension of a company’s corporate branding and is playing out in several ways: ▪ Logo colors and themes that flow through the office in carpeting, paint, artwork
▪ Unique reception and conference areas that showcase company branding, achievements and innovation ▪ Wayfinding that uses corporate colors and names to help move people through the office space The office market also has seen a tremendous geographic expansion in the past 25 years, with River North and, more recently, the Fulton Market coming into the mainstream as desirable office locations. Each different market sector provides businesses with plenty of opportunity to find an ideal space and add the level of customization needed to build employee loyalty, spur on productivity, and impress existing as well as prospective clients. All these changes are also impacting the landlord market, as they look to maintain their buildings to the highest levels and add amenities that will attract and retain tenants. Many downtown buildings, from River North to Fulton Market to the CBD, are undergoing extensive redesigns or upgrades to the common areas and amenity packages. Some landlords are also rethinking how their buildings should
flow to fit today’s collaborative office culture. They are being proactive about designing new space and speculative suites to increase leasing activity. All these efforts also contribute to the brand identity of the building, or building ownership. While each office tenant is unique, there are other common themes driving tenants today in the various business sectors: ▪ The need for efficiency in space planning. Many tenants have moved toward smaller work stations and/or offices to improve efficiencies. The large executive offices that were common in the 1980s and 90s are rarely included in office floor plans. ▪ A desire for full service capabilities from business partners. This extends to space design and build out, as businesses are moving at a fast busy and often look for service providers that can deliver a comprehensive result. EAA, for example, added SEAATS, a commercial furniture division to fill that need for streamlined design and furniture selection services. ▪ A focus on technology, ranging from conferencing solutions, monitors
and screens, to wifi hotspots and “hot desk” options that allow for flexible use of space. Technology provides tremendous flexibility, allowing employees to connect remotely and easily move around the office to join in collaborative, team efforts. These themes are taking place on all business sectors, from established technology tenants to start-up firms, and from law firms to financial and professional services firms. The past 25 years have seen many exciting changes in the downtown office market, ones that should continue to shape the business community for years to come. Chicago-based Earles Architects and Associates (EAA) is celebrating its 25th anniversary. The firm provides architectural and interior design services, along with commercial furniture services, for a wide range of businesses including commercial offices, retail spaces and restaurants throughout Chicagoland and Northwest Indiana.
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May 2016
5 Ways to Work Smarter:
Leveraging Economic Development Professionals for Ease and Efficiency sf expansion of Grede Foundry in St. Cloud by coordinating the regulatory application and expediting the MPCA air handling permit process within four months so they could open on schedule.
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s the Economic Development Director of the City of St. Cloud, my team and I get the opportunity to work with people at varying stages of development every day of the week. And in my 20 years of municipal experience, I’ve noted countless instances where contacting our office at the start of the project would have saved the prospective developer time, money, and frustration. Here are five specific ways that Economic Development (ED) pros like myself can really add value to your experience. 1) Navigate the city and state development processes. ED staff members are closely linked with other city department heads and public officials—oftentimes operating in the same building. As a result of these interdepartmental connections, we can direct you to the right person— whether you’re trying to acquire a utility permit, a liquor license, or the status of a building permit application— saving you time and endless phone calls in the process. A great example is
Cathy Mehelich Minnesota Business First Stop, a group that works to triage and streamline the development process for complex business expansions that involve financing, licensing, permitting and regulatory issues overlapping multiple state agencies. I recently witnessed them play a crucial role in facilitating the 32,000-
2) Make informed workforce decisions. Site selection today is driven more and more by where the workforce is available. ED pros are closely connected to the workforce centers, colleges and universities, and DEED Regional Analysts that can quickly provide us with specific occupational profiles that reveal demand, average wage, and regional comparisons. For example, St. Cloud has become a growth hub for customer service and call centers. The current demand ranking for these positions is #6 of 481 job types in Central Minnesota with an average hourly wage of $14.52. By comparison, the Twin Cities Metro ranks these positions at #1 in demand with an average hourly wage of $18.78, making St. Cloud a competitive choice.
