MREJ April/May 2022 with Real Estate Awards by REjournals

2022 Minnesota Real Estate Journal Awards Section Pg. 32

A flight to quality? An amenities race? Empty cubicles? Uncertainty still rules the day in Minnesota office market By Dan Rafter, Editor

10 West End, in suburban St. Louis Park, is an example of a new office building that boasts the amenities and feel that will help companies bring workers back to the office.

t’s not easy working as an office broker today. More than two years into the COVID-19 pandemic, many companies still don’t know when, or how, they’ll bring their workers back to the office. Others are debating how much office space they need and wondering what amenities they’ll must offer to pry employees away from their home workspaces and back into the office. And in downtowns across the country? Many office towers remain mostly quiet, with a skeleton staff of workers

commuting into and out of the city each day, while the majority of their co-workers log their hours from their homes, apartments or cabins on the lake. Challenges in the Twin Cities The Minneapolis-St. Paul office market is no exception. It might face even more challenges than others as a result of the murder of George Floyd in 2020 and the protests that followed. Just ask the brokers working this market.

Steven Chirhart with Minneapolis-based TaTonka Real Estate Advisors said that the office market is in the middle of what looks to be a long period of uncertainty. No one yet knows what the office sector will look like in one year, two years or beyond. Much of this is the result of the COVID-19 pandemic, of course. It didn’t take long after companies sent their employees home to work remotely, for them to discover OFFICE (continued on page 14)

How hot can industrial get? In Minnesota, and across the country, no one knows By Dan Rafter, Editor

he hot streak? When it comes to industrial real estate it’s showing no signs of slowing. And that’s just as true in Minnesota as it is across the country.

CRE professionals working in the state say that Minnesota’s industrial sector is still booming, with demand soaring, rents rising and vacancy rates plummeting. This isn’t new: The industrial market was strong here long before the COVID-19 pandemic began making headlines.

But throughout the pandemic? Demand for industrial space has only grown stronger as the online shopping habits that consumers picked up during the pandemic have forced companies to open more warehouse and distribution space.

INDUSTRIAL (continued on page 16)

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MINNESOTA REAL ESTATE JOURNAL

A FLIGHT TO QUALITY? AN AMENITIES RACE? EMPTY CUBICLES? UNCERTAINTY STILL RULES THE DAY IN MINNESOTA OFFICE MARKET It’s not easy working as an office broker today. More than two years into the COVID-19 pandemic, many companies still don’t know when, or how, they’ll bring their workers back to the office. Others are debating how much office space they’ll need and wondering what amenities they must offer to pry employees away from their home workspaces and back into the office.

HOW HOT CAN INDUSTRIAL GET? IN MINNESOTA, AND ACROSS THE COUNTRY, NO ONE KNOWS The hot streak? When it comes to industrial real estate it’s showing no signs of slowing. And that’s just as true in Minnesota as it is across the country.

DID ECOMMERCE AND COVID KILL EXPERIENTIAL RETAIL? NOT A CHANCE Remember those long-ago days before COVID-19 hit the United States? Back then, retailers were embracing experiences. Offering consumers an experience that they couldn’t get online was one way for brick-and-mortar retailers to battle the Amazons of the world.

COME BACK BUSINESS TRAVELERS! HOTEL RECOVERY STILL A SLUGGISH ONE The hotel industry is slowly recovering from the shots it’s taken during the COVID-19 pandemic. Unfortunately, the key word here is “slowly.”

AS DEMAND CONTINUES TO RISE, MINNESOTA SENIORS HOUSING DEVELOPER LAUNCHING NETWORK OF COOPERATIVE-LIVING FACILITIES The seniors housing market has long been a strong one. And given the aging of the U.S. population, don’t expect the demand for independent-living, assisted-living and skillednursing facilities to wane anytime soon.

WHAT DOES $1,400 A MONTH IN RENT GET YOU IN THE TWIN CITIES? NOT A LOT OF SQUARE FOOTAGE Apartment rents have been rising steadily in the Minneapolis market and throughout the entire state of Minnesota. But a new study by RentCafe shows just how expensive apartment living has become in the Twin Cities.

THE SIZZLE STILL THERE IN INDUSTRIAL MARKET How long can the industrial market’s winning streak continue? No one knows the answer. But a recent report from CommercialEdge shows that the sizzle continues in this commercial sector, with the national average for in-place industrial rents rising 4.4% this February when compared to the same month one year earlier.

SELF-STORAGE IS ON A GROWTH KICK—AND IT’S NOT SLOWING DOWN Selfstorage has long been lauded as a recession-resistant industry. A few years ago, conventional wisdom told us that a healthy supply of self-storage space lived at six net rentable square feet per capita. Today, most people in the industry will tell you that the number rests anywhere between 10 and 13 square feet per capita, depending on the region.

RATE VOLATILITY TRIGGERS REFI OPPORTUNITIES: PLENTY OF FINANCIAL INCENTIVES TO REFINANCE AHEAD OF MATURITY DATES On the heels of the long-anticipated Fed rate hike in mid-March – its first since 2018 –cost of capital is top-of-mind for real estate owners.

2022 MINNESOTA REAL ESTATE JOURNAL AWARDS SECTION

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Did ecommerce and COVID kill experiential retail? Not a chance President | Publisher Jeff Johnson jeff.johnson@rejournals.com Managing Editor Dan Rafter drafter@rejournals.com Vice President | Publisher Jay Kodytek jay.kodytek@rejournals.com Chief Financial Officer Todd Phillips todd.phillips@rejournals.com Art Director | Graphic Designer Alan Davis alan.davis@rejournals.com Managing Director National Events & Marketing Alyssa Gawlinski agawlinski@rejournals.com 7767 Elm Creek Boulevard, Suite 210 Maple Grove, MN 55369 For information call 952-885-0815

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By Dan Rafter, Editor

emember those long-ago days before COVID-19 hit the United States? Back then, retailers were embracing experiences. Offering consumers an experience that they couldn’t get online was one way for brick-and-mortar retailers to battle the Amazons of the world. But during the height of the pandemic? Consumers either couldn’t, or were too nervous to, go to indoor golf ranges, adult arcades or high-tech bowling alleys. That led to worries that experiential retail, which had been so strong, would fade away. The fear was that consumers would be hesitant to gather in indoor spaces even after COVID cases began to fall. The good news? That fear seems to have been misplaced. Across the Midwest, commercial real estate professionals report that experiential retail in their markets has rebounded in the last six to nine months. People are again flocking to fitness centers, are returning, in slower numbers, to movie theaters and are happy to spend their dollars at bowling alleys, indoor golf simulators and trampoline parks. The rebound is here Deb Carlson, director at the Bloomington, Minnesota, office of Cushman & Wakefield, said that experiential retail is bouncing back strong in her market, especially as COVID-19 numbers continue to fall. “Consumers are looking for interesting ways to spend their dollars,” Carlson said. “They want to spend them on experiences today.” This is good news for indoor mini-golf spots targeted toward adults or bowling alleys offering gourmet meals and light shows. It’s good, too, for movie theaters with heated seats and meal service and adult playlands that offer retro arcade games and golf simulators. Carlson points to the trend of revenge shopping. Some consumers waited so long to return to retailers, that they are now ready to spend their dollars with a vengeance. “We are as anxious in the Twin Cities as anybody to get out of our houses,” Carlson said. “We are ready to get out there and spend our money. The experience piece is going to be more important going forward. We haven’t had many experiences the last couple of years. There’s a real interest now that we are getting out of the

The House of Sports, a new concept from Dick’s Sporting Goods, has already opened in Knoxville, Tennessee.

house again on what interesting things we can do.”

spaces, such as Target stores adding CVS branches.

And experiential retail isn’t just about big chains offering electronic putt-putt and high-end bowling. It’s also about local retailers.

