Minnesota Real Estate Journal Oct 2023 by REjournals

Novenber 2023 • VOL. 40 No. 4

“The plumbing is clogged.” Industrial development, new construction faltering as interest rates remain high By Dan Rafter, Editor

hallenging times. That’s what the industrial sector is facing today in the Minneapolis-St. Paul market. The culprit? High interest rates, of course. This doesn’t mean that the Twin Cities-area industrial market is at a standstill. There’s still great demand from end users looking for industrial space

Hyde Development’s Northern Stacks Project in Fridley, Minnesota. throughout the region. That isn’t changing. What is slowing are industrial sales and new development, again thanks to high interest rates. We spoke with Paul Hyde, co-founder of Minneapolis’ Hyde Development, about the challenges that developers face in today’s high-interest-rate environment. Here is what he had to say.

I’ll start with a broad question: How have high interest rates impacted the development of new industrial projects throughout the Twin Cities market? Paul Hyde: Quite frankly, it’s been terrible. Typically, whether you are talking about an acquisition or new construction, developers take on 60% to 70% debt on a project. When so much of a project’s deIndustrial to page 20

So many challenges to overcome: Construction companies navigating a tough economic environment By Dan Rafter, Editor

he story isn’t shocking to anyone who’s followed

back to the 3% range anytime soon. And even though

good at mastering the art of scheduling so that proj-

commercial construction: High interest rates and

the escalation of material cost increases has slowed,

ects aren’t delayed by long lead times for switchgears

the rising costs of materials and labor are mak-

the price of switchgear, roofing components and steel

and other electrical components.

ing it more expensive to build commercial real estate

aren’t dropping anytime soon.

In fact, the commercial construction industry has

On the positive side? The commercial construction

shown plenty of resilience in overcoming the challeng-

And the stark reality? These challenges aren’t going

companies navigating the Midwest are picking up

es of today’s economic climate. And the professionals

away. Even if the Federal Reserve Board no longer

plenty of public work to help offset the slowdown in pri-

working the Twin Cities market say that this resilience

raises its benchmark interest rate, rates aren’t going

vate-sector construction. And they have gotten awfully

Construction to page 19

developments.

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CONTENTS

October 2023 11 CORFAC survey:

Economic concerns rise even as industrial

continues to surge

12 The tax nuances of debt modification:

Smart strategies for

restructuring debt

1 So many challenges to overcome:

Construction professionals

navigate a tough economic environment

1 “The plumbing is clogged”:

Industrial development, new construction faltering as interest rates remain high

4 The boom in built-to-rent single-family housing:

What’s behind

14 To sublease or not? That is the question:

With so much disruption in the office marketplace, some office real estate users may find their best fit to be sublease space that offers pre-built conference rooms, lunchrooms and offices along with furniture and additional amenities.

26 News Briefs:

The latest commercial real estate deals, promotions and milestones in the state of Minnesota.

the growth in this housing type?

6 A bundling of challenges:

The healthcare real estate sector is far from immune to today’s economic and staffing hurdles

8 Going up (and up and up):

JLL report details the rise of the urban

multistory warehouse

10 Familiar shores:

In a changing global marketplace, onshoring likely to remain an important industrial demand driver

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MINNESOTA REAL ESTATE JOURNAL

October 2023

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The boom in built-to-rent single-family housing: What’s behind the growth in this housing type? By Dan Rafter, Editor

ne of the fastest-growing segments of the U.S. housing market? According to recent research from Ber-

Jeff Coles: It really starts as a response to the changing

kadia, it’s built-to-rent single-family homes, homes

lifestyle needs of Millennials, Gen Zers and even Baby

that look like traditional single-family residences but are

EDITORIAL ADVISORY BOARD JOHN ALLEN JEFF EATON

Why has built-to-rent housing become so attractive today?

built to be rented, not owned.

Boomers. Millennials are reaching major life milestones. They

A new report from Berkadia, Single-Family Rental &

have needs that require housing products. But they are

Build-to-Rent: The Emergence of a Leading Class, finds

hampered by a lack of savings. Single-family homeowner-

that developers are boosting the supply of single-family

ship might not be attainable to them. It can be difficult for

MARK EVENSON

housing in the United States that is built for renters, not

Millennials to save for a home. Home prices are high. Mort-

PATRICIA GNETZ

owners.

gage interest rates are high. It’s hard to achieve the goal

TOM GUMP CHAD JOHNSON BILL WARDWELL

And Berkadia’s researchers only expect more built-torent single-family homes to pop up across the country in the coming years.

of homeownership, so many younger buyers are turning to single-family rentals. At the same time, Millennials and Gen Z are renters by

What’s behind the growth in built-to-rent single-family

choice. They are transient in nature. They are the genera-

JEFFREY LAFAVRE

housing and why are so many renters choosing these

tion of commitment-free consumers. They like the flexibility

WADE LAU

properties instead of traditional multifamily properties? We

of renting.

JIM LOCKHART

spoke with Jeff Coles, vice president of client services at

Baby Boomers are interested in single-family rentals, too.

Berkadia, about the growth in the build-to-rent market and

They like the financial flexibility that renting a home gives

why this real estate model is gaining in popularity.

them. They like that additional liquidity that they normally

DUANE LUND CLINT MILLER WHITNEY PEYTON MIKE SALMEN

October 2023

MINNESOTA REAL ESTATE JOURNAL

wouldn’t have because it’s usually tied up in a home

have the potential to convert this type of housing

that they own. They like certain product types of

from rental to for-sale if that’s what the market de-

built-to-rent properties, the horizontal, one-floor,

mands.

ranch-style properties. They don’t have to deal with

What amenities are people who buy into built-for-rent

stairs.

homes looking for?

It’s added up to rising demand for built-to-rent

Coles: They want the look and feel of a home and

housing.

neighborhood. That is first and foremost. They don’t

Why are these renters choosing single-family homes

want to come home to something that feels like a

instead of traditional multifamily properties?

traditional rental product. They like walkability and a

Coles: Renters really like and expect a home-like

neighborhood feel.

feel and the finishes that single-family residences

They also like the extra space. If you give some-

provide. Built-to-rent single-family homes are built

one a garage, not only can that person park a car,

just like traditional for-sale single-family homes.

he or she can store a lot of stuff. And when people

They have the additional storage space that you

store a lot of stuff? They’re not going anywhere else

don’t always get in apartment units. They often have

Jeff Coles

garages. They feel more like homeownership.

anytime soon. They are not going to move out in a year. They’ll typically stay two, three years or more.

Then there are the amenities. Many of these built-

there, too. That sets the stage for the growth in

A fenced backyard is even more important to

to-rent homes are built in communities. They come

built-to-rent housing. There is a demand for exurb

them. If you give people a community feel with

with clubhouses, dog parks and that community

living, too, in areas like Phoenix, Dallas, Southeast

housing built like traditional homes with the type of

feel. They have professional property management

Florida and Charlotte. Those markets have all been

modern fit and finishes that come with traditional

in place. The people who rent in these built-to-rent

successful ones for built-to-rent housing.

single-family homes? That’s attractive to a renter.

communities don’t have to worry about the property

The Midwest is one of the larger areas where we

upkeep and expenses that come with homeown-

are seeing a growth in built-to-rent single-family

ership, but they get many of the amenities and

housing. This product works well in the Midwest.

extra indoor and outdoor space that come with a

Do you think the growth we’re seeing in this sector will

single-family home.

continue?

Are built-to-rent single-family homes usually located in walkable areas close to shops and restaurants? Coles: They often are built in communities that have the feel of an urban neighborhood but in a suburban setting. It’s not like the traditional sub-

Coles: I think so. It is a change in mindset and de-

urb where there are no amenities within walking

mands. There is the growth of this commitment-free

distance. With these, there are usually mixed-use

Coles: As interest rates rise, mortgage interest

consumer lifestyle that has permeated the Millenni-

centers that are close by. That’s not the case ev-

rates typically do, too. Those higher mortgage rates

als and Gen Zers. Hybrid work-from-home policies

erywhere, of course. Some are in suburbs that lack

push prospective buyers into the rental market. As

are here to stay, too. Families and households re-

walkability. But a lot of these built-to-rent communi-

borrowing becomes more expensive, that leaves

quire workspace in their homes. That won’t change.

ties are developed within walkable neighborhoods.

less money for housing. The overall cost of living

Bult-to-rent single-family homes provide that extra

goes up and that leaves less money for families for

space for workspaces.

Are today’s higher interest rates boosting the demand for single-family rentals?

housing. Built-to-rent housing provides families with the

As we continue to see a shortage in the supply of housing and a need for additional living space, a

opportunity to live in a higher-priced neighborhood

demand for this product type will remain.

with better schools. They might not be able to af-

Investors like this product type, too, right?

ford that neighborhood if they are instead buying

Is new construction still taking place in this sector, even with higher interest rates? Coles: They are still building. It comes down to the ability to access debt. That has absolutely become more difficult to do. The people who are going to be successful in this space are the ones who have

a home.