3) Find the best financing fit. Though financing assistance tools are ever-changing, ED pros have a knack for knowing which ones will best fit unique projects. Because financing tools are often tied to specific eligibility requirements, sharing your basic details—which remain confidential—such as building size, construction or renovation, type of company (manufacturing/office/warehouse), estimated equipment needs, and jobs and wages, help us make the most valuable match for you. 4) Tap into local property knowledge. MNCAR and Xceligent are valuable tools that are linked on many city websites and can include several cityowned properties. However, ED pros are in the know about the city’s longterm vision, which sometimes results in unlisted properties that are optimal for development or redevelopment based on the city’s Comprehensive 5 Ways to page 21
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Space From page 1
rent for a limited time — grew by 12.9 percent. The Instant Group said that the total flexible workspace market grew by an average of 4.3 percent last year, with 3,596 combination centers now offering co-working spaces and executive suites. The United States leads the world in this kind of workspace, with the United Kingdom in second place with 3,290 combination centers. The increase in buildings offering some form of co-working is four times higher than that of the growth of conventional executive suites, which increased by only 3.4 percent during the same time period. “Co-working has proven to be a powerful driver of the market in the United States,” said Tim Rodber, chief executive officer of the The Instant Group, in a statement. “Coworking benefitted from early adop-
Minnesota Real Estate Journal
tion by tech and media firms that have, in turn, done a marvelous job of promoting shared workspace and collaboration between start-ups and established firms.” Rodber says that the growth of coworking and shared office spaces is showing no signs of slowing. “What we are seeing is a broad expansion of flexible workspace solutions as companies of all sizes seek out collaborative workspaces that challenge the conventional office market,” Rodber said. Tenants in all markets don’t have equal access to co-working spaces, though. According to the study, the U.S. flexible workspace market is still relatively concentrated, with 50 percent of the total market for this kind of office space located in just five states. The same 50 percent of the market is also concentrated in just 50 cities across the country. Not surprisingly, given its reputation for tech start-ups, California leads the way as the state with the most flexible office space and the largest number of dedicated co-
working spaces. According to The Instant Group, there are now 103 “pure” co-working spaces in California, a number that more than doubles that of any other state in the United States. These centers are devoted solely to co-working. New York City continues to have the most expensive flexible work space in the country, with desks costing $1,047 to rent on average each month. Washington D.C. offers pricey flexible work space, too, with an average workstation rate of $1,022 a month. That’s an increase of 17.2 percent when compared to one year earlier. In the Midwest, Illinois has the largest number of co-working centers, 145 according to The Instant Group. That’s a year-over-year increase of 5.4 percent. The average desk rate for co-working space in the state is $709 a month, according to The Instant Group. Chicago, not surprisingly, led the way in the state, with 116 co-working centers with an average monthly desk rate of $839.
May 2016
Ohio boasted the second-highest number of co-working spaces in the Midwest, according to The Instant Group’s report. The state had 70 coworking centers with an average desk rate of $588 a month. Michigan had 61 co-working centers with an average monthly desk rate of $643. Minnesota had 45 co-working centers, according to the report, a jump of 7.1 percent. The average desk rate here was $701 a month, while Tennessee had 56 centers with an average monthly desk rate of $652.