Consider Kohl’s, too. This chain has brought Amazon into its stores. Consumers who want to return their Amazon purchases can simply bring them to a Kohl’s. They might then spend some time shopping at that Kohl’s location.

Carlson said that shoppers are aware that local retailers got hit especially hard during the pandemic. They didn’t have the cash reserves of some of the national chains. Consumers, then, are ready to patronize local retailers again. And these locals are ready to provide them with experiences of their own. When consumers shop at local stores they might meet the shop’s owners. They might get into a conversation with the owner of the local toy shop about what educational toy would be the best fit for their grandchildren. Or maybe they’ll attend the signing of a local author at the neighborhood independent bookstore. These are all experiences, too. “More and more retailers are offering experiences like this as a way to fight back against online shopping,” Carlson said. “Some of the malls here have even added more local players. They are adding more local, Midwest-based vendors. They are trying to bring that local experience retailer back in.” In addition to offering experiences, Twin Cities-area retailers are looking at right-sizing their footprints, Carlson said. This might mean opening smaller locations in urban centers, spaces designed for consumers who want to run into a store, grab a few items and take public transportation or walk home. Other retailers are closing locations that are no longer performing well. Still others are adding additional retailers inside their

Other retailers are using their physical locations as advertising for their products. They don’t care if shoppers buy their products while they are in their stores. They just hope they’ll buy them online once they return home. This is the omnichannel approach – using both brick-andmortar locations and an online presence in tandem – that has become a winning formula for retailers, Carlson said. “That omnichannel approach is so important today,” Carlson said. “Now that we are all expert Internet shoppers, the retailers who are the winners have figured that out. We will never go back to what it was before. There isn’t a strong, successful national retailer that hasn’t gotten good at offering customers a myriad of ways to shop. You can come into the store. You can do it online and pick it up at the store or have it delivered. There are so many ways to access that product. The smart retailers are really good at doing that.” Cities vs. suburbs Russell Sagmoen, executive vice president at the Milwaukee office of Colliers, said that the retail market in general and experiential retail in particular have been slower to rebound in downtown Milwaukee than they have in the city’s suburbs.

RETAIL (continued on page 6)

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Perspective changes everything.

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said that the slowdown in experiential retail was more like a blip during the height of COVID. Now that mask mandates are falling away across the country and COVID cases continue to fall, consumers are returning to gyms, bocce ball courts, themed restaurants and arcades, she said.

RETAIL (continued from page 4)

This echoes the trend across the nation, where the centers of cities have been hit harder by COVID than the suburbs. Much of this is because many workers have yet to return to their offices, hurting the restaurants and retailers serving them.

“People want to get out into stores,” Hanke said. “They want to get back to those social connections that they missed during lockdown.”

But retailers in downtown Milwaukee haven’t been hit quite as hard as they have been in other major cities, Sagmoen said.

Hanke said that during the worst days of the pandemic, no one, not even the experts, knew what to expect from commercial real estate. Some wondered if places like trampoline parks and movie theaters would disappear.

“It has not been as severe in downtown Milwaukee as it has been in, say, Chicago,” Sagmoen said. “River North and the Loop in Chicago is way down in terms of activity than what I see in Milwaukee.” Even during the pandemic, experiential retailers showed resilience in Milwaukee, Sagmoen said. He points to the corporate outings that Colliers held here during the last two years, most of them held at experiential retailers. He also saw that families were out and about during the pandemic, taking their children to trampoline parks, gyms and bowling alleys. “Those spaces weren’t quite as full as they were before the pandemic, but they were still busy,” Sagmoen said. “In the suburbs especially, in places like Brookfield and New Berlin, these places have been pretty busy during the last six to nine months.” This doesn’t mean that all retailers offering experiences thrived during the pandemic. Sagmoen said that sit-down, white-tablecloth restaurants were hit especially hard during the last two years. Fitness centers and gyms also struggled. But both types of retailers have experienced a solid bounce-back now that COVID cases have been falling steadily in the United States and mask mandates have been lifted throughout Wisconsin. Developers, though, are still cautious here, Sagmoen said. “There has not been a lot of new retail product hitting the market in the Milwaukee area,” he said. “The cost of construction is so high today, it is stalling a lot of deals. The rents in Milwaukee are not quite as high as they are in Chicago and other cities. To get rent high enough to solve for construction costs is challenging here.” The exception? Quick-service restaurants. Sagmoen said that quick-service owners have pivoted in Milwaukee, as they have across the country, to drive-through and pick-up windows. Chipotle and Panera are good examples. Both chains are now looking for locations in which they can offer drive-through service. “It seems like everyone is fighting over that one drive-up window,” Sagmoen said. “That causes a problem. You usually can’t have more than one drive-through in a shopping center. Some projects have stalled out because they can’t find a site.

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That, of course, didn’t happen. After the slowdown caused by lockdowns and nervous consumers, experiential retail has indeed rebounded, Hanke said.

Puttshack, which offers electronically scored indoor miniature golf, has already opened in the Chicago market and is planning new locations in Nashville and St. Louis

Land prices are up. Construction prices are up. Quick-service restaurants are hit by food and labor costs. Sales are up, yes. But are they up enough to compensate for all that?” What’s the motivation to get that turtleneck? Tim Henry, principal with the Chicago office of Avison Young, said that the resiliency of retailers during the pandemic largely depended on the type of retail. He pointed to retailers covering daily needs, such as pharmacies and grocery stores, as being more pandemic-proof than other retail types. For those retailers that aren’t selling products designed to meet consumers’ daily needs? Experiences then become important, Henry said. “When you are looking at non-drug or -food retailers, the experiential factor is big,” Henry said. “The alternative for consumers is to shop online. If you are a retailer who isn’t covering the daily needs, you need to make the argument to consumers that they should get out of the house, that they shouldn’t be sitting at home. If you can offer consumers some sort of entertainment option, that might keep them from staying at home and shopping online. Henry cites X-GOLF as an experiential retailer that is growing quickly, offering several locations in the Chicago area. This retailer offers indoor golf simulators, and is steadily expanding. Shopping center owners like this kind of use, Henry said, because they attract

steady crowds to the retail areas in which they sit. These crowds might then visit nearby shops and restaurants once they are done playing. “This is as experiential as you can get,” Henry said. “The landlords are very excited about this type of use. They drive customers to a shopping center. They are Amazon-proof. They are exciting and profitable. They also do well in cold-weather climates, which helps in the Midwest. They can offer league play and lessons to keep the crowds coming along.” Henry said he expects to see experiential retail continue its growth as the country moves out of the COVID-19 pandemic. Before the pandemic hit, this type of retail was booming. COVID-19, especially in the earliest days of the pandemic, slowed this growth. But Henry said that is already changing in his market. “What is the compelling reason to go out to a store to buy a maroon turtleneck when you can instead go out and golf or go to a movie in a new theater?” Henry asked. “If you do have the chance to go to an entertainment center, you might decide to get that turtleneck from a physical store if that store happens to be in a center with indoor golf, bowling or a movie theater. Then it’s not just about the sweater. It’s about having fun with your friends or family.” That ecommerce slowdown? It was more of a blip Sara Hanke, associate broker with Omaha, Nebraska-based The Lerner Company,

“Everyone reset and took a deep breath,” she said. “In the past year, activity at experiential retailers in the Omaha market has picked back up. It is almost back to pre-pandemic levels.” Hanke said that gaming concepts have been especially popular, with consumers returning to adult-targeted bar-and-arcade concepts. Rockwall climbing venues, too, are growing in popularity. Then there are the indoor-golf concepts such as Topgolf, a brand that continues to grow. “From what I’ve seen, people are tired of being at home,” Hanke said. “They can shop online and workout at home. But they want to get out. They want to get that customer service and that social connection.” And what does the future hold for experiential retail? Hanke points to the new House of Sport concept from Dick’s Sporting Goods. The company has opened two of these so far, one in Knoxville, Tennessee, and another in Rochester, New York. House of Sport offers a towerinng climbing wall, outdoor fields and indoor batting cages. Puttshack, which has one Midwest location in Chicago and is planning on opening in both Nashville and St. Louis, is another concept that is growing. Puttshack offers indoor miniature golf that is electronically scored and features innovative holes such as one where golfers have to knock their balls into a stack of oversized beer-pong cups. “Some of our shopping habits have changed during the pandemic,” Hanke said. “But I don’t think we are only going to shop online. It’s up to retailers to get creative and figure out how to capitalize on both the convenience and experience. Amazon is not going anywhere. But even during the height of the pandemic, ecommerce only captured 17% of retail sales overall. There will always be ecommerce. But there will always be brick-and-mortar stores, too.”