Coles: They do. The rent growth is higher than

projects that can come out of the ground in 2024

what we see in traditional apartments. There are

and 2025, the people who have been able to

In what parts of the country are you seeing more built-

higher occupancy rates for these properties and

capitalize these projects despite the restrictions to

to-rent single-family housing?

higher retention rates. Operating expenses are

construction lending. There is a need and demand

lower. All of this will continue to fuel investor de-

for this type of housing. There is a lack of supply in

mand.

this space. Those who can develop new products

Coles: That’s a tricky question. It comes down to the cost of land. Does the land cost provide the opportunity to build an affordable product that will

Right now, built-to-rent homes are providing bet-

meet the return requirements for investors? Areas

ter returns and yields than probably any other asset

with higher housing prices have higher land costs

class out there. There is also the potential to convert

that make it prohibitive for built-to-rent product.

this type of housing into traditional for-sale housing

There has been a migration to the Sunbelt states

in the future. Say interest rates lower. There might

because of employment growth. Costs are lower

be more demand for for-sale housing. Owners then

now will reap the benefits.

MINNESOTA REAL ESTATE JOURNAL

October 2023

A bundling of challenges: The healthcare real estate sector is far from immune to today’s economic and staffing hurdles By Dan Rafter, Editor

edical providers are increasingly moving into traditional office spaces today. That’s not surprising. As office vacancies continue to rise, landlords need to fill their empty spaces. They might be willing to offer lower rents as an enticement. And those lower monthly rents are just as attractive to healthcare providers as they are to any tenant. This is just one trend that Steve Brown, founder of Forte Real Estate Partners in Bloomington, Minnesota, has seen in the healthcare real estate market in which he has worked for more than 30 years. Brown says that this commercial sector is in the middle of several key changes. And it’s up to the commercial real estate professionals working in this sector to not only understand the changes hitting the healthcare industry but adapt to them. It’s the only way for CRE pros to serve their healthcare providers. A changing healthcare market Forte Real Estate Partners focuses on three primary commercial asset types, office, industrial and healthcare. Brown said that healthcare real estate work is keeping Forte busy today. But this work is less of the straightforward transactional work that Forte took on 10 years ago. Today, Forte is handling more non-traditional work for its healthcare clients. This means that Forte is spending more time on strategic facility planning for its clients. That’s especially true today as healthcare providers juggle the challenges of higher interest rates with the need to open new medical office buildings, ambulatory care centers and free-standing medical clinics to better serve their patients. “We have been very busy from the standpoint of helping our clients understand today’s market,” Brown said. “Historically, when we had issues that impacted the healthcare segment, it was usually one issue. Back in 2008, our clients faced one major economic issue. In our world right now, though, there are several factors that are impacting the healthcare field.” Rising interest rates have had a major impact, Brown said. The higher costs of borrowing money are making it more difficult for healthcare providers to take on needed expansions. Then there are supply chain issues. It is still difficult for contractors to get all the materials needed to build new healthcare facilities. This means it takes longer to build new clinics and medical office buildings. “If you are doing new construction and you need switchgear, it might take two years to get that equipment,” Brown said. “That throws a major crimp in your schedule. It is challenging trying to get physicians groups to focus on the long-range planning it takes today to build a new facility.” Then there are the staffing issues that medical providers face. Following the COVID pandemic, a high

Skin Rejuvenation Clinic moved from its 7,567-square-foot space in the Southdale Medical center to a new 10,000-square-foot location on the ground floor of France Place at 3601 Minnesota Drive in Edina, Minnesota.

the investors that make up these REITs want higher profits. This puts additional financial pressure on healthcare providers. “All these issues are bundling up on each other,” Brown said. “It’s an ‘a-ha!’ moment: It’s not just one issue that we are facing in healthcare real estate, it is multiple ones.”

Steve Brown

number of nurses and doctors have left the medical field. That makes it difficult for medical providers to staff all their facilities and might cause some to put expansion plans on hold. Some healthcare providers have hired traveling nurses to fill the gaps in their staffing. That is a solution, but it’s not an inexpensive one, with traveling nurses commanding high salaries. This, too, can eat into the budgets of medical providers. Brown says that healthcare real estate is now a food group by itself, joining the traditional asset classes of office, retail, industrial and multifamily. REITs today, then, are focusing more on healthcare real estate, and

Healthcare providers moving into traditional office space Brown said that many healthcare providers in the Twin Cities area are moving into more traditional office spaces, space that wasn’t initially designed for medical users. Part of the reason for this? The costs of building new facilities have risen so quickly that healthcare providers are looking to save dollars by moving into existing office space. And with vacancy rates so high in the office market today, healthcare providers are often finding lower rents by moving into space that has never housed medical uses before. Brown said that Forte Real Estate Partners recently worked with five healthcare clients that moved into traditional office space. These tenants paid what Brown said were good rates for landlords used to traditional office rents but were a discount for the rents that medical users typically pay. The challenge, though, is that not every traditional office space works for medical users. There needs to be enough parking for patients. Medical users also need easy access for their patients, meaning that their offices and clinics must be easy for patients to find. It helps, too, if these spaces are located directly off major highways or thoroughfares. “This is something that was tried in the past, back in the ‘80s and early ‘90s,” Brown said. “Some of these Healthcare to page 16

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MINNESOTA REAL ESTATE JOURNAL

October 2023

Going up (and up and up): JLL report details the rise of the urban multistory warehouse By Dan Rafter, Editor

hat can developers do when companies need warehouse space in tight urban locations? Why not build up? In a recent report, JLL predicts that the United States will soon join locations such as Asia and India in “building up instead of out” to add more logistics space to crowded cities such as Chicago, New York and Miami. And in news that’s important for the entirety of the Midwest, these multistory warehouses, which fall into the growing urban logistics space, might soon be popping up in smaller but still major cities across the country. The reasons for this are clear: Ecommerce continues to grow. Customers are comfortable ordering everything from electronics and apparel to shoes, toys, fitness equipment and groceries online. And these same customers want their products delivered to them quickly. Because of this, companies need warehouse space that is located close to these customers. That frequently means opening warehouses in urban environments, where space is limited. Companies are increasingly turning to vertical construction to squeeze more warehouse space into smaller urban areas. JLL’s latest urban logistics report, released Oct. 11, looks at both the history of multistory warehousing and its future. Not surprisingly, multistory warehouses are most common in Asia, where space in urban centers is limited. JLL says that multistory warehouses have existed in Asia for at least two decades. The tallest multistory warehouses are located in Hong Kong, where warehouses can stretch up to 22 stories. Those are outliers, but, as JLL reports, it’s not unusual see multistory warehouses in China, Singapore and Japan that stand at least five stories. The main ingredient that sets these high-rise warehouse facilities apart is that there are loading docks on more than one level. An example of the this trend in the Midwest? Construction crews have broke ground on 1237 W. Division in Chicago. Once complete next year, this warehouse will include 1.2 million square feet spread across two stories. The complex will include both rooftop parking and a five-story parking garage. The center will include parking for 1,600 vehicles and offer 36-foot clear heights. JLL says that the facility will be located with a five-mile radius of a potential $2 billion in ecommerce sales. Plenty of positives Why does JLL predict that these taller warehouse spaces will become more common throughout the United States? They feature what JLL calls “agile architecture.” By building vertically, developers can maximize even smaller urban sites. Developers can also choose on which floors to have loading docks and whether to

1237 W. Division will be Chicago’s first multistory warehouse when it opens in 2024

use buildings’ rooftops for parking or as an office space. Developers can get creative when they build up instead of out. Then there is parking. By building vertically, developers can more easily add needed parking spaces to their warehouse facilities. JLL says that this is important even in urban areas. Yes, big cities such as Chicago have public transportation. But even vertical warehouses will tend to cluster in the far corners of metropolitan areas, creating the need for workers to commute to the sites. By placing parking on a top floor, developers can ensure that building employees have a place to stow their car even if the site on which the warehouse sits offers limited acres. Delivery vehicles are changing, too. While most deliveries are still made with large delivery trucks, deliveries from urban logistics buildings also rely on smaller, more nimble vehicles such as electric bicycles and scooters. These smaller vehicles can travel down routes that are more challenging for larger cars or trucks to maneuver. Multistory warehouses that rely on a range of delivery vehicle types, then, might become the norm in crowded urban areas. But there are hurdles, too This doesn’t mean that developers won’t face challenges when trying to add multistory urban warehouses to big cities.

Zoning laws are often outdated when it comes to warehouse space and major cities. Residents might not want warehouses in their neighborhoods, whether these spaces are vertical or horizontal. As JLL says, consumers want their packages delivered on the same day that they order them, but they don’t want the buildings that house their deliveries in their backyards. Then there’s the question of land availability and prices. Even though developers don’t need as much land when building vertically, they still need to find sites appropriate for warehouse development. That can be challenging in urban areas. The availability for land for industrial assets continues to shrink across the United States. Multistory warehouses also face competition from other commercial property types. As JLL reports, developers might propose building hotels, multifamily sites and retail assets for the same land that other developers have targeted for multistory warehouses. Neighbors might prefer a new Target or apartment building over a warehouse.