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Hotels From page 1
being conservative in their projections for the next two years and considering alternative strategies. Timing is everything A big risk with new construction is the 18-to-24-month gap between project start date and completion. If a developer is planning to launch a new project based on recent growth statistics, there’s a good chance that the hotel is going to open in market conditions that could be drastically different from what they are now. Michael Watson, head of BMO Harris Bank’s Hotel Finance Group, points out that several markets that had a low risk of oversupply a few years ago, including Chicago, Nashville and Austin, have since begun to show signs of oversupply based on projects that were started in 2013 and 2014. That type of new supply has a negative impact on occupancy, which in turn puts a constraint on the ability to drive rates. Of course, it’s tough to predict when
Minnesota Real Estate Journal
a downturn will come. But it’s clear that valuations have peaked over the last 12 months in many markets, and we’ve recently seen a number of pending transactions break down prior to closing due to pricing concerns (i.e., buyers were fearful of overpaying for future revenue growth that could be delayed). Assess the alternatives Considering that we’re in the late innings of this industry upswing, Watson says developers should look at a few key indicators when evaluating new projects. What are investors willing to pay on a per-key basis? Ideally, you want your purchase price to be less than the replacement cost for a new property. For example, an investor might be able to buy an existing property for $275,000 per key, whereas it would cost $325,000 per key to build the same hotel brand new. What are the current capitalization rates? In general, cap rates are currently rising because growth expectations are slowing and investors are not willing to pay high multiples on in-place cash flows. Applying a cap rate of 7.5
to 8.5 percent is a reasonable “base case” for an average hotel in an average market today. Year-over-year RevPAR growth. Over the last 20 years, the average rate of annual RevPAR growth across the United States has been 3 percent. In many markets, we’re now expecting growth of 1 to 3 percent on average for the next two to three years, with some markets outperforming and some markets lagging. New supply levels. Anything more than 5 percent of current supply is a danger sign, but stronger markets are better able to absorb new supply. Be ready to adapt The savviest investors who have been through these cycles understand these risks and make their decisions accordingly. Given the current market dynamics, the best opportunity for developers might be to buy — from a motivated seller — an existing property that could benefit from capital improvements, rebranding or repositioning. That way you eliminate the construction risk with its long delivery lead time, potential cost overruns and possible delays
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in delivery. You can also better manage your total per-key costs with an eye on keeping them below acceptable replacement costs. Bull markets don’t last forever. But if you have a sound strategy in place that accounts for trends in your target market — especially supply-demand factors and expected RevPAR growth — you can put yourself in a position to thrive even when conditions change course and markets soften. John Petrovski is senior vice president and managing director of U.S. commercial real estate for BMO Harris Bank.
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Schmidt From page 1
for multifamily, but that this has changed today. In addition to multifamily, what type of building developments and acquisitions are borrowers looking to finance? Schmidt: On the construction side we are seeing some industrial financing requests, particularly for bulk warehouse-type opportunities. A lot of big users are consolidating their warehouse space. We are also seeing a number of financing requests for build-tosuit office opportunities. These properties fill a specific need. Companies don’t want to own a building. They want to lease it, but they are looking for a build-to-suit opportunity so that the building is designed specifically for their company. We are getting some requests for financing for retail construction, too. But these requests are usually for infill locations, for the redevelopment of existing properties as opposed to brand-new big-box retail. MREJ: What about on the incomeproducing side? What kind of financing requests are you getting when it comes to acquisition and repositioning loans? Schmidt: Where we are seeing a lot
Minnesota Real Estate Journal
of activity is from the loans that were financed through the CMBS market back in 2005, 2006 and 2007. Typically, those CMBS loans had a 10-year term. Those loans are maturing today. If you went back and looked at the CMBS industry, those were some of the biggest years for that kind of lending. We are talking billions and billions of dollars of CMBS loans. The nature of those loans is such that all you can do with them is put them to bed. You make the payments. You can’t do anything else until they mature. Well, they are maturing now. We are seeing some opportunities to reposition properties that have come off the CMBS rolls.
problems because the market dropped so fast. Most developers had problems. If they were in the middle of developing a property and trying to lease it up in the middle of the downturn, chances are it didn’t go according to plan. That is OK. But we want to make sure that they behaved properly and were cooperative, that they did what was needed to get through that cycle. We want to make sure that they took care of their obligation with the banks.
MREJ: What are some of the factors you look at when deciding which financing requests to approve? Schmidt: One of the most important things is to look at the people. What is their track record with this particular type of property? You want someone who has done this several times before. You don’t want someone who is learning the basics of a certain property type for the first time. You want someone with a long track record in that particular type of property.