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Come back business travelers! Hotel recovery still a sluggish one

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By Dan Rafter, Editor

he hotel industry is slowly recovering from the shots it’s taken during the COVID-19 pandemic. Unfortunately, the key word here is “slowly.” And the reason for this agonizingly slow recovery? It’s not leisure travel, which has steadily recovered since the worst days of the pandemic. It’s business travel. Companies still aren’t sending their workers on nearly as many road trips requiring hotel stays. And no one knows yet when this will change. According to an April 19 report from the American Hotel & Lodging Association and Kalibri Labs, U.S. hotel business travel revenue is predicted to end 2022 down more than $20 billion when compared to 2019. This comes after hotels lost an estimated $108 billion in business travel revenue during 2020 and 2021 combined. “While dwindling COVID-19 case counts and relaxed CDC guidelines are providing a sense of optimism for reigniting travel, this report underscores how tough it will be for many hotels and hotel employees to recover from years of lost revenue,” said Chip Rogers, president and chief executive officer of AHLA. Is there a glimmer of hope, though, for business travel? Rogers said there is.

“The good news is that after two years of virtual work arrangements, Americans recognize the unmatched value of faceto-face meetings and say they are ready

to start getting back on the road for business travel,” Rogers said.

Again, though, no one is certain when business travel will finally rebound. And until it does, the U.S. hotel industry will face challenges.

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These challenges are hitting urban markets harder. That’s because these markets rely heavily on revenue from business meetings, seminars and conferences. According to the American Hotel & Lodging Association, two Midwest cities are among the 10 urban markets projected to end this year with the largest percentage declines in hotel business travel revenue. This includes Minneapolis. In 2019, Minneapolis saw more than $698 million in hotel business revenue, according to the lodging association. In 2022, the city is projected to see more than $431 million in this type of revenue. That’s a dip of 38.2% from 2019 to 2022. And the news is bad in Chicago, too. The lodging association said that in 2019, Chicago hotels saw more than $2.48 billion in business travel revenue. That figure is expected to drop to more than $1.27 billion in 2022, a decline of 48.7%. The U.S. city expected to see the biggest drop in hotel business revenue? That’s San Francisco. The lodging association says that in 2019, San Francisco saw more than $2.4 billion in hotel business travel revenue. This year, the city is expected to see just more than $762 million in this type of revenue. That’s a big drop of 68.8%.

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“The good news is that after two years of virtual work arrangements, Americans recognize the unmatched value of face-to-face meetings and say they are ready to start getting back on the road for business travel.” Minnesota as a whole is also expected to see a big drop in hotel business revenue this year. The lodging association predicts that Minnesota will see more than $826 million in hotel business travel revenue this year, down from more than $1.18 billion in 2019. That’s a drop of 30.2%, the ninth-biggest among all states, according to the association. Illinois is expected to see the fifth-biggest drop in hotel business travel revenue this year, according to the association. In 2019, Illinois saw more than $2.9 billion

in hotel business travel revenue. That figure is expected to drop by 41.1% to more than $1.7 billion this year. But back to that glimmer of hope. The American Hotel & Lodging Association also recently released a survey showing that 64% of employed Americans and 77% of business travelers agreed that it is important to bring back business travel. The survey also found that 80% of employed Americans and 86% of business travelers say face-to-face interactions

are important for boosting a company’s success. That survey gives lodging association officials at least a bit of hope that companies will bring business travel back. But until that happens? Expect hotels, especially in urban areas, to continue facing economic troubles even as the pandemic, hopefully, wanes.

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As demand continues to rise, Minnesota seniors housing developer launching network of cooperative-living facilities By Dan Rafter, Editor

he seniors housing market has long been a strong one. And given the aging of the U.S. population, don’t expect the demand for independent-living, assisted-living and skilled-nursing facilities to wane anytime soon.

As one of the largest senior living providers in Minnesota, with a history dating back to 1917, Ebenezer operates seniors housing communities for all stages of senior living. Today, the company is the largest managing agent of housing cooperatives in Minnesota, drawing on its background of more than 40 years of experience managing member-owned cooperatives to successfully manage more than 60 cooperatives throughout the upper Midwest.

And as demand continues to rise, expect the players in this space to expand and offer new services to meet the changing need of older Americans. An example taking place in Minnesota now? Ebenezer Management Services, one of Minnesota’s largest senior housing operators, is developing a network of seniors housing cooperatives across the United States. The first of these new cooperatives, which will be branded under the Estoria Cooperatives name, will open in Lakeville, Minnesota. The development of the first senior living cooperative community in the nation can be credited to Ebenezer’s president A. Luther “Lute” Molberg. In 1977, his idea of a seniors cooperative became

But why “Estoria?” The word is of Portuguese origin and means “story” or “history.” Estoria Cooperatives will be a member-owned cooperative for adults 62+ years old and is designed to cater to the active lifestyle of its member-residents. reality with the opening of 7500 York in Edina, Minnesota. The concept proved popular, and the senior cooperative

housing concept has expanded across the country since.

Congratulations Congratulations to Newmark’s Jim Damiani, Ryan Bohrer, and Andrew Commers whose representation of Deluxe Corporation is a Minnesota RE Journal ‘Most Significant Lease Transaction’ finalist. Special thanks and gratitude to valued client, Deluxe, for its trust and partnership.

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SENIORS (continued from page 10)

provider, while honoring each member-owner as they share their own story,” said Susan Farr, Ebenezer vice president of business development and head of the new Cooperative Development division, in a written statement. “The future member-owners of the Lakeville cooperative community will have an opportunity to add their own stories to this rnarrative.” The first Estoria Cooperative will feature 89 homes. As part of the fastest-growing community in the Twin Cities metropolitan area, Estoria Lakeville will be located in a suburban neighborhood setting with easy access to parks, Crystal Lake, shopping, dining, the arts and downtown Lakeville. Construction is expected to take about 14 to 16 months. Cooperative communities like Estoria offer an opportunity designed to fit the changing lifestyles and needs of younger seniors. Members of these communities own a share or divided interest in the cooperative corporation. This corporation owns the building and land. Decisions are made democratically by an elected board of directors consisting entirely of community members and supported by various committees of interest. Ebenezer’s staff in the Homeowners As-

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“The future member-owners of the Lakeville cooperative community will have an opportunity to add their own stories to this narrative.” sociation Property Management division will offer their insight and guidance, too. “Member-owners enjoy all the traditional benefits of homeownership, including growing equity and taking tax deductions, without drawbacks like home maintenance, yardwork or surprise expenses,” said Shona Schmall, Ebenezer director of sales and marketing/cooperative development, in a statement. “Instead, members choose to simplify and downsize to a one-level floor plan, freeing up time to pursue other interests, engage in social groups, take advantage of amenities like a yoga/fitness center or art studio and even travel worry-free knowing their home is secure.”