MINNESOTA REAL ESTATE JOURNAL

October 2023

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October 2023

Familiar shores: In a changing global marketplace, onshoring likely to remain an important industrial demand driver By MaCauley Studdard, ElmTree Funds Managing Director

n a volatile and uncertain global marketplace, one U.S. commercial real estate sector has been a stalwart source of strength in recent years: industrial. With e-commerce sales continuing to climb, tenant leasing activity remains robust, which is allowing the sector to continue to see growth in rental rates and positive net absorption. In conjunction with ongoing e-commerce growth, a post-pandemic operational shift for many retailers to maintain higher inventory volumes has provided additional fuel for industrial fundamentals. There is a third—and perhaps somewhat underappreciated—factor that has been and will likely continue to play an important role in contributing to demand growth in the years ahead: onshoring. A growing number of U.S. and international companies moving to onshore their supply chain operations is expected to have significant ramifications for both individual U.S. markets and the broader industrial sector. Looking forward, the onshoring trend is anticipated to be one of the most important industrial demand drivers for some time to come, shaping the contours of the industrial market in a variety of ways. In that context, analyzing which markets, industries, and tenants will benefit most significantly from the onshoring trend is essential for decision-makers in the evolving industrial real estate sector. Trade trends level off There is a strong argument to be made that the globalization of trade has been the defining attribute of modern economies over the last several decades. In the 35 years prior to 2008, the percentage of the global economy attributed to international trade nearly doubled (increasing from around 30% to 59%). Today, international trade remains a key feature of the global economy. However, the extent of its influence has remained steady since 2008, with several factors contributing to slowing global trade growth. Increased demand for skilled labor; geopolitical uncertainty and instability; supply chain disruptions; fuel price increases; and unpredictability have all played a role in slowing down global trade. Another factor that cannot be ignored is the impact of higher wages in many international manufacturing hubs. In China, manufacturing wages have nearly doubled in the last decade alone. Without the appeal of an overseas production model that can no longer consistently deliver the advantages of reliable and cost-effective global production and transport, global trade growth has largely leveled off.

of 10 manufacturers plan to continue reshoring or near-shoring their manufacturing operations. In addition, government initiatives and incentives are encouraging and rewarding onshoring and reshoring. The CHIPS and Science Act of 2022 and the Inflation Reduction Act both provide substantial new incentives for manufacturers to produce more goods domestically. The CHIPS Act provides $39 billion in U.S. manufacturing incentives and $13.2 billion in R&D and workforce development, and the Inflation Reduction Act funds a $7,500 EV tax credit for vehicles using batteries manufactured in the U.S.

MaCauley Studdard

Black swans and new perspectives Manufacturing industry dynamics can be added to the long list of things altered by the COVID19 pandemic. Pandemic-related production and transportation disruptions caused shipping and production delays and transportation bottlenecks. Trade limitations caused by political and regulatory complications became more frequent, and supply chains globally were under constant strain. For manufacturers looking to reduce uncertainty and find ways to invest in a sustainable cost-effective production model, overseas manufacturing began to lose its luster. Many manufacturers subsequently concluded that the potential savings of a global supply chain model no longer justified the risks. Initiatives and incentives A number of incentives for domestic manufacturing operations remain in place. The global supply chain continues to be plagued by interruptions and unpredictable delays and challenges. There is persistent and perhaps sustained uncertainty in the global economy. Geopolitical volatility remains high and there is continued concern about the impact of sizable disruption in places like Ukraine and China. These are significant considerations that present a background state of uncertainty. Against that backdrop, manufacturers are looking to maintain greater control over their supply chain operations. A recent survey indicated that seven out

A long and growing list While the number of companies currently engaged in or committed to noteworthy onshoring or reshoring initiatives is long and growing, some highlights include: • Intel: Building a $20 billion semiconductor chip plant in Columbus, Ohio. • Walmart: Planning to spend $350 billion on domestically produced goods in the next decade. • Hyundai: Building a $5.5 billion EV battery facility in Savannah, Georgia. • TSMC (Taiwan Semiconductor Manufacturing Company): Making a $40 billion investment in a plant in Phoenix, Arizona. • SK Innovation: Building a new $2.9 billion plant as part of a 1,500-acre campus outside of Memphis, Tennessee. As evidenced by the above list of examples, it is not just U.S. companies investing in U.S.-based production. The shortlist of significant manufacturing projects currently underway in the U.S. represents a cumulative investment of more than $100 billion. Today, many manufacturers are still in the initial stages of reshoring and onshoring their supply chains. With geopolitical instability and economic uncertainty now pervasive (and showing no signs of slowing), it seems clear that the globalization of manufacturing has not just slowed but reversed. Not only does it seem likely that both U.S. and international companies will continue the onshoring and reshoring trend, those efforts could even pick up steam. As they do, stronger domestic supply chains and continued reshoring and onshoring momentum will likely continue to drive industrial demand for the foreseeable future. MaCauley Studdard is managing director with St. Louis-based ElmTree Funds

October 2023

MINNESOTA REAL ESTATE JOURNAL

CORFAC survey: Economic concerns rise even as industrial continues to surge By CORFAC International

nflation and rising interest rates continue to weigh on the minds of commercial real estate professionals, according to CORFAC’s mid-2023 Business Impact Survey. The survey of CORFAC’s independent real estate firms around the globe also revealed that the industrial/manufacturing sector continued to fuel the pipeline for more than three-quarters of the respondents, while the office sector fueled transactions for over half. When digging into market dynamics, CORFAC members expressed a leveling of business activity compared to the latter half of 2022. Overall transaction volume increased for about one quarter of respondents, remained about the same for 35% of respondents and decreased slightly for 35% of respondents. Members expressed concerns about inflation, remote work trends, bank failures and high construction material costs. But the primary worry was the potential for a recession – with more than 70% of respondents expressing greater worry about the effects of an impending recession than at the end of last year. A recent survey of manufacturing professionals in nine mid-American states conducted by Creighton University concurred with those worries, finding that

“45% of supply managers expected a recession in the second half of 2023.”

“Due to higher interest rates and concerns about a recession, investors are waiting on the sidelines for better times,” said one respondent. “Hybrid and CORFAC to page 22

MINNESOTA REAL ESTATE JOURNAL

October 2023

The tax nuances of debt modification: Smart strategies for restructuring debt by Aleksander Dziedzic, Tax Partner, Real Estate Group, Anchin

he real estate sector is presently encountering exceptional difficulties as the era of low interest rates and minimal inflation has concluded, with lingering economic uncertainty casting a shadow. In a distressed real estate market, owners and lenders may consider loan term renegotiations to maximize their cashflow, however this may bring unexpected tax consequences. For part 2 of The Tax Nuances of Debt Modification series, we will review tax strategies for specific situations including bankruptcy, insolvency and Qualified Real Property Business Indebtedness (QRPBI). To briefly recap, real estate owners may modify their debt to better manage their cashflow by using strategies including: • Extending the loan’s maturity date; • Changing the interest rate; • Exercising conversion features; or • Changing fixed payment of principal to contingent amounts. While potentially valuable, these modifications may come at a cost. When the original debt’s issue price is higher than the new debt’s issue price, the taxpayer usually recognizes Cancellation of Debt (COD) income. In other words, they may realize a substantial taxable gain even though they have not received any cash proceeds. That said, there are provisions that allow taxpayers to exclude or defer COD income. The following section focuses on COD income with respect to bankruptcy, insolvency and QRPBI. Although, it is important to note that that QRPBI does not apply to developers. Bankruptcy and insolvency In bankruptcy, taxpayers do not have to include forgiven debt as income. However, taxpayers that are insolvent, but are not bankrupt, can only exclude COD income up to the amount by which their debts are greater than the value of their assets. Both the bankruptcy exception and the insolvency exception apply at the partner level. Reduction of tax attributes Being able to exclude COD income in the event of bankruptcy or insolvency comes at the cost of lowering certain tax benefits, generally in the following order: 1. Net operating losses; 2. General business credits; 3. Minimum tax credits; 4. Capital loss carryovers; 5. Basis of the taxpayer’s property; 6. Passive activity loss and credit and carryovers; and 7. Foreign tax credit carryovers.

rule, debt backed by full ownership in a disregarded entity satisfies the “secured by” requirement under certain conditions, but it appears that the safe harbor allows for only one level of debt to be secured by a disregarded entity interest.

Aleksander Dziedzic

However, a taxpayer can elect to first reduce the basis of depreciable property, but in many cases, the immediately available net operating loss or credit will be more valuable than depreciation expenses spread out over the life of the property.