MREJ: How about the real estate itself? What do you look at when it comes to the actual property being acquired or repositioned or the project being developed? Schmidt: We have to be comfortable that the real estate makes sense. We want to make sure, for example, that an apartment in this location makes sense based on how other apartments have leased up, based on what the demand in the area is. We look hard at the real estate. Then when it comes to construction loans, we look at who the contractor is. That’s pretty important to us. Does this contractor have experience building this type of property? Have they been around for a while?
MREJ: What else do you look at? Schmidt: It is meaningful to us to see how they performed during the last downturn. A lot of developers had
MREJ: What type of property and location combinations make for safe loans, in your opinion? Schmidt: Well-located apartments
May 2016
are still very strong bets. Apartments in strong markets where there is still a lot of demand make sense to us. There are some good opportunities in the industrial market, too. There is some consolidation going on in the industrial market today. Some companies are consolidating several of their warehouses into larger spaces. Properties that make sense in that sector are those located close to freeways. It’s all about travel to various parts of the country. As a result, a lot of our industrial lending is being done in the Midwest today. Indianapolis, Columbus and Chicago are all great industrial markets for nationwide businesses. They can locate close to freeways and get to the north, south, east and west in a short amount of time. MREJ: Speaking of the industrial market, why do you think this commercial sector is performing so well today? Schmidt: One of the big factors is online commerce. A lot of that online merchandise is distributed through warehouses, through big, huge distribution facilities as opposed to retail locations. Your Amazons and Targets and Costcos are investing in big distribution warehouse facilities to handle their huge online businesses.
May 2016
Minnesota Real Estate Journal
5 Ways from page 14
Plan. Redevelopment is another option that ED pros can bring to light. While redevelopment requires a more experienced and knowledgeable developer, it can also reward you with a prominent location and additional financing incentives that level the playing field when compared to a greenfield site. 5) Connect with area suppliers. As for operating cost, the location proximity to critical suppliers can be
News to page 10
Executive Vice President and Director of Real Estate. “We enjoy helping people find the gear they need to get out and enjoy the great outdoors.” Grand opening celebrations for all three stores are being planned, and will include celebrity appearances, demos, giveaways, kids’ workshops and more. Additional details on special events, activities and promotions that will be a part of the new store grand opening celebrations and full schedules will be available soon at www.GanderMountain.com. Each new Gander Mountain store
just as important as workforce. ED pros have connections with regional manufacturing networks such as Central Minnesota Manufacturers Alliance and DEED who can match needs to area suppliers. For Germanbased Geringhoff’s first North American expansion in St. Cloud, the agricultural equipment manufacturer was matched with 65 component suppliers statewide. Prototyping quickly followed and contracts were secured with many of the suppliers, 80% of which were Minnesota-based, of
which 60% are based in Central Minnesota.
will feature one of the region’s largest selections of new and used firearms, together with the best selection of gear and accessories for hunting, shooting, fishing, camping, archery, hiking and boating. The stores offer an extensive selection of men’s and women’s active performance outdoor and casual apparel featuring exciting brands like Under Armour, The North Face, GSX, Columbia, Carhartt, Guide Series and Kühl, and a wide variety of men’s and women’s active footwear featuring brands like Asics, Carhartt, Ariat, Muck, Gander Mountain, Merrell, Rocky, Reebok, Reef, Keen, Irish Set-
ter, Teva, New Balance, Timberland, LaCrosse, Skechers, Saucony and Under Armour. In addition to adding more than 55 new stores throughout the country since 2012, Gander Mountain has remodeled more than 85 of the company’s existing stores to bring the best in outdoor gear and service to its customers across the country. More new store announcements are expected soon.
If you’ve found value in these five insider tips, just remember—there’s even more that ED professionals can do for you and your project. Give us a call and keep us involved. We’ll both be glad you did! Cathy Mehelich has 20 years of municipal economic development experience, including St. Cloud, Elk River and Olivia, Minnesota. She was selected in 2011 to lead the City of St.