Member-owners also benefit from the built-in social opportunities that come with the cooperative lifestyle. Members are all a similar age, often at similar places in their lives, and the community layout, shared amenity spaces and committee-planned activities help create friendships. By reserving and purchasing their home during the developmental phase, new member-owners can personalize their living spaces by choosing their own home finishes. Member-owners can select from various options, including quality cabinetry, hard-surface countertops, appliances, lighting packages and more to create a home that’s their own.

The Estoria Cooperatives Information Center and Showroom is currently under construction and will be opening soon, allowing members to see samples of the available home finishes. “We are excited to bring our years of experience to the development table and once again create a cooperative community that is designed around the needs of member-owners and to cultivate community,” said Jeff Lantto, development consultant, who also served as the director of the cooperative housing division for more than 30 years at Ebenezer.

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OFFICE (continued from page 1)

that bringing them back to the office would be a true challenge. Even today, many employers are unsure of their back-to-work plans, with some opting for a hybrid schedule in which some employees work part of the time from home and other days in the office. This uncertainty means that many companies are still not sure how much office space they’ll need in the future and how this office space will look. And Chirhart said that the Minneapolis market faces even more uncertainty than others. The murder of George Floyd in 2020 and the protests that followed caused many residents to avoid downtown Minneapolis-St. Paul. That reticence remains for many, which, in combination with so many still working from home, has led to a slower-than-expected recovery in the city’s downtown office market. “In the Minneapolis CBD we were hit with some tragic events, the George Floyd death and surging crime,” Chirhart said. “That made people afraid to come back to the office. There was maybe more concern with crime than there was with COVID.” This has led to a bifurcated office market. Chirhart said that office activity has been higher in suburban areas than it has been in the Minneapolis CBD. Jim Damiani, executive managing director and tenant advisory office specialist in Newmark’s Minneapolis-St. Paul office, said that not all suburban areas are created equal when it comes to the office market, either. He said that suburban markets with more walkability and amenities, including those that have created their own downtown areas with restaurants and shops, are seeing more office activity than are suburban markets in which office buildings tend to be surrounded by concrete parking lots and highways. Those neighborhood amenities are key to a strong office market today, Damiani said. “Today, the whole key to getting people back to the office, whether full-time or hybrid, is the experience,” Damiani said. “Is the experience better for people when they are working remotely from home or is it better in the office? Getting people back to the office is not a one-size-fits-all approach. Every company has a different culture and structure. I’d love to be able to tell my clients, ‘Here is what you need to do. It works for everyone.’ Unfortunately, that’s not the case. That will never be the case.” A downtown bounce-back? The suburban office market doesn’t rely as heavily on public transportation, another factor in the higher activity in this slice of the sector. Chirhart said that many office

Employees who have worked from home for two years want to return to brighter, airier offices. (Photo courtesy of 10 West End.)

workers don’t feel safe in either downtown or on the public transportation they’d need to get there. Then there’s the natural reluctance from workers to return to an office setting when they’ve already proven during the last two years or more that they can work from home and still be productive, Chirhart said. “I think the downtown office market is going to feel this for a while longer,” he said. How much longer? That’s a difficult question to answer, but Chirhart said that more than half of the office space in downtown Minneapolis-St. Paul remains empty, with a noticeably smaller group of workers trekking to downtown offices each morning. “People learned to work remotely so effectively, they are reluctant to come back to the office,” he said. Damiani said he has seen some positive changes in downtown Minneapolis-St. Paul during the last month. More people are slowly returning to the office and to downtown, he said. One piece of evidence for this? Damiani said that when he takes a lunch break while working from downtown -- he works in the office most every day -- he now has to wait in line to order his meals. That wasn’t the case not too long ago. On the negative side, Damiani still has fewer options for his lunch breaks, as many

restaurants in the downtown area remain closed. Damiani has also seen positive signs from his perspective as a commercial broker. His company recently closed a lease for a client that is moving from the suburbs to Minneapolis, and will bring 200 jobs with it. His company also closed the deal that will bring Deluxe’s headquarters to downtown from the suburbs, all 100,000 or so square feet of it. “Every time you hear that a company like Target is putting downtown space on sublease, someone else is planning to take advantage of the good market conditions in the city itself,” Damiani said. As Damiani says, downtown has the infrastructure, the multifamily housing opportunities, sporting events, theaters, restaurants and retail space in place. Because of this, downtown will bounce back from the pandemic. But how long will this bounce-back take? “I think it will take a couple of years,” Damiani said. “People have to feel good about coming back. When that happens, then the retailers will say they are ready to open. Once more retailers open, more people will come back downtown. It is a process, but it will definitely come back. It’s just a matter of when.” Quality spaces matter This has all led to a flight to quality in the Minnesota office market. Companies that

are moving are often selecting higher-quality office space that they might not have been able to afford before the pandemic. Others are targeting higher-quality spaces to entice hesitant workers to return to the office, Chirhart said. And while doing this, many companies are moving from larger offices to smaller spaces that might cost more per square foot. He points to one client of his that moved from 7,000 square feet of office space to 4,000. That 4,000-square-foot space is higher quality and comes with more amenities. But even with the higher per-square-foot cost of the new office, the client is saving money with the move. This trend, if it continues, will have a longterm impact on the local office market. “I am definitely seeing a flight to quality in the new office leases I am closing, whether it’s a renewal or a relocation,” Chirhart said. “People are trying to create office spaces that entice their employees to come back. If they are in a ‘B’ building, they are looking to move to a quality ‘A’ building. They might be moving to a space that is $4 or $5 a square foot more expensive than their previous building. To offset that, they are taking 25% to 30% less space because not everyone will be in the office at the same time.” The higher-quality space is a key to bringing employees back, Chirhart said. Employers want to offer their workers amenities that make coming into the office,

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even on a part-time basis, as attractive as working from home.

gy: Instead of sending their workers across the country or globe for meetings, they can instead set up a Zoom meeting.

This could mean larger break rooms and lunch areas; places for after-work happy hours and social events; larger windows to bring in more light; on-site fitness centers and cafeterias; and on-site covered parking.

That’s far less expensive than booking flights and hotel rooms for traveling employees. The bigger challenges

“Companies are focusing on improving the quality of their spaces,” Chirhart said. “That started before COVID and it isn’t going away.” Damiani said he recently met with a client who asked him if the company should adopt a hybrid-work model. Damiani said that he couldn’t tell that client what to do, but he did advise that the client not make any long-term decisions yet on the amount of space it needed and the layout of that space. “Get the employees back and see what their wants, desires, likes and dislikes are,” Damiani said. “If it is hybrid, set a policy with their input. Try it out for six months. No companies know what will work until they try it out. What works today might change in six months.” This uncertainty means that flexibility in the office world is critical. This flexibility is especially important when tenants are signing leases, Damiani said. He recommends that clients target office buildings in which they can expand, contract, terminate, extend or renew a lease without struggle.

Chirhart said that office vacancies continue to rise in the CBDs of Minneapolis-St. Paul. His concern? If these vacancy rates start rising to 25% or 30%, landlords could struggle financially. That could result in a crash in the downtown areas.

Office spaces remain empty across the United States, and no one knows when this will change.