Qualified Real Property Business Indebtedness

Subject to limitations, taxpayers who are neither bankrupt nor insolvent may have the option to exclude COD income from the discharge of QRPBI. Note, this election is not available to C corporations. QRPBI is defined as debt that is: (a) incurred or assumed by the taxpayer in connection with real property used in a trade or business and is secured by such real property; and (b) was incurred or assumed before January 1, 1993, or was incurred or assumed after such date to acquire, construct, reconstruct, or substantially improve such property. As with the bankruptcy and insolvency exceptions, the QRPBI exclusion applies at the partner, rather than the partnership, level. To exclude income from the discharge of QRPBI, the taxpayer must make a valid election. The amount of excluded income reduces the basis of the taxpayer’s depreciable real property, which is not limited to the property that was secured by the debt. The fact that the debt must be secured by real property can create challenges when dealing with LLCs. In large acquisitions, it is typical to see multiple tranches of debt, with varying maturities, interest rates, and degrees of risk. Under an IRS safe harbor

Limitations on Excludable Income Taxpayers have two limits on how much forgiven debt income they can exclude for tax purposes. In general, the amount of income excluded cannot exceed the lesser of: 1. The excess of the outstanding debt principal (immediately before the discharge) over the fair market value of the real property securing the debt (reduced by the principal amount of any other qualified real property business debt secured by the property); or 2. The aggregate adjusted bases of all depreciable real property held by the taxpayer determined as of the first day of the tax year following the discharge (or, if earlier, the property’s disposal date)— the overall limitation. When refinancing, relief is available as long as the new loan amount doesn’t exceed the amount of the original business property debt. If a partnership borrows against real property and distributes all of the additional proceeds to its partners, the additional borrowing can’t be treated as QRPBI. Seek Advice Before You Need It Navigating the COD income rules can be difficult. Taxpayers need to exercise caution in assessing whether a “significant modification” of debt occurs, potentially leading to a deemed re-issuance of the debt. It is also important to test the revised debt to determine whether it is treated as debt or ownership in the company. For more information on significant modifications, read part 1 of this series by clicking here. While debt modification can offer valuable advantages, meticulous advance planning is critical, and initiating research on your options can never begin too early. It is important to consult with your trusted advisors if you are considering debt modification to best understand the tax strategies available to you. Aleksander Dziedzic is tax partner in Anchin’s Real Estate Group. You can contact him at aleksander. dziedzic@anchin.com.

MINNESOTA REAL ESTATE JOURNAL

October 2023

To sublease or not? That is the question By Katie Trevena, Forte Real Estate Partners

ith so much disruption in the office marketplace, some office real estate users may find their best fit to be sublease space that offers pre-built conference rooms, lunchrooms and offices along with furniture and additional amenities. It’s rare to have so many sublease options available but it makes sense for tenants to consider them given the substantial financial discount offered when completing a sublease. Our research of the office sublease market combined with our anecdotal experiences with both tenants and landlords shows that the Minneapolis/ St. Paul market has the largest amount of sublease space ever available, even more than during the Great Recession in 2008 through 2010. In early July, there were 62 Class-A options having more than 20,000 square feet with than 24 months plus remaining on the lease and another 54 office options in Class-B and Class-C properties. However, a vast amount of the square footage being offered as sublease space is more than 50,000 square feet. Of the 62 Class-A options, 43 are larger than 50,000 square feet. Users for those size spaces are not traditionally subleasors, but already one large sublease option of 300,000 square feet has been taken by Thomson Reuters in the Eagan-Prime Therapeutics headquarters. When it works: Subleasing works well for start-up or growing companies that might not have the capital to pay for the expenses of construction, furniture and AV equipment. Those growing companies also want flexibility for future space needs or to test a temporary second location. For those companies, sublease space works best when there are three to five years of rent left on the lease contract. In many cases, sublease space can be leased for up to a 50% discount on the direct rent for the same space. Our team is working with a company right now that is considering two subleases with longer lease terms. This business needs around 30,000 square feet. Although there are numerous options to sublease office space throughout the metro, only two options fit their specific criteria. With one option, the 30,000-square-foot space has 10 years left, which pencils out to an obligation of $9 million. The original tenant may consider writing a check to the landlord for half of the obligation. The landlord can then use that money to fund a new longer-term tenant and offer, in the words of many, “a pretty sweet deal” to the new tenant. The new tenant benefits because it can occupy the space as-is with little or no improvements, avoiding a large capital expenditure for furniture and improvements. If your business is considering a sublease space: - Review the credit of the original tenant. If you are paying the original tenant, that tenant also needs to pay the landlord. If that original tenant stops paying, your company could get kicked out of your “sweet”

- Finally, review the credit of the landlord. Many owners of office space might have financial challenges due to the rising interest rates and declining occupancy rates in office properties.

Katie Trevena

space or be asked to pay significantly increased rent. - Understand how subordination works. If you have a verbal agreement with the new landlord, the written language will supersede a verbal agreement if the building is sold. - Understand the terms and conditions of the original lease. Some language – such as the number of parking spaces, the hours of allowed operation, allowed use – may not work for your business. - Evaluate whether exclusives are included in the lease language. Those exclusives may preclude specific businesses – mortgage or title company for office space or a competing specialty medical practice – from occupying a vacant space.

When it doesn’t: A company’s size may not be as big as a deterrent as once thought given the number of large sublease spaces available. But the specific configuration of the space may not work even if the size is a fit. Subleasing also may not work because the subtenant must agree to take the space in its current state – and with its lease obligations. Subtenants with unique space uses or more parking needs than the current contract allows may be better off finding vacant space and negotiating for those unique needs directly with the landlord. Like any lease obligation, subleasing is a contract that needs to be fully understood before being executed. In all cases, businesses should have the appropriate counsel to represent them -- not the original tenant nor the landlord – to ensure that their needs are met for the short-and-long term. Of course, I’d suggest you contact one of Forte’s advisers for our experience, personal attention and in-depth knowledge of the costs that get rolled into any lease term. Katie Trevena is vice president – Advisory for Bloomington, Minnesota-based Forte Real Estate Partners. She has been involved in commercial real estate for 16 years and serves and supports office and healthcare clients.

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MINNESOTA REAL ESTATE JOURNAL

16 Healthcare from page 6

moves are more successful than others. There has to be a strategy in place. Does the whole building have to be medical uses or is it OK if there are multiple types of users in a space? Does the building have adequate parking? You can’t go into a move to traditional office space blind.” And that’s where Forte comes in. Forte works closely with its medical clients to make sure that they are moving into a space that will work for their practices, whether that space is a traditional medical office building or a space that has never been home to medical uses. Brown points to a surgery center that Forte recently helped move into a traditional office building. The center featured plenty of parking, a plus. The visibility, though, was not as good as what medical providers usually enjoy. But back on the positive side, the move was, as Brown says, an economic homerun for the office building’s owner and a good value for the tenant. In this case, the positives outweighed the negatives for the medical client, Brown said. The biggest issues that medical providers face when moving to traditional office space are parking, infrastructure and the need for a high capacity for HVAC and plumbing, Brown said. If a traditional office building overcomes those challenges? Then the space might be a good fit for a medical user, he said. “Those are the big issues,” Brown said. “If you go into a deal without knowing that or understanding these challenges, it could cost you a lot of money.” Another good example of a medical provider successfully moving into traditional office space? Forte helped Skin Rejuvenation Clinic move from its

October 2023

7,567-square-foot space in the Southdale Medical center to a new 10,000-square-foot location on the ground floor of France Place at 3601 Minnesota Drive in Edina, Minnesota. Brown said that the new space boasted plenty of positives for the clinic. The building offered a firstfloor location. Skin Rejuvenation Clinic has its own entrance at the property, and the clinic gets its own sign above the door. The building is also in a location that is easy to find and access. As Brown says, it was a wonderful fit and a good example of a successful medical provider move to traditional office space. Staying put brings its own challenges Because of the higher costs to build today, many healthcare providers that might have moved are opting to say put and remodel their existing space to better serve their patients. This, though, comes with its own set of challenges. It’s expensive to build new. But the rising costs of both labor and materials mean that it is expensive to remodel, too. Remodeling also puts strain on staffers and patients if a clinic or office is trying to remain open during renovation work. Brown said that the key to a successful remodel is for healthcare providers to hire talented architects and contractors. These professionals can then break down the project for a medical provider, outlining when each phase of construction should occur to generate the least amount of disruption. “Even though the cost of renovating a space has increased, this is still a far more affordable option than building new space,” Brown said. “Renovating or building new space is a delicate balance. You want

space that is professional and clean but not space that is ostentatious or overboard. You want to have an architect that understands that and can design a space that looks nice but is not overdone.” A recovery from the pandemic? Healthcare providers suffered during the pandemic, often cancelling elective or non-essential procedures. Today, patients have returned. But that doesn’t mean that healthcare providers aren’t still suffering from the pandemic’s impact, Brown said. He pointed to the staffing challenges that healthcare providers face. There simply aren’t enough nurses and physicians to meet the demand for medical services today. “Where did all the people who were working go?” Brown asked. “It’s not just nurses, either. Staffing in general is hard.” At the same time, medical providers that lost money during the pandemic years are now scrambling to boost their bottom lines. That means many are operating on razor-thin margins. Many of these healthcare providers are also operating in older buildings that need upgrades. With the financial challenges these providers face, will they move to new space, renovate existing space or remain in outdated facilities to save money? Brown said that the healthcare real estate industry is waiting to see how it all plays out.