Dougherty Mortgage LLC closes $6.7 million Fannie Mae loan for Edge Studio
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Cloud’s creation of its first Economic Development Authority. Since then she has facilitated a variety of business expansions and attraction projects resulting in the creation of 500 jobs, 400,000-sf of expansion, $66million in private investment and $5.5-million in public investment. Cathy has a Bachelor of Arts degree in Local & Urban Affairs and is a Certified Economic Development Finance Professional.
Apartments Dougherty Mortgage LLC, a full service national mortgage banking firm, recently closed a $6.7 million Fannie Mae loan for the acquisition of Edge Studio Apartments, a 128-unit market rate multifamily apartment property located in San Antonio, Texas. The Fannie Mae 12-year term, 2-year interest only, 30-year amortization loan was arranged for borrower Bluemel 2016 LLC through a partnership with Old Capital Lending and Dougherty’s Vienna, Virginia office. News to next page
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Minnesota Real Estate Journal News from previous page
The Excelsior Group, LLC and Ryan Companies US, Inc. Announce Plans for 10 WEST END Development The Excelsior Group, LLC and Ryan Companies US, Inc. have announced plans to develop 10 WEST END, a 315,000-square-foot office building located at the southwest quadrant of Interstate 394 and Highway 100 within the West End mixed-use development. The 11-story building is the first of two phases and the first Class A office building constructed in over 16 years in the 394 submarket of the Twin Cities. Building amenities will include a dramatic and active entrance lobby, progressive creative work environments, rooftop terrace, fitness center, ground floor bike storage, lockers, showers, and outdoor balconies on every floor with views of downtown Minneapolis and the vibrant West End neighborhood. In addition, 10 WEST END is located adjacent to a new urban park and is in close proximity to a wide range of transit options including mass transit and the Cedar Lake bike trail – a major artery of the Three Rivers Park District regional trail system. Further, the location offers walkable neighborhood amenities including restaurants, shopping, entertainment, multi-family housing and hotels. 10 WEST END will offer flexible and efficient floor plates, best in class technology infrastructure, and ample parking. “10 WEST END is the new urban, and will check all the boxes when it comes to attracting today’s employees, offering the best of urban offices without the hassles," said Tom Tracy, Vice President, The Excelsior Group. "We’re thrilled to be partnering with Ryan Companies once again to create the next generation office building.” “10 WEST END is absolutely unique in its ability to meet the need of both business leaders and the future workforce, and we’re thrilled to be sharing it,” said Mike Ryan, President of Ryan A+E, Inc. “The neighborhood offers a pedestrian experience that cannot be found elsewhere in the Twin Cities. It combines many of the retail amenities, transportation connections, and living options of a downtown setting, with the ease of access and visibility of a suburban setting. The
ground floor of the building will further enhance the unique West End experience further with outdoor patios, direct park access, retail space, and the activation of a number of the buildings’ amenities. The building’s striking brick façade is capped with a distinctive wood and steel cornice which protects a large outdoor terrace from the elements, and additional balconies ensure each office floor has outdoor space.” “The 394 corridor is clearly a bright spot in the Twin Cities office market,” added Tony Barranco Vice President of Development, Ryan Companies. “With low vacancies, rising rents, and very few large blocks of available space, we feel that the market is right for an asset like this, especially on such an accessible and amenity-rich site like West End.” Ryan Companies is providing development, construction, capital markets, and architecture & engineering services. The Excelsior Group will support development and leasing activities with Jim Jetland as the listing agent, and provide property management services.