“These are all rights that landlords might not like giving, but if you want to thrive in an office building, you need that flexibility in the lease language,” Damiani said. “And you need it, too, in the design of your space the furniture you use. If only 23% of people want to come into the office and you need to contract your space, you need that flexibility. It is about being flexible with every aspect of your lease, space, design and future.” This can be challenging for both landlords and tenants, Damiani said. Many landlords say they can’t afford to be that flexible. As the landlords say, they have a mortgage to

pay and they need more certainty when signing tenants to leases. And Damiani’s response? “If I was a tenant, I would probably not move to a building where landlords wouldn’t give me that flexibility,” he said. “I’d seek out a different space.” But even as companies focus on amenities, Chirhart said, the technology that made working from home possible isn’t going away. He pointed to Zoom and Microsoft Teams meetings. Companies can realize significant savings by using this technolo-

“I am concerned,” Chirhart said. “No one wants to see our landlords fail. And if tenants are questioning whether their landlords have the funds to maintain their buildings or pay for improvements, that’s not good, either.” Chirhart said that the office buildings seeing the greatest challenges today are Class-C and lower Class-B properties. These buildings don’t have many amenities to attract companies looking for new office space. That has lessened the demand for them. Another change? Chirhart is seeing a surge in office subleases today throughout the Minneapolis-St. Paul market. That isn’t unOFFICE (continued on page 16)

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OFFICE (continued from page 15)

usual: Sublease volume is growing steadily in office markets across the country. For his part? Chirhart said that he, too, is adapting to the new market left behind by COVID. In the past, 60% to 70% of his business was in the office sector, predominantly office leasing. In 2021, 70% of his business was in sales and a good portion of that was in industrial and land. “As a broker with 30-some years in the business, I’ve had to adapt the way I do business to take advantage of other sectors,” he said. When does he see the office sector returning to at least something approaching normalcy, especially in the harder-hit downtown areas? Chirhart said that changes must be made. Workers and tourists alike must feel safe in downtown again. This might not happen until there are more people shopping downtown retailers and eating at restaurants in the CBD. “Downtown retail is tragic right now,” Chirhart said. “So many restaurants in our skyways had to close. If we had a 12-month to 18-month period where offices were mostly closed, I think those restaurants could have weathered this. Going on two-

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“They (workers) can work up at the cabin or they can choose a hybrid model. We just have to see how the working world changes.” years-plus, though, might have permanently shut the lights on those spaces.” The positive news? Developers had not overbuilt office space in the Twin Cities and its suburbs before the pandemic hit. That is fortunate and means that there is less empty space than there could have been. And as companies adjust to the new reality of work, landlords, building owners and office brokers will soon have a better understanding of what the new office market will look like. “If the economy can sustain its growth – and I know inflation is a huge concern – than we can recover from this,” Chirhart said. “We are going to adapt to a very different work model going forward. There

will be more flexibility for workers who choose whether to work remotely or work from home. They can work up at the cabin or they can choose a hybrid model. We just have to see how the working world changes.” Damiani said that vacancy rates remain up in downtown Minneapolis office buildings that lack the amenities or modern feel of Class-A spaces. He says that many of these spaces will eventually be transformed from offices to housing, hotels or other uses. As an example of an office building that is attracting new tenants today? Damiani points to 10 West End, an office development in suburban St. Louis Park. That office development sits in the middle of

a busy area filled with restaurants, bars, fitness centers and entertainment options. The office space itself is new and boasts several on-site amenities. So far, this newer space is already more than 70% leased. “It is a higher-cost alternative, but it has all the amenities and walkability that people want,” Damiani said. “If you are trying to get people back to the office, and two years is a long time for them to be away, you have to give them something better to come back to. If it’s just the old office with no amenities or walkability, they are not going to want to come back to that.”

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An underserved market

INDUSTRIAL (continued from page 1)

Jacki Christopher, director of national build-to-suit development with the Minneapolis office of Ryan Companies, said that the demand for industrial space in the Twin Cities market is still outpacing the supply. This means that rising rents and falling vacancy rates aren’t going anywhere here anytime soon.

Industrial, then, remains the darling sector of the commercial real estate world. “In my 36 years of working in this business, I have never seen rent growth the way it is now,” said Mark Kolsrud, senior executive vice president in the Minneapolis-St. Paul office of Colliers. “There is such a constraint on available industrial space. COVID showed people how much industrial space we really need. Now, two years later, demand for this space is still growing.”

“Minneapolis is one of those markets that is underserved in terms of industrial product,” Christopher said. “We need more warehouse space here.”

Busy times for industrial Kolsrud described the Minneapolis-St. Paul market as a kind of primary secondary market. The Twin Cities might be a secondary market for industrial real estate, but it is one of the best secondary markets out there, he said. Because of this, plenty of capital has bounced from bigger markets, especially those on the coasts, to the Twin Cities as investors look for stability. “We have never had the highs or lows that other markets have,” Kolsrud said. “We enjoy more of a stability here. That’s something that we can offer investors. We have always been able to monetize our real estate here. It is liquid. Investors can sell it if they need to.” An influx of institutional capital has hit the Twin Cities market, Kolsrud said. That

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And don’t expect the supply of industrial space here to catch up with demand anytime soon. The need for warehouse space in the Twin Cities market continues to soar.

has provided yet another boost to the local industrial sector. “The market keeps getting better and better,” Kolsrud said. “Developers are building more industrial space, and the space that they are building is better product. That is helpful to our market, too. We are seeing real quality product here.” The industrial boom has even spread to submarkets that have traditionally been quieter. Kolsrud points to communities such as Woodbury and Cottage Grove as markets that haven’t seen much industrial activity in the past but are now becoming hotbeds for new warehouses and distribution centers.

That doesn’t mean that there aren’t challenges in this sector. Interest rates, of course, are on the rise. That could impact investors’ returns. Inflation is rising, too, which could cool off the state’s economy.

“We have a long way to go before we catch up to demand,” Christopher said. “There are a lot of reasons for that. We are still experiencing so many construction delays. The labor force is insufficient. There is a shortage of building materials. We will be catching up to demand for quite some time, a few years, at least.”

But so far? Not even these headwinds are slowing demand for this sector in the Twin Cities and the rest of the state.

Because of this, developers will be busy adding new industrial space to the market throughout this year and 2022.

“The party is still going,” Kolsrud said. “We have basically had no bad news in the industrial market for 10 years. This is the first time some people in my industry have ever seen anything that could be considered something to worry about.”

“There are so many tenants out there looking for industrial space,” Christopher said. “It’s not much different from what we are seeing in the housing market: They have a need and they can’t fulfill it. The need doesn’t go away.”

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It doesn’t help that older industrial space doesn’t always meet the needs of tenants today.

Consumers were shopping online, of course, before the COVID-19 pandemic hit. But consumers gravitated even more toward online shopping during the pandemic, with many wary of shopping in-person.

“Users are looking for much more sophisticated space,” Christopher said. “That often means that existing industrial space needs to undergo a big retrofit. It can be hard to get the materials for that. We also have a land shortage that is hampering the development of new space. It is difficult to get materials for construction in a decent timeline. The end users are in a tough spot. There are not a lot of great options in this market right now.” Changing habits Peter Loehrer, senior associate with the St. Louis Park, Minnesota, office of Colliers, said that industrial remains the darling of the commercial real estate investing world. And because it’s easier today for investors to raise money, this equals historic levels of activity in the industrial market. Combine that with the increase in online shopping, and suddenly you have a red-hot market that is showing no signs of a slowdown. “The activity in industrial rose overnight to a level that we thought we would hit during the next five to 10 years,” Loehrer said. “We saw a huge amount of new demand from a new type of tenant in addition to the more traditional tenants who are trying to get online, too. Companies such as Amazon, Home Depot, Target and other ecommerce

Even those who had never embraced online shopping before COVID-19 hit, began ordering groceries, restaurant meals, apparel, toys, shoes and electronics online. This put pressure on companies to open more warehouses and distribution facilities across the country, all to get these products to their customers in fewer days.

Remember the toilet-paper shortage in the early days of COVID? Companies do, and they are taking steps to make sure it doesn’t happen again.

tenants starting circling Minneapolis as a place to be.” Loehrer said that not too long ago Minneapolis and St. Paul didn’t rank as particularly strong ecommerce hubs. The cities aren’t really on the way to other parts of the country, which sets them apart from other Midwest cities such as Indianapolis, Columbus and Milwaukee. This meant that the industrial buildings in Minneapolis typically served greater Minnesota, the Dakotas and maybe part of Wisconsin. The market was home to high-tech, manufacturing and healthcare companies that needed industrial space.