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MINNESOTA REAL ESTATE JOURNAL

October 2023

Construction from page 1 will help commercial construction companies weather this storm. A new-construction slowdown fueled by higher interest rates Tom Schmall, vice president of project development for Minneapolis-based Mortenson, said that those commercial construction projects that are moving forward are those designed for very specific users. Spec construction, though, has come to a standstill, Schmall said, even in sectors such as multifamily where demand for space remains high. “Some of it is a conundrum,” Schmall said. “You talk about housing. Apartment deals are happening, but not at the pace they once were. Still, there’s

Stahl Construction is also working on the construction of the St. Francis City Hall and Fire Station in St. Francis, Minnesota.

a huge demand for housing. With such a strong need, you’d think that at some point the fever has to break. We need more housing. But the higher rates are keeping projects on the backburner.” Troy Blizzard, vice president and general manager with Mortenson, said that everyone in the commercial real estate business is talking about interest rates today. He said that he himself has never talked about the Federal Reserve Board so much in his life. Blizzard compared it to the supply chain issues that commercial construction companies faced

during the height of COVID: Everyone knew about

remains strong in this area, even when it comes to

those issues, too, and everyone was hyper-focused

sales and new construction, he said.

on them. The same is happening today with interest

“The high-tech businesses are still humming.

rates, with everyone in the real estate industry wait-

That business can overcome the interest-rate dis-

ing to see when sales and development activity will

cussions,” Blizzard said. “There is no slowdown in

rebound.

people wanting data centers even with the higher

Blizzard, though, said that not all sectors have

rates. But other markets like hospitality and residen-

been equally hit by the higher rates. He pointed

tial are seeing a slowdown because of higher rates.

to high-tech or industrial manufacturing. Activity

The impact of interest rates is broad, and everyone knows it.”

Construction to page 20

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MINNESOTA REAL ESTATE JOURNAL

October 2023

Construction from page 18

Cathy Schmidt, president and chief executive officer of Minneapolis-based Stahl Construction, said that higher interest rates have had a significant impact on the multifamily sector, with the higher rates slowing the development of much-needed new apartment units. “There appears to be some level of stoppage in terms of new development or projects that were in the process,” Schmidt said. “Today, developers are waiting to see when interest rates will stabilize or go down. The higher rates are making the numbers harder to pull together to make a deal work.” Schmidt said that she has spoken with a handful of developers who are pausing their new multifamily projects until they get more certainty regarding interest rates and any future moves by the Fed. And if rates do stabilize? Multifamily developments

Troy Blizzard

might start moving forward again. The problem? New construction won’t start immediately.

how public-sector work has been a lucrative alterna-

“Nothing happens quickly in commercial real es-

tive even as interest rates remain high.

tate,” Schmidt said. “Even if rates stabilize or tick down

“Even if private development slows down, public

a bit, it will still take time for those processes to be

development won’t,” Schmidt said. “We are very busy

revved up again. There are so many steps before you

with public work right now. There are a lot of pent-up

get to the start of new construction.”

dollars from the pandemic. In Minnesota, the bonding

Schmidt said that those multifamily projects that are

bill was delayed by a year, but a large bill passed in

already under construction or close to starting won’t

the spring. There is a steady stream of public projects

stop. That’s because of the huge demand for multifam-

thanks to that. We are still early on in that cycle.”

ily units across the country.

Schmidt said that Stahl has a long history of sup-

But a bigger slowdown in multifamily construction

plementing its private work with public projects. That

might come a year from now, Schmidt said. That’s

helps the company stay steady even when economic

when the current slate of apartment projects will wrap

challenges slow the flow of private-sector work.

construction. And because of higher interest rates,

“It is nice to be in both worlds,” she said. “When

there might not be many new apartment projects fol-

one world is a bit slow, the other tends to be busy. It’s

lowing. “The Twin Cities market needs new apartment units,” Schmidt said. “We have a long way to go before we build enough to meet the demand. Then there’s the fact that we are building a lot of new luxury units when what we really need are affordable units. It’s not easy for developers to make the numbers work when it comes to affordable housing.” Developers typically rely on tax and other financial incentives from governments to make affordable housing projects work. That won’t change in the future, Schmidt said. “You have to put all the right pieces together,”

important to be able to pursue and have experience Cathy Schmidt

“We are seeing some reshoring today,” Schmall

construction and renovation projects. That’s thanks

said. “It’s especially true in the solar business. A lot of

largely to the number of communities dotting Stahl’s

companies are bringing manufacturing in solar here.”

coverage area that continue to grow and need new

And while Blizzard said that reshoring hasn’t had a

Stahl is also taking on a significant amount of mu-

especially those that have embraced the CHIPS and

nicipal work, including the construction of city hall, fire

Science Act that provides new funding to boost do-

station and public works buildings.

mestic manufacturing of semiconductors, are seeing plenty of high-tech manufacturing locate in their states. “There are some states that are going all in on the

The Inflation Reduction Act helps

dollars to get these projects. Minnesota is talking

does a significant amount of work in the renewable energy business. Thanks to the Inflation Reduction Act, companies have brought manufacturing back to the United States, including manufacturing for the renewables industry. As Schmall says, these are big jobs, big enough to keep commercial construction firms such as Mortenson busy.

public-school buildings.

huge impact in the Twin Cities market, some markets,

CHIPS act,” Blizzard said. “They are committing big

has helped Mortenson find new business. Mortenson

in both areas.” Schmidt said that Stahl has been busy with school

Schmidt said.

Schmall said that the Inflation Reduction Act of 2022

Tom Schmall

about this, but there is competition for CHIPS act work all over the country. We have not seen the huge impact here yet.” Public-sector work has been a boon to Mortenson, too, filling in the gaps from the downturn in private-sector construction jobs. Blizzard pointed to the impressive amount of K-12 education projects, both new construction and renovations, that Mortenson has taken on as an example of

Waiting for stability It’s unlikely that interest rates will ever dip back to the lows the country saw in 2020 through 2022. But Schmall said that what the commercial real estate industry needs is stability when it comes to interest rates. This means that construction firms are waiting for the Fed to put an end to the tweaking of its benchmark interest rate, Schmall said. “What the market hates is uncertainty,” Schmall said. “If it gets to the point where the Fed says that this is enough, that will bring comfort. It’s kind of a fool’s errand now, though, to try to predict whether we’ll see another interest rate hike.”

Construction to page 24

MINNESOTA REAL ESTATE JOURNAL

October 2023

Industrial from page 1 velopment is financed by loans, when interest rates move it has a significant effect on whether you can get that project done. A year ago, the rates were dramatically lower. And 18 months ago, they were even lower. The higher interest rates have had a cascading effect on industrial development. Higher interest rates also drive depositors to take their money out of banks and invest it in something like a U.S. Treasury bond, which might be the safest investment in the world. They are almost paying 10% on the 10-year bond. If the banks, then, don’t have the deposits they can’t lend the money. As a result, people aren’t starting new buildings because they can’t get loans. They aren’t buying buildings because they can’t get loans. We have counted on the superregional and regional banks to provide financing for real estate projects, whether new construction or acquisition. Now that banks have no money and aren’t lending, there is no money available for developers to start new projects or for investors to buy existing projects. Then the loans on the banks’ books aren’t getting turned over. The loan they made two years ago on a project isn’t getting sold or refinanced. This basically means that the primary entity that finances commercial real estate, the regional and superregional banks, are on the sidelines. In the capital markets piece, the plumbing is clogged, someone said. That’s a great explanation. Are you hopeful that the Fed might be done with its rate hikes, or nearly done? Hyde: Whenever we get a little window of activity – we had a couple, one in January and another in early summer – and we think things are getting better, another jobs report comes out or a war starts in Gaza. If there was a deal you were working on and rates move violently again it blows those deals up. For us, we are not starting any new projects. It’s not for a lack of leasing activity. It’s just hard to finance a project when interest rates are in the 6% or 7% range when two years ago they were at 3%. And when we do go after acquisitions and we make a bid, the rates keep rising. As rates rise, our price goes down and the sellers pull the properties off the market because they are so frustrated with the low offers they are receiving. They remember the prices they were getting a year or two ago. Are there any indications that these challenges will lessen in the near future? Hyde: That’s hard to say. On the building sales side we didn’t see much industrial product in the Twin Cities market during the first six months of the year. During the last two or three months, people have said that we might have seen the last rate increase from the Fed, things are starting to get better. We need to sell buildings and sell them now. Then the jobs report comes out and it’s not what people wanted to see, and rates keep going up. Buyers are saying that the prices they were offering in June or

Hyde Development’s Highpoint project in Denver

corrected. Cost escalations have flattened out. Lead times are better. That needed to happen. In that sense, these interest rate increases have helped. The leasing activity is still strong. There will be more demand for industrial space with no new construction coming. That will lead to a much brighter market in 2025 and going forward. We have to focus on the future and the fundamentals while suffering through what is happening today.