THE EXCELSIOR GROUP AND A JOINT VENTURE PARTNER PURCHASE HISTORIC COLONIAL WAREHOUSE IN NORTH LOOP A joint venture partnership including Minneapolis-based real estate firm The Excelsior Group has purchased Colonial Warehouse located at 212 Third Avenue N. in Minneapolis. Originally constructed in 1885, the building is on the National Register of Historic Places and is a prominent landmark in the dynamic North Loop neighborhood. The building totals 203,000 SF and serves the office needs of several technology and marketing firms, among others. In addition, it is the address of North Loop icons Moose & Sadie’s and MartinPatrick3. The Excelsior Group will provide property management services, and Cushman & Wakefield | NorthMarq (CWN) has been selected to represent the ownership in leasing the property. “We are thrilled to be involved in the ownership of this irreplaceable asset in the Twin Cities’ most vibrant neighborhood,” said Chris Culp, President of The Excelsior Group. “We plan to
make exciting improvements that will make this an even more appealing environment for today’s modern workforce,” Culp added. The CWN leasing team will include Mark Stevens and Brent Erickson. “Colonial Warehouse is a true, authentic timber building, and is located in a prime location in the burgeoning North Loop,” said Brent Erickson, Executive Director, Brokerage Services at CWN. “As attractive as it currently is as a home for many quality businesses, the new ownership is making changes that will upgrade the experience at the building for businesses and their employees,” said Erickson.
THE EXCELSIOR GROUP AND BAILARD, INC. PURCHASE 7500 FLYING CLOUD IN JOINT VENTURE PARTNERSHIP A joint venture partnership between Minneapolis-based real estate firm The Excelsior Group and a real estate fund managed by California-based Bailard, Inc., a wealth management and advisory firm, has purchased a 10story office building located at 7500
May 2016
Flying Cloud Drive in Eden Prairie, MN. The 200,000+ SF building sits at the intersection of Highway 494 and Highway 212. The property was purchased from Cornerstone Real Estate Advisors, who has owned the building since 2006. 7500 Flying Cloud is currently 81% occupied by such tenants as Boulay, Milk Specialties, Nestle, and Kraft. The strategic location of the asset in the Southwest sub-market, and its proximity to Supervalu’s headquarters, make it an attractive option for tenants in the market. The building was constructed in 1985 by Ryan Companies, U.S., Inc. The Excelsior Group will manage the property and CBRE has been selected to represent the ownership in leasing the building. “Several things attracted us to this investment including its location, visibility, and quality; the building is in a proven location with excellent visibility from highways 494 and 212, and was built and has been maintained to a very high standard. Additionally, the property has an outstanding tenant roster,” said Chris Culp, President of The Excelsior Group. “We plan to make
May 2016
Minnesota Real Estate Journal People to page 4
Saint Cloud Health Services addition as well as contributing to Knutson’s hard bid pursuit teams. Theusch’s previous experience includes three years as a project engineer focusing on high paced remodel projects throughout the country. Theusch has a degree in construction management from Minnesota State University Moorhead. Hannah Ellingson has joined the firm as project assistant. Hannah brings experience in inside sales and graphic design. Hannah graduated with honors from Mount Marty Community College in Yankton, SD and was the recipient of the South Dakota Jazz Band outstanding soloist award. Laura Kownslar has joined the firm as project assistant. Laura’s previous experience includes administrative assistant, customer service representaNews from previous page
modest capital improvements to enhance the building’s appeal to both existing and future tenants, and implement a strategic leasing plan to help bring the occupancy to 90+% in the coming months,” said Culp. The CBRE leasing team will include Brent Karkula and Joe Conzemius. “We are thrilled to partner with The Excelsior Group and Bailard on 7500 Flying Cloud. Clearly based on the quality of the companies located there today, 7500 Flying Cloud is already a highly-desirable property in the southwest submarket. It is our belief that the building’s amenity package combined with its location, access to area amenities and outdoor space set this building apart from the competition and continues to draw interest from tenants,” said Conzemius.
Dougherty Funding LLC Closes $3.2 million loan for Cedartown Shopping Center Dougherty Funding LLC has closed on a $3.2 million acquisition loan for Cedartown Shopping Center, an existing shopping center situated on 5.33 acres in Cedartown, Georgia. Constructed in 2006, the property features 30,600 square feet of rentable space and is located adjacent to a 24-hour Walmart Supercenter. The acquisition financing was arranged for AT Cedar-
tive and scheduler. Laura attended the University of Winchester in England where she received a degree in primary education before moving to the states. Laura has also spent time volunteering with the Soul Survivor organization as a missionary in Durban, South Africa. “We are pleased to announce these additions to our Minneapolis office,” stated Lance Hornaday, general manager. “We are fortunate to employ a group of talented, passionate, and innovative professionals and will continue to grow our Knutson team to better serve our customers."