That is now changing, Loehrer said, with ecommerce companies gravitating to the Twin Cities market. These companies recognize that the Twin Cities market is a strong and growing one, and they want warehouses and distribution facilities near the rising number of customers in the area. “I think this is a permanent change,” Loehrer said. “Once ecommerce companies have sunk their teeth in an area it’s hard to unsink those teeth. They can’t increase delivery times. They can’t have lower inventory levels. It’s a one-way trip. I’m not saying we’ll have the unprecedented levels of increased demand every year. But ecommerce companies will continue seeking industrial space here.”

At the same time, companies realized that storing just enough products and materials doesn’t work well when demand soars. Many companies today, then, are boosting the amount of product they are storing in the United States so that they won’t be caught shorthanded when consumers demand more of a product. That has led to a need for more industrial space, too. “Companies are still playing catch-up,” Christopher said. “Many companies embraced that model of having just-enough product stored onsite to decrease the amount of warehouse space they needed. Why pay rent to store toilet paper onsite if you can get it right before you need it? “But companies are now realizing that this is not reliable. For a business, there is nothing worse than not being reliable. How INDUSTRIAL (continued on page 20)

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INDUSTRIAL (continued from page 19)

many times will consumers keep going to Walmart and not be able to get what they want before they no longer go back?” COVID exposed the weaknesses of this “just-enough” model, Christopher said. Now companies are looking to build in redundancy so that they will always have enough product available to meet demand. Kolsrud said that he doesn’t expect these trends, especially the rise in online shopping, to disappear anytime soon. “Our willingness to shop online? That will never change,” he said. “This is how we do it now. I don’t think we ever lose the ground we gained in ecommerce. If my 85-yearold parents are ordering products online, everybody is doing it. All the companies realize that they need to provide this product quickly to the consumers to be competitive.” Food delivery has become important, too. Today, companies need more cold-storage space and freezer buildings. These spaces must be localized in different areas of different markets. As Kolsrud says, companies can’t just open “one big beast in the middle of a market.” There are challenges in today’s industrial market, too. The biggest? The lack of enough labor and the months it now takes to get the construction materials needed to build more industrial space.

Loehrer said that this last challenge, especially, doesn’t look to be easing anytime soon, as materials shortages and construction delays continue to hamper new industrial construction. “It is taking longer to get everything from the springs on the dock doors to the roofing materials,” Loehrer said. “It can take a full year to 18 months to get these products. And then your vendors are not giving you a set price. You can’t lock the price in.” This makes it challenging for tenants to find industrial space in the Twin Cities market. As Loehrer says, finding the right space can sometimes seem like an impossible task. “Part of our job today is being a therapist,” Loehrer said. “I have to remind my clients that this is a landlord-friendly market. It’s a tough situation they are in. The good news, though? Tenants are making more money than they have ever made, too.” Why tenants are targeting the Twin Cities What makes the Twin Cities and its suburbs such attractive destinations for industrial end users today? There are plenty of reasons. Christopher points to the growing population in Minneapolis-St. Paul and its surrounding areas. The residents here, like consumers across the country, are shopping more frequently online, which drives the need for more warehouse and distribution space in the Twin Cities.

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The Twin Cities area is also known for having a business-friendly environment. The lower cost of doing business here helps, too. “While you won’t see the amount of activity that you see in Atlanta, Dallas or the Carolinas and Florida, there is plenty that Minneapolis offers industrial users,” Christopher said. “We have highly skilled workers here, workers that many of the more sophisticated industrial users need. We offer proximity to long-term established brands like 3M and General Mills. This is seen as a strong place for industrial users to be.” Not all industrial facilities are created equal, of course. Companies looking to attract the best workers, and to retain them, need to offer industrial workspaces that come with a higher level of amenities, Christopher said. This means nicer breakrooms and powerful air-conditioning systems. It also means landscaped outdoor spaces and walkways that workers can enjoy when on break. “There was a time when you didn’t even need to have air-conditioning in a facility,” Christopher said. “Now that is changing. That is a shift. If you want to retain workers, you can’t ask them to work in a facility that doesn’t have air-conditioning in the middle of the summer. Workers will say, ‘Forget that.’ They’ll go down the street to the next employer.” “Functionality in industrial is the key amenity,” Loehrer said.

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This means that industrial spaces must feature high clear heights for ecommerce tenants that need to stock products higher. They need docks that are protected from cold air. And they need a lot of trailer parking. That last bit is important, Loehrer said. Trailers often line the streets overnight around infill or urban industrial facilities in and around Minneapolis because these buildings don’t have enough parking spaces. It’s something that both the city and industrial tenants hate, Loehrer said. “That’s an eyesore,” Loehrer said. “If a new industrial building is going up, the first thing investors look for is whether they have enough trailer drops.” Loehrer said that developers are building as quickly as they can. They don’t want to overbuild, as that could eventually lead to lower demand and empty spaces. But there is little worry that the Twin Cities area will have too much industrial space anytime soon. “If you are an industrial investor and you started in this business right after the Great Recession, you haven’t had a bad day yet,” Loehrer said. “Your value has only increased every single day. Cap rates are going down. Rental rates are increasing rapidly. And you are not doing anything special. You’re just owning the space. There is nothing that is going to touch the industrial market right now. There is too much demand by tenants and too much capital pouring into the sector.”

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What does $1,400 a month in rent get you in the Twin Citeis? Not a lot of square footage By Dan Rafter, Editor

partment rents have been rising steadily in the Minneapolis market and throughout the entire state of Minnesota. But a new study by RentCafe shows just how expensive apartment living has become in the Twin Cities.

“Renters in Minnesota are actually making

RentCafe in March released a report showing how much apartment space tenants can rent in 39 cities in Minnesota for $1,400 a month.

out a bit better than those in

For $1,400 a month in Minneapolis, renters can get an average of 675 square feet of apartment space. In St. Paul, that $1,400 a month will get renters an average of 831 square feet of living space. That Minneapolis figure? That’s the least amount of apartment space renters in the entire state of Minnesota can get for $1,400 in monthly rent. In Golden Valley, renters will get just 743 square feet, while $1,400 a month will fetch renters just 791 square feet in Edina. Renters seeking more space in the state can turn to Mounds View, Minnesota, where $1,400 in monthly rent nets an

other states.” average of 1,119 square feet, the highest average amount of space in the Twin Cities metropolitan area. In Brooklyn Center, this much rent earns tenants an average of 1,067 square feet, while it nets an average of 1,063 square feet in Anoka.

For the entire state, renters get the most space for their $1,400 in Moorhead, at 1,488 square feet; St. Cloud, at 1,334 square feet; and Sartell, at 1,219 square feet. Renters in Minnesota are actually making out a bit better than those in other states.

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RentCafe found that $1,400 in monthly rent nets an average of 780 square feet in the 100 most populated cities in the United States. The average apartment space in Minnesota for this monthly rent comes out to 867 square feet.

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The sizzle still there in industrial market By Dan Rafter, Editor

ow long can the industrial market’s winning streak continue? No one knows the answer. But a recent report from CommercialEdge shows that the sizzle continues in this commercial sector, with the national average for inplace industrial rents rising 4.4% this February when compared to the same month one year earlier.

“This strong start is yet more evidence that investor interest in industrial

According to CommercialEdge’s most recent industrial report, the average inplace industrial rent across the top 30 markets in the United States hit $6.45 a square foot in February.

properties is not slowing.”