Paul Hyde

July are no longer possible because of that, so the owners don’t sell. I do think rates will eventually go down. We do hear from the experts who say that will happen next year. There is a presidential election coming up. There will be lots of political pressure to lower rates before the election. For us, we are trying to ride it out until 2025. That’s what we are thinking. 2025? That’s a long time away Hyde: It is a long time. We are fortunate because we have a business plan. We keep our buildings. We are still collecting rents and operating our buildings. That side of the business is doing great. We are just not developing anything new. Most development companies focus on building and selling buildings. That model is strained in these times where there is no activity. All that being said, this was needed and healthy. We were coming through a time in 2021 and 2022 when our costs to build a building went up 21% each year. The cost to build an industrial building went up 42% in those two years. I’d never seen that in my life. We couldn’t get switchgear, roof supplies, all the guts of a building. That, by and large, has been

Leasing activity is still strong throughout the industrial market? Hyde: Yes. We have a project in Eagan called The Waters that we bought a year ago. We have been renewing some tenants and leasing up some vacancy. That project is so active, it is hard to keep track of the tenants that are coming in to see the space. It is going well. We are fortunate that we bought this building at the right time and fortunate that our interest rate on that loan is a good one, that the fundamentals of the leasing market are still going well. We are hopeful, based on the data we are seeing, that leasing activity will fill up whatever buildings are out there. The amount of new industrial construction will go down dramatically. That will lead to an increase in rental rates and demand for new construction when the rates do start to come down. The Twin Cities industrial market has been strong for a long time. What are some of the reasons for this? Hyde: I have done this for 25 years. Historically, the diversity of our economy is what makes our market so strong. We aren’t captive to just one business or one industry. The diversity of the group of businesses and industries here is what drives our leasing market. We have never been a market that overheats like you see on the coasts. We have a much healthier industrial market than other markets that threw up multiple million-square-foot distribution centers without any tenants based on a surge in ecommerce after COVID. That surge didn’t justify as much new industrial construction as some markets put up. Industrial to page 22

MINNESOTA REAL ESTATE JOURNAL

CORFAC from page 11

remote work trends continue to shrink users’ space requirements and the impact of this will become more visible in the coming months.” Reasons for optimism Brokers are seeing some bright spots amid the uncertainty that’s clouding their outlook. A strong job market and favorable hiring trends, return-to-work mandates by employers and improved delivery times for construction materials lead the list of positive dynamics affecting commercial real estate in the first half of the year. One respondent added, “Interest rates have stabilized, tourism has returned and many workers have returned to their offices, though hybrid work policies appear to be the new norm.” Sources of new business included clients expanding, clients downsizing, new companies moving to the market and members receiving referrals from other CORFAC members. More than 35% of respondents received an inbound referral from another member, a strong indicator of the network’s value for business development in challenging conditions.

goes up. A staggering 81% of survey respondents said availability of capital and interest rates are major factors affecting transaction activity. Other drivers of client decisions include availability of inventory, pricing and incentives. To find opportunities and time deals in this challenging environment, the need for experienced local market expertise is more important than ever. “As interest rates stabilize, and owners have more time to accept new pricing based on the higher cost of, or lack of, debt, the gap between seller and buyer expectations will close,” a respondent commented. National economic trends such as inflation are having an impact at the regional level, but localized factors such as workforce trends, inward and outward business and population migration, pro-business legislation and investors’ interest in specific markets are also at play. To help steer their clients, CORFAC brokers can tap into shared intelligence from the global network to complement their deep local expertise.

October 2023

Industrial from page 21

Historically, we have not had that overbuilding of spec space that you’ve seen in other markets. We were headed there, frankly, last fall. There was 10-million-plus square feet of spec construction planned or on the way. With these interest rates, those projects have been put on hold, which was appropriate. There are still a couple of big spec projects that were designed poorly and not appropriate for the Twin Cities by out-of-town developers that need to get filled up. But they’ll fill up. Our conservative approach to development will help us recover faster.

Investors are waiting and watching Across the CORFAC network, members are seeing investors wait to place capital as the cost of financing

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MINNESOTA REAL ESTATE JOURNAL

October 2023

Blizzard said that the developers in the Twin Cities have already shown that they are ready to jump at new work once interest rates stabilize. He pointed to developers embracing any project that has certainty attached to it, typically public-sector work. “There is cautious optimism out there,” Blizzard said. “This is a moment in time that we are all monitoring very carefully. The Twin Cities market has always rebounded after slowdowns in the past. It’s more a question of how fast it will rebound, not so much if it will rebound.” The Twin Cities has long benefited from its more conservative approach to development. Unlike other major markets, the Minneapolis-St. Paul market is not overbuilt in any sector, whether that be multifamily, industrial or retail. This lack of excess inventory will help the market recover quickly once interest rates stabilize, Schmall said. The unknown factor, though, is what the office sector will look like in the future. No one knows yet what the workplace of the future will look like and when, or if, most employees will return to the office on a full-time basis. That variable is something that the commercial development and construction businesses have not had to deal with in the past. “We talk about this quite a bit,” Schmall said. “That

Stahl Construction recently completed construction work on Valerius Elementary for Urbandale Community Schools, in Urbandale, Iowa.

is one element of the market that is different this time around. There are quite a few buildings in the CBD that are lightly occupied. What is that going to do? Fortunately, we have not been uber aggressive or risky when it comes to new development. We don’t get too far over our skis.” Some office buildings with high vacancy rates will probably be repositioned, turned into other uses such as multifamily. But as Blizzard said, not every struggling office property can be turned into an apartment. Such conversions are expensive and don’t make sense for every building. “We can’t leave buildings empty forever,” Blizzard said. “But we are all in the middle of figuring out which buildings work and how to repurpose them. Repositioning old office buildings, though, can be

are now seeing healthcare

“Once materials costs have gone up, they might

organizations with pent-up demand to do things.

go down a little, but they won’t go back to where

They are moving forward with their projects. Health-

they were,” Schmidt said. “And labor costs are

care has been pretty strong for us in Minneapolis.”

not going to go back down. We also have a labor

Stahl had built plenty of hotel properties in the

shortage. Labor is still in the driver’s seat in terms

past, Schmidt said. But new construction in hospital-

of demanding what they want to work. If people are

ity has slowed, especially in the Midwest.

waiting for construction costs to go down signifi-

This slowdown can be traced to a lack of business

cantly, that probably won’t happen.”

travel. Leisure travelers have returned and are filling

Like other commercial construction companies,

up hotel rooms. But conferences, cross-country

Stahl is also dealing with materials delays. It still

meetings and other forms of business travel remain

takes longer to get certain materials to the job site.

down, slowing the demand for new hotel construc-

This means that construction companies need to

tion. “We are starting to see a few more hotel reno-

plan their jobs carefully, mapping out every step of the building process, Schmidt said.

part of what gets the market bouncing again.”

vation projects pop up, but we are still not seeing

“This has required owners and design teams to

Not all asset types created equal

many new construction projects in this sector,”

choose their systems very early on in the process,”

Schmidt said. “The business travel is going to re-

Schmidt said. “That way, these materials can be

main depressed for the near future. The future of

pre-ordered. You have to fund those systems early

hotels, then, is largely dependent on vacation trav-

on.”

Today’s interest-rate environment hasn’t hit all asset types as hard. As Schmall says, housing and industrial remain active, especially on the leasing side where demand for these property types is still high. The demand for new advanced manufacturing facilities continues to rise, too. Companies seemingly have an insatiable appetite for data center space. Then there is the healthcare sector, which Schmall says has rebounded solidly since the days of the COVID pandemic. “Healthcare took a dip during the pandemic, but now it is getting stronger again,” Schmall said. “We

elers. If that keeps ticking up, we will start to see

Schmidt said that switchgears and electrical

new construction rebound in the hospitality sector.”

equipment still have long lead times, largely be-

The challenge of higher construction costs Interest rates aren’t the only challenge that construction pros face today. The industry is still dealing with higher materials costs, which makes completing new construction projects more expensive. Schmidt said that this will be a long-term challenge: She doesn’t see construction costs falling by much.

cause there are fewer suppliers of these items. “You have to get in line when you need these items,” Schmidt said.

OFFICE 2023 Minnesota

December 1, 2023

SUMMIT

19th Annual

Golden Valley Country Club | 8:00am - 12:00pm Program

4 Hours of Real Estate CE have been applied for with the Minnesota Department of Commerce Andrew Webb

Redline Property Partners

Christopher Stockness Shenehon Company

Hans Okerstrom

SPEAKERS & SPONSORS

Anne Smith

Barry Stoffel Gardner Builders

Hempel Real Estate

Ben Krsnak

Brandon Champeau

Dan White

David Anderson

Deanne Erpelding

Emily Marden

Perkins&Will

iSpace Environments

Jessica LeGare

Cushman & Wakefield

JL Commercial Services

Kevin Salmen

Marc Nanne

Transwestern

JLL

Frauenshuh

Gensler

United Properties BDH

Forte Real Estate Partners

Cushman & Wakefield

Tom O’Brien

John McCarthy

Roslyn Zumbrunnen

Shaun Chambers

Russ Nelson

Jim Jetland

Mohagen Hansen Architecture | Interiors

In-Focus Systems

Colliers International NTH

Brian Helmken Avison Young

scan for more information and to register

TOPICS & AGENDA 8:00am Office Market Update 9:15am

Break

9:25am

Office Development, Management & Investment Trends Changing the Industry

10:40am Break 10:50am Tenant Improvement Strategies

www.rejournals.com/upcomingevent/

sponsorship opportunities contact:

Jeff Johnson jeff.johnson@rejournals.com 612-819-0385

Jay Kodytek jay.kodytek@rejournals.com 612-940-3713

MINNESOTA REAL ESTATE JOURNAL

BRIEFS Minneapolis’ United Properties names ESG manager

October 2023

Vista Prairie Communities acquires senior care communities in Minnesota Jon Ruzicka, Joseph Ferguson, Jake Erickson and Jared Plamann, investment specialists in Marcus & Millichap’s Minneapolis office, marketed the property on behalf of the seller. The buyer was procured by the team of Ruzicka/Ferguson/Erickson/Plamann, too. AmericInn Hotel & Suites is located at 14331 Nicollet Court in Burnsville. This sale marks the 74th hotel transaction for the team of Ruzicka, Erickson, Plamann and Ferguson out of Marcus & Millichap’s Minneapolis office and the 14th thus far in 2023.