Crossroads Properties expands adding team members that span three generations Oakdale based Crossroads Properties is pleased to announce the addition
town GA LLC. Dougherty Funding LLC serves as lead lender for the loan.
Cushman & Wakefield/NorthMarq Completes Sale of Rochester Clarion Inn Cushman & Wakefield/NorthMarq (www.cushwakenm.com) Senior Director Ronn Thomas represented Sonor Hotel Corporation in the sale of the 196-room Clarion Inn in Rochester, Minnesota. The hotel, at 1630 South Broadway Avenue, sits atop approximately 5.5 acres of land. The site is immediately south of the Olmsted County Fairgrounds and is a short drive from the Apache Mall and downtown Rochester. The sale closed Thursday, April 28. The buyer, Lamont Companies, intends to redevelop the Clarion Inn site into a new mixed-use project including a Candlewood Suites hotel and multitenant retail. The seller will also retain a financial interest in the new development. “This transaction offered ideal outcomes for both parties involved,” said Thomas. “The location has easy access to major highways, booming downtown Rochester and other demand generators, and is ideal for a new hotel development.”
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of three real estate professionals. Zac Houle, a 2012 graduate of Stillwater Area High School and 2016 graduate of University of St. Thomas will be working with David Johnson, Mike Conners and Dawn Wessels leasing space that Crossroads Properties owns and manages. In addition, John Higgins and Dan Dolan have joined Mark Young in the Tenant Representation, Sales and Leasing Division. John is a graduate of Drake University with a BS in Finance with seven years of commercial real estate experience. For more than 50 years, Dan Dolan has pursued a career in real estate. His companies included Dan Dolan Realtors, a residential real estate brokerage company based in St Paul; the housing developments of Evergreen, an upscale residential development in Woodbury; Wexford of Eagan; and Duck Pass in Hugo. His commercial developments included Oakdale Crossing Business
Park and other Woodbury and Oakdale commercial developments. Crossroads Properties, with their offices at 7300 Hudson Blvd. N., Suite 210, Oakdale, MN 55128, is a commercial real estate developer whose primary function over the last 15 years has been the leasing and management of its own portfolio, which is predominantly located in the east metro. (www.crossroadsproperties.net) “We are excited to have the energy and insight that comes from the younger generation as well as the knowledge and experience from over 50 years in the industry,” says David Johnson, President of Crossroads. “The addition of these individuals increases our capacity to serve the business community in the East Metro beyond our historical capability. We look forward to continued growth and success of our team”
Dougherty Mortgage LLC closes $9.3 million Fannie Mae loan for Silverado Apartments
National Real Estate Advisors, LLC announced that the 20,000 square feet of retail space at LPM Apartments in the Loring Park neighborhood has reached 100% occupancy. New retailers include Eggy’s Diner, YogaFit Studios, Lakes and Legends Brewing Company and Inspire, an arts and crafts shop with a humanitarian mission. Minneapolis City Councilmember Lisa Goodman expressed enthusiasm about the new retail tenants at LPM. “These diverse retail retail tenants have brought new services, restaurants and culture that our constituents are looking for,” Goodman said. “New development brings excitement and activity to our downtown neighborhoods.”
Dougherty Mortgage LLC, a full service national mortgage banking firm, recently closed a $9.3 million Fannie Mae loan for the acquisition of Silverado Apartments, a 184-unit market rate multifamily apartment property located in Irving, Texas. The Fannie Mae 10-year term, 1-year interest only, 30-year amortization loan was arranged for borrower Elmstone Group OP1, LLC through a partnership with Old Capital Lending and Dougherty’s Minneapolis, Minnesota office.
RETAIL SPACE AT LPM APARTMENTS REACHES 100% OCCUPANCY Magellan Development Group and