And the average price of industrial leases signed in February hit $7.35 a square foot. That is 90 cents higher than the national average for in-place leases. And those aren’t the only strong stats for industrial. CommercialEdge reported that the national industrial vacancy rate averaged 5.2% in February, a drop of 30 basis points when compared to January. At the same time, the average sale price for industrial space was $125 a square foot as of February. The average sales price for this sector has been on a steady upward trend for six consecutive quarters, increasing a jump of 50% from the

third quarter of 2020 until the first of 2022.

year is typically the slowest for commercial real estate transactions.

Nationally, industrial transactions amounted to nearly $9.1 billion in the first two months of the year. According to CommercialEdge, this strong start is yet more evidence that investor interest in industrial properties is not slowing, considering that the first quarter of a

Five U.S. markets exceeded the $500 million mark by the close of February in terms of transaction volume. Chicago industrial transactions ranked second in the country in this category, behind only Philadelphia, with $689 million in transactions.

Across the country, 592.5 million square feet of industrial space was under construction by the end of February, accounting for 3.5% of existing stock. The industrial pipeline has increased by more than 90 million square feet in the last six months, according to CommercialEdge.

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Self-storage is on a growth kick—and it’s not slowing down By Michael Baillargeon, senior vice president, operations at Store Space

elf-storage has long been lauded as a recession-resistant industry. A few years ago, conventional wisdom told us that a healthy supply of self-storage space lived at six net rentable square feet per capita. Today, most people in the industry will tell you that the number rests anywhere between 10 and 13 square feet per capita, depending on the region. As the market continues to reverberate from the economic impact of COVID-19, the self-storage industry is still experiencing meteoric growth. That growth is projected to continue. While other real estate asset classes, even those previously considered stable, have taken heavy hits during the pandemic, self-storage has been insulated from the impact of broader market changes. In 2020, the global self-storage market was valued at $48.02 billion. It is expected to reach a value of $64.71 billion by 2026, registering a compound annual growth rate of 5.45% from 2021 to 2026. When I joined Store Space two years ago, the company had 26 locations. Now, we

When a global event like the COVID-19 pandemic causes broad market shifts, retail and office customers re-evaluate their model—or are forced to move out. In an office or retail development, which may have three or four renters, the loss of one customer can cause significant financial instability. On the other hand, self-storage provides services to hundreds or thousands of customers from one location at any given time. As a result, the customer base is stable—and the demand is high. Pandemic-driven demand

have 119 locations with roughly 30% of those located in the Midwest. Why does the industry keep growing? While asset classes like office or retail tend to have a

few significant customers in one location at any given time, self-storage has a broad customer base, which offers an unusual level of stability.

As more and more workers opt for remote or hybrid work, business owners are re-evaluating their office rentals. Having to shift to work-from-home for large portions of 2020 and 2021 drove up the demand for self-storage as business owners looked to cut costs on rental office spaces. Now, companies are considering a permanent shift to remote work. Office spaces, as a result, are being downsized or abandoned altogether, further increasing the need for storage.

A P R I L / M AY 2 0 2 2 On the residential side, self-storage is also booming. Today, 10.6% of households rent a self-storage facility. Whether times are good or bad, people always need storage. When the economy is healthy, people accumulate material goods and need space to store them. When times are tough, people and businesses downsize. As families seek smaller and more affordable living spaces and businesses move out of their brick-and-mortar properties, self-storage proves to be an affordable alternative to residential or commercial rental space. Spurring investment Self-storage is unique as an asset class in that it has maintained steady growth throughout the Great Recession, COVID19 and the Great Resignation. That stability spurs new investment in the industry, and as prices and inflation heat up, more and more money is rolling into storage. Since joining the industry more than 20 years ago, I’ve seen the industry grow exponentially both in the level and diversity of investment. While traditionally, investors in self-storage have been REITs and high net-worth individuals, institutional money is now joining the scene. Large private equity firms are moving capital into the self-storage industry, fueling higher sales prices and elevated acquisition activity. Like housing, self-storage is considered a stable investment—indeed,

M I N N E S O TA R E A L E S TAT E J O U R NA L many of the equity funds investing heavily in storage are also bulk buying housing. These private equity firms are looking for steady growth and return on investment, and self-storage has a track record of delivering. From 2009 to 2018, self-storage facilities experienced an average annual ROI of 16.9%, outpacing office, industrial, retail and residential properties. With major investors here for the long haul, growth patterns will only continue. Generational shifts Generational shifts are also informing growth in the self-storage industry. As Baby Boomers permanently leave the workforce, they’ll navigate a fixed-income lifestyle against rapidly increasing housing costs. Increased living costs will drive up the demand for storage as more and more retirees choose to downsize. Migration patterns are likely to be affected, too. Traditionally, the older generation has headed South for retirement, settling in states like Florida and Texas. However, as housing costs surge, retirees are more likely to take advantage of the high quality of life that affordable regions, like the Midwest, can offer. Meanwhile, the millennial preference for urban living is driving self-storage demand up, too. As millennials flock to urban centers, they’ll be met with increasingly small, expensive living spaces and

adopt a transient lifestyle, moving more frequently than previous generations. Self-storage is the obvious and economical alternative to larger, more expensive living spaces. The Midwest stands to benefit from these trends. While increased housing costs have hit the region, the growth has been less dramatic. As a result, people are migrating inland in search of affordable housing. The Midwest also offers a viable choice for millennials looking to stretch their dollars and access enhanced affordability in the housing market. These shifts will feed the Midwestern real estate market and increase storage demand across the region. New opportunities for innovation As the millennial population grows as a customer base, new opportunities to disrupt the self-storage industry are emerging. Millennials typically expect a technology-rich and responsive experience, and self-storage businesses are evolving to meet the demand. At the beginning of the pandemic, Store Space started to test in-store kiosks to supplement in-person services. When the pandemic hit, what began as a test quickly became a more permanent business model. While millennial customers typically embrace new technology, older generations can be harder to predict. Surprisingly, contactless methods of doing business

27 proved popular across all customer bases. For example, in Bonita Springs, Florida, where the average age is 70, Store Space found that self-service kiosks were so popular that the local branch moved to a more technology-driven model. As a result, the facility has performed better in the last two years than ever before. Self Storage is here to stay Investors and consumers agree: Self-storage is on an upward curve. As the pandemic continues to impact migration patterns, the storage industry looks to cash in. These shifts are particularly good for under-saturated markets like the Midwest, which stand to benefit from pandemic-induced and generational population migration. Today, the annual revenue of the self-storage industry is $39.5 billion. As Baby Boomers retire, the workforce shifts away from brick-and-mortar spaces and consumers swarm to urban areas, that revenue will only grow, paying dividends for those who choose to invest. Store Space is a self-storage operator and third-party management company. Located in Winter Garden, Florida, the company currently owns, has under purchase agreement and operates more than 100 properties in 20 states. Contact Store Space at inquiries@storespace.com, or visit the company at www.storespace.com.

Congratulations Kelly!

Let's Start a Project Together. Visit atrfloors.com to learn more. 7180 Commerce Circle W, Fridley MN 55432 | 651.463.1250

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Rate volatility triggers refi opportunities: Plenty of financial incentives to refinance ahead of maturity dates By Noah Juran

n the heels of the long-anticipated Fed rate hike in mid-March – its first since 2018 –cost of capital is top-of-mind for real estate owners.

an owner might save over the life of a new loan. For example, Northmarq recently conducted a loan portfolio analysis for a client on eight different properties (self-storage and apartment). The analysis took a comprehensive look at pre-payments, current payments, future payments and cash-out ability across different lender and loan product options.