Ridgeway Senior Living and Vista Prairie Communities have completed the transition of ownership for a pair of HADC Ridgeway senior communities in

Minneapolis-based United Properties reaffirmed its commitment to social and environmental responsibility today with the formalization of its environmental, social and governance (ESG) initiatives

New Ulm, Minnesota.

Upland Real Estate Group closes $5.8 million sale of Minnesota retail center

and guiding principles. The company also promoted

memory care services in 116 apartments. Housing Alternatives Development Corporation (HADC) and transition effective Sept. 30.

year, expanding on her extensive involvement in

Vista Prairie Communities, ranked in the nation’s

diversity, equity and inclusion (DEI) and ESG within

200 largest not-for-profit senior living multi-sites, will

the commercial real estate industry.

now own 10 senior communities with this addition.

Over the past year, MacLean has begun spear-

The ownership change will expand the level of

heading the growth and development of United

care that is currently offered in assisted living set-

Properties’ ESG strategies, working in close collab-

tings in New Ulm. The changeover will also offer

oration with company leaders to help identify and Upland Real Estate Group‘s net lease team of

MacLean chairs the company’s ESG Advisory

Keith Sturm, Deborah Vannelli and Amanda Leath-

Group, in addition to UNITED Together, the compa-

ers represented the buyer in the sale of the Oak 36

ny’s DEI committee. She also led the development

Retail Center net lease investment property in Oak

of six ESG focus groups for green building certifica-

Park Heights, Minnesota, for more than $5.8 million.

tion, electric vehicle (EV) charging, vendor and sup-

Oak 36 Retail Center is 100% leaed with five ten-

plier diversification, solar, governance and policy,

ants, Crisp & Green, Aspen Dental, AT&T, Shopko

and marketing and communications.

Optical and Potbelly.

Marcus & Millichap closes sale of 82-room hotel in Burnsville

Ridgeway on 23rd, provide assisted living and

Vista Prairie Communities completed the ownership

Janelle MacLean to the role of ESG manager last

measure ESG practices, risks and opportunities.

The two properties, Ridgeway on German, and

opportunities for enhanced training, education, and support for staff members of both Ridgeway communities.

Kraus-Anderson finishes construction of $99 million high school in Minnesota

The retail center is located along Minnesota Highway 36. Other nearby tenants include Menards, Walmart, Lowe’s, TJMaxx, Target, Cub Foods and Harbor Freight.

Kraus-Anderson has completed construction on a $99 million high school at 1455 18th St. SE in Owatonna, Minnesota. The project is part of a $112 million district bond Marcus & Millichap recently brokered the sale of AmericInn Hotel & Suites Burnsville, an 82-room hospitality property in Burnsville, Minnesota.

referendum, which voters passed in November 2019. Construction began in May of 2021. Designed by Wold Architects and Engineers, the three-story, 317,000-square-foot high school, which

MINNESOTA REAL ESTATE JOURNAL

October 2023

2023 Minnesota

AFFORDABLE HOUSING SUMMIT

December 13, 2023

10th Annual

Golden Valley Country Club | 8:00am - 12:00pm Program

4 Hours of Real Estate CE have been applied for with the Minnesota Department of Commerce

SPEAKERS & SPONSORS Anne Mavity

Minnesota Housing Partnership

Christina Rieck Loukas

Claire VanderEyk

Bernadette Hornig

Cathy Capone Bennett

Chris Sherman

Greg Handberg

Heidi Rathmann-Smith

Marsha Goff

Matt Teasdale

Schafer Richardson

Hornig Companies

Twin Cities Housing Alliance

Winthrop & Weinstine

Emanuelson-Podas, Inc.

John Nordstrom

Dr. Eric Johnson

John Errigo

Michael Morrell

Micah Springston CBRE

Merchants Capital

Melissa Taphorn

Peter Mathison

Petro Megits

Shaun Chambers

Minnesota Equity Fund Washington County CDA

Sunrise Banks

AEON

National Equity Fund

Kaas Wilson

Artspace

In-Focus Systems

Sherman Associates

CommonBond Communities METIS Investments

Steve Minn

Lupe Development

Paul Connolly R4 Capital

scan for more information and to register

TOPICS & AGENDA 8:00am Affordable Housing: Current State of the Market 9:10am 9:25am

Break Capital Market Strategies for Affordable Housing

10:35am Break 10:50am Regulated & Unregulated Affordable Housing

sponsorship opportunities contact:

Jeff Johnson jeff.johnson@rejournals.com 612-819-0385

www.rejournals.com/upcomingevent/

Jay Kodytek jay.kodytek@rejournals.com 612-940-3713

MINNESOTA REAL ESTATE JOURNAL

October 2023

will accommodate 1,600 students, includes new

212, placing it within the coveted “Golden Triangle”

officer for Pentair. Previously, she served in various

classrooms, state-of-the-art industrial arts labs and

submarket of Eden Prairie.

roles at General Mills, including vice president of

tech shop spaces, as well as an 825-seat auditori-

The Oakview Business Centre I & II is a

human resources for the U.S. Segment. She also

um and a large commons and cafeteria space in the

157,428-square-footlight industrial campus that is

led Global Diversity & Inclusion at General Mills,

center of the building.

96% leased to 10 tenants in a myriad of industries.

strengthening diverse representation among the

Highlights include a main gymnasium and auxiliary

The overall portfolio has been 100% occupied for

company’s leaders.

gymnasium with walking track, a 3,451-seat football

15 of the previous 21 years, demonstrating tenant

stadium, eight tennis courts, two grass multipurpose

demand and positive positioning within the overall

fields, two synthetic turf multipurpose fields (for soc-

market.

cer, lacrosse, football, baseball, softball and physical

The nearly fully leased 344-million-square-foot

education), two softball fields, two baseball fields

Minneapolis/St. Paul industrial market continues

and a full track at the stadium.

to enjoy favorable conditions, having successfully

Located on 90 acres with parking lots for 890 ve-

absorbed over 14 million square feet of space over

hicles, the full site development also includes four

the past 24 months, representing the strongest ab-

storage buildings for athletics.

sorption phase on record.

Minneapolis’ Aeon names local COO as new board member

Construction is a combination of structural steel and precast concrete with an exterior facade comprised of brick and metal panels along with a substantial amount of glazing to bring abundant natural light into the building. The main curtain wall at the

Minneapolis’ The Opus Group adds to its board of directors

entrance to the building is 66 feet wide by 31 feet tall. Interior finishes include terrazzo flooring throughout the commons and fitness areas, prefinished interior

The board of directors with Minneapolis-based

panels in the auditorium, and numerous locations

housing agency Aeon has named Second Harvest

of tile, hardwood panels and metal panels covering

Heartland chief operating officer Sarah Moberg as

the walls and column wraps.

its newest member. Aeon, a non-profit developer, owner and manager of almost 6,000 affordable homes in the Twin Cities

Arden Logistics Parks acquires three-building industrial portfolio in Minneapolis market

area, is tackling the affordable housing crisis that lingers in the aftermath of the COVID-19 pandemic. Moberg’s decades of experience in organizational Minneapolis’ The Opus Group announced that

leadership, coupled with her passion for nonprofit

Kelly Baker, executive vice president and chief

work, makes her an exceptional asset to Aeon’s

human resources officer of Thrivent, has been elect-

board.

ed to its board of directors.

Moberg manages end-to-end sourcing and distri-

Thrivent is a Fortune 500 diversified financial ser-

bution of millions of meals at Second Harvest Heart-

vices organization with $162 billion in assets under

land, an organization dedicated to ending hunger.

Arden Logistics Parks acquired the Minneap-

management and advisement, and total revenue of

She also develops programming to address hunger

olis Light Industrial Portfolio, a three-building,

$9.4 billion. In her role at Thrivent, Baker is respon-

in collaboration with schools, clinics and senior care

361,428-square-foot portfolio of light industrial as-

sible for the teams that provide strategic human

centers.

sets in the Minneapolis region.

resources advice and enterprise support for talent

Moberg spent 25 years at General Mills, last serv-

The portfolio consists of the Flying Cloud Business

acquisition, benefits and compensation, organiza-

ing as Senior Director of Innovation, Technology and

Centre in Eden Prairie and the Oakview Business

tional design, diversity and inclusion, and workforce

Quality prior to joining Second Harvest Heartland in

Centre I and II located in Eagan, Minnesota. The

culture and effectiveness.

2021. She brings a global perspective to her work,

portfolio is currently 98% leased and represents the

The Opus board of directors includes business

first Minneapolis acquisition for ALP as the company

and industry experts, as well as family members

continues to expand into new markets.

of Gerry Rauenhorst, who originally founded the a

business in 1953. It provides strategic guidance

204,000-square-foot, 24’ clear, Class-A warehouse

and supports responsible practices in many areas,

building 100% leased to four tenants. The asset

including financial controls and audits, conflicts of

has achieved full occupancy for several years

interest, enterprise risk, investment management,

demonstrating the tenant demand for the property.

corporate responsibility, board and leadership team

The well-located building is also positioned at the

composition, succession planning and executive

nexus of Highway 62, Highway 169 and Highway

compensation.

The

Flying

Cloud

Business

Centre

Prior to joining Thrivent in 2021, Baker was executive vice president and chief human resources

having led teams locally as well as in Mumbai and Shanghai throughout her career.

2023 Minnesota

APARTMENT SUMMIT

January 11, 2024

19th Annual

Double Tree by Hilton Bloomington | 8:00am - 1:00pm Program

5 Hours of Real Estate CE will be applied for with the Minnesota Department of Commerce

SPEAKERS & SPONSORS

Abe Roberts

David Stofer

Joyce Stupnik

Keith Collins

Marcus & Millichap BDH

Brent Rogers

Saturday Properties

Josh Brandsted Greco

Evan Doran

MV Ventures CBRE

Erik Johnson

Venture Commercial Mortgage

Leanna Stefaniak

At Home Apartments, L.L.C.

Grant Campbell

The Doran Group

Centerspace

Matt Fransen

Timberland Partners

Heather Fleetham

Nick Place

Heidi Addo

Michel Commercial Real Estate

Sean Sweeney

Bridgewater Bank

Hall Sweeney Properties

John Nordstrom

John Rent

Willow Bridge Property Company

Emanuelson-Podas, Inc.

Associated Bank

Mark Decker

Rafi Golberstein

Ted Bickel

Proterra Real Estate Partners

PACE Loan Group

TOPICS & AGENDA 8:00am Demographic Update 8:30am 2024 Twin Cities Apartment Market Update 9:40am Capital Markets Challenges & Opportunities 10:40am Break 10:55am Developing, Construction & Design Showcase & Trends 12:00pm Apartment Management: Demographic, Operations & New Technology

scan for more information and to register

www.rejournals.com/upcomingevent/

sponsorship opportunities contact:

Jeff Johnson jeff.johnson@rejournals.com 612-819-0385

Northmarq

Jay Kodytek jay.kodytek@rejournals.com 612-940-3713

MINNESOTA REAL ESTATE JOURNAL

HealthPartners celebrates ground-breaking of surgery center in Woodbury HealthPartners broke ground on a new specialty center in Woodbury, Minnesota, Sept. 19. The new facility will provide additional medical and surgical specialty care to the community. “We’ve proudly served the Woodbury community for more than 25 years, and we’re excited for this opportunity to build upon our long-standing commitment to provide high-quality, affordable primary and specialty care offerings to this growing community,” said Kate Klugherz, vice president of medical specialties at HealthPartners, in a statement. The $50.5 million project is expected to be complete by winter 2024. The 55,000-square-foot, two-story facility will be located on City Place Boulevard in Woodbury.

October 2023

therapy spaces, allowing PrairieCare to serve an

“Now more than ever, it’s important to retain local-

additional 1,000 youth and young adults each year.

ly based businesses like Redpath and Company in

This marks the largest increase of psychiatric beds

downtown St. Paul,” said Stella, a Senior Director at

for youth in the state in decades. The newly ex-

Cushman & Wakefield. “And while it’s a sign of pos-

panded hospital is adjacent to 610 Medical Center,

itive momentum for the area, it’s also a testament

the two-story medical office building which houses

to the quality of Securian Center and its unmatched

PrairieCare, PrairieCare Medical Group, and the

location and amenities.”

PrairieCare Foundation. 610 Medical Center was developed and built by Ryan, and designed by Ryan A+E, Inc. The grand-opening ceremony took place Sept. 20, which included a ribbon-cutting and tour. Ryan built the expansion. Pope Architects served

Saint Paul’s The Heights redevelopment earns LEED Platinum precertification

as the architect and interior designer for the project. The PrairieCare expansion marks more than 1 million square feet built by Ryan in Brooklyn Park since 2016. Other projects Ryan constructed in the area include Kurita Water Industries and 610 Zane East & West.

The specialty center is the health system’s latest addition to its widespread presence in the Woodbury area, including HealthPartners Clinic Woodbury, TRIA Orthopedic Center, Melrose Center and other specialty care clinics including eye care,

Cushman & Wakefield closes 33,690-square-foot lease in St. Paul

The Saint Paul Port Authority has successfully earned a LEED for Communities Platinum level

plastic surgery, dermatology, dental and behavioral

precertification for The Heights, a brownfield rede-

health.

velopment project slated to bring 1,000 new housing units and 1,000 living wage jobs to Saint Paul,

Kraus-Anderson is the construction manager.

Minnesota’s, Greater East Side.

KA’s history with HealthPartners on projects goes

This award was granted by the U.S. Green Build-

back to 1974.

ing Council as part of its LEED for Cities and Communities certification program. Platinum is the high-

Ryan Companies wraps construction of Minnesota psychiatric hospital ahead of schedule

est level to be obtained and puts The Heights on course as the first project in the State of Minnesota and one of fewer than 55 communities worldwide to reach this milestone. “This precertification represents the Port AuCushman & Wakefield has represented landlord

thority’s dedication to equitable and sustainable

Securian Financial in leasing 33,690 square feet

development. From day one, our objective at The

at 400 Roberts Street North in S. Paul, Minnesota,

Heights has been to bridge social, economic, and

to Redpath and Company for its new headquarters

environmental investments to protect the health

location.

and wellness of those who live and work on the

Cushman & Wakefield’s Tom Stella and Eric King

Greater East Side,” said Kathryn Sarnecki, chief de-

represented Securian Financial, while Mike Salmen

velopment officer for the Saint Paul Port Authority.

of Transwestern represented Redpath and Compa-

“Our next step is to find businesses that are poised

ny.

for growth and share our commitment to sustainabil-

With the headquarters relocation, the locally After breaking ground in August 2022, Ryan Companies US, Inc. completed PrairieCare’s youth and young adult psychiatric inpatient hospital expansion

based CPA firm retains its base in Downtown St. Paul.

ity to relocate to our light industrial parcels.” A LEED for Communities Platinum® certification is achieved through a comprehensive rating system

400 Roberts St. N., also known as Securian Cen-

evaluation. To achieve Platinum certification, a min-

ter, is a Fitwell 1 Star rated building with amenities

imum score of 80 points is required. The Heights

Finishing three weeks ahead of schedule, Prai-

such as Skyway connectivity in four directions; a

received 87 points.

rieCare can begin serving more youth and young

work café with outdoor patio seating; on-site child-

adults during a month where there is historically an

care; conference and training center: on-site, 24/7

increased need.

security; and access to area restaurants and retail.

in Brooklyn Park, Minnesota, ahead of schedule.

The nearly 30,000-square-foot expansion includes an additional 30 inpatient beds, activity and

MINNESOTA REAL ESTATE JOURNAL

October 2023

OFFICE 2023 Minnesota

December 1, 2023

SUMMIT

19th Annual

Golden Valley Country Club | 8:00am - 12:00pm Program

4 Hours of Real Estate CE have been applied for with the Minnesota Department of Commerce Andrew Webb

Redline Property Partners

Christopher Stockness Shenehon Company

Hans Okerstrom

SPEAKERS & SPONSORS

Anne Smith

Barry Stoffel Gardner Builders

Hempel Real Estate

Ben Krsnak

Brandon Champeau

Dan White

David Anderson

Deanne Erpelding

Emily Marden

Perkins&Will

iSpace Environments

Jessica LeGare

Cushman & Wakefield

JL Commercial Services

Kevin Salmen

Marc Nanne

Transwestern

JLL

Frauenshuh

Gensler

United Properties BDH

Forte Real Estate Partners

Cushman & Wakefield

Tom O’Brien

John McCarthy

Roslyn Zumbrunnen

Shaun Chambers

Russ Nelson

Jim Jetland

Mohagen Hansen Architecture | Interiors

In-Focus Systems

Colliers International NTH

Brian Helmken Avison Young

scan for more information and to register

TOPICS & AGENDA 8:00am Office Market Update 9:15am

Break

9:25am

Office Development, Management & Investment Trends Changing the Industry

10:40am Break 10:50am Tenant Improvement Strategies

www.rejournals.com/upcomingevent/

sponsorship opportunities contact:

Jeff Johnson jeff.johnson@rejournals.com 612-819-0385

Jay Kodytek jay.kodytek@rejournals.com 612-940-3713