Capital markets have changed dramatically during the past two months because of rising rates and wider spreads created by external market forces. The 10-year treasury has climbed more than 1% since Sept. 1, 2021, and about 75 basis points in 2022 alone. In addition to its quarter-point rate increase, the Federal Open Market Committee has signaled that the Fed will likely raise rates up to six more times this year and up to four times in 2023. Although that context is important, rate moves are never a sure thing. Frankly, no one has that crystal ball to say whether rates will move higher when they could just as easily drop 30 or 40 basis points tomorrow. One of the certainties of the current volatile environment is that now is an ideal time to review your portfolio and look at

In this case, the pre-payment was a fixed 1% for the next three years. The client believes that rates are going up and recently moved forward with the the refinance of the first loan on a self-storage asset. The client was able to lock in the rate in the low-3% range on an IO loan, pull out several million dollars in equity and reduce the loan payment by $3,000 a month. loans that might be maturing within the next three to four years, to see whether it makes sense to refinance. That analysis takes into consideration key factors – the

ability to lock in a new low rate and pull cash out, while also weighing pre-payment premiums to determine how much

That is a bit of a best-case scenario with a “trifecta” of incentives to refinance now. REFI (continued on page 30)

Since 1991, Oppidan Investment Company has grown into a nationally recognized real estate development company, successfully developing 566 projects valued in excess of $4.3 billion and spanning 26.4 million square feet throughout 40 states and parts of Canada. From construction management and asset management services to the industrial, commercial, senior living, residential, affordable housing and mixed-use markets, our team is proud of our success for the past 31 years.

952.294.0353 • OPPIDAN.COM 400 WATER STREET, SUITE 200 EXCELSIOR, MN 55331

REFI (continued from page 28)

However, if the owner had not done the analysis, it would not have been aware of the opportunity. If you believe rates could substantially increase in the future, the cost to refinance early could easily be less than a higher-rate loan in the future. It is important to note, that, comparatively speaking, we are still in a period of historically low rates. The 10-year treasury historic low occurred on Aug. 4, 2020, at 0.52%, while the 10-year treasury high occurred on Sept. 30, 1981, at 15.84%. The historical average for the 10-year treasury since 1962 is 5.94% (with a median rate of 5.73%). The 10year treasury today is above 2.40%. Despite rate volatility and speculation that rates could move higher, borrowers can still find attractive financing rates and lock in low rates for the next 10 or 20 years. Although lenders are shying away from risk, they are willing to lend on all property types, including stepping back into retail, office and, in some cases, hospitality. Borrowers will benefit from life insurance company loans that offer early rate locks (at term sheet or loan application), which the lender can hold for three to six months at no additional premium. Some lenders are willing to hold a rate even longer, for nine to 12 months, which

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A P R I L / M AY 2 0 2 2

“Another incentive fueling refi opportunities is the strong value appreciation that many property owners have experienced. Property cash flow and values have increased significantly during the last five to 10 years.”

delivers the added benefit of reducing any prepayment penalty. Holding that rate for a longer period does come with a slight premium, 2 to 5 basis points per month past three or four months. However, the upside is that it may allow you to reduce your prepayment penalty and provides the added benefit of holding your rate in a rising rate environment. Another incentive fueling refi opportunities is the strong value appreciation that many property owners have experienced. Property cash flow and values have increased significantly during the last five to 10 years. However, if an owner

decides to sell an asset to realize gains, it creates a question of what to do with the sale proceeds. Can you reinvest in today’s competitive marketplace and successfully complete a 1031 exchange, or could you potentially face a tax on the gain? A big advantage of a cash-out on a refi is that those proceeds are tax-free, and you also continue to generate cash flow from the property. Oftentimes, borrowers put long-term, fixed-rate debt on a property and forget about it until that loan is about to expire. That is even more true in what has been a long-running period of historically low

interest rates. Now that the rate environment is starting to shift, it is a good time to conduct a financial analysis of loans with maturities through 2025 to determine if there are any opportunities to refinance. Noah Juran is senior vice president and managing director at Northmarq Cincinnati. Northmarq has a loan servicing portfolio of more than $70 billion and is the top servicer of life insurance company loans in the country.

CONGRATULATIONS to all the finalists in the 2022 Minnesota Real Estate Journal Awards! ESG is proud to be part of such a vibrant real estate and design community!

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qtcommercial.com 763-535-5831 6909 Winnetka Ave N Brooklyn Park, MN 55428

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A P R I L / M AY 2 0 2 2

CONGRATULATIONS TO ALL THE MREJ AWARD FINALISTS!

We are very proud of our team members for their creative vision and leadership on all of our finalist projects which include Cordelle, Isaac, Morrow, The Shale, Alvera and Elmwood. We’d also like to thank Reuter Walton Development, Ackerberg Group and Main Street Companies for their partnership and support!

ARCHITECTURE | INTERIORS | URBAN DESIGN djrarch.com

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LIFETIME ACHIEVEMENT KELLY DORAN Kelly Doran is widely regarded as one of the leading developers of high-end residential and retail communities in the Twin Cities. With nearly 40 years of experience, his nuanced understanding of the market combined with his relationships and tenacity ensure his projects not only succeed, but that they are recognized for their superior level of quality, design, popularity and lasting value. Throughout his career, Kelly has developed dozens of major retail and multi-family projects with an aggregate value into the billions. With a currently owned real estate portfolio valued at over $1 billion, Kelly has received widespread recognition as both a leader and a developer. Kelly is the recipient of numerous awards, including being named “The Most Admired CEO” by the Minneapolis-St. Paul Business Journal, “Executive of the Year” by the Minnesota Real Estate Journal and inducted into the Minnesota Shopping Center’s Hall of Fame, the Twin Cities Business’ Hall of Fame, and the Business Journals’ National Influencers List in Commercial Real Estate. A Minneapolis native, Kelly attended Minneapolis Public Schools and the University of Minnesota where he earned a bachelor’s and master’s degree in finance. Proud of his deep roots in the city, he has shared his success with many donations to educational institutions, including: Southwest High School; the University of Minnesota; Augsburg University and Summit Academy. He has also provided numerous scholarships for students from the Minneapolis Public Schools to attend college, including first-generation college students and students who could not otherwise afford to attend. Kelly currently lives in Minneapolis with his wife Connie, with whom he shares six adult children.

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DREAMS AREN’T BUILT ALONE.

PROJECT AWARDS

Affordable Housing - Urban

Affordable Housing - Suburban

Morrow Nova SP

Blooming Meadows North Cahill Apartments WINNER! PRESERVE AT SHADY OAK Sound on 76th Spring House Apartments

WINNER! PERIS HILL

Greater Minnesota Associated Wholesale Grocers - St. Cloud Cry Baby Craigs

Verdant

WINNER! MILLE LACS HEALTH SYSTEM EXPANSION

Flex Building Project

The Pillars of Grand Rapids Tiller + Main Vue at Bluestone

WINNER! KINDEVA DRUG DELIVERY CORPORATE HEADQUARTERS

2 0 2 2 M I N N E S O T A R E A L E S T A T E J O U R N A L A WA R D S

A P R I L / M AY 2 0 2 2

Medical Property

Hotel

WINNER! M HEALTH FAIRVIEW SOUTHDALE HOSPITAL INPATIENT EXPANSION

WINNER! RAND TOWER - MARRIOTT TRIBUTE HOTEL

Associated Wholesale Grocers - St. Cloud Golden Triangle Corporate Center

Mille Lacs Health System Expansion Park Dental and The Dental Specialists Radio Drive Summit Orthopedics Lakeville Clinic Twin Cities Orthopedics Stillwater Xchange Medical

Interior Design – Suburban Office

Mixed-Use Property

10 West End Cretex Medical Office Relocation

Morrow Noko Apartments The Crystal Court Renovation

Industrial / Manufacturing / Science WINNER! 610 JUNCTION BUILDING #3

WINNER! GREYSTONE CONSTRUCTION OFFICE

WINNER! THE LARKING

Interstate Development Minnesota Women’s Care, Apple Valley One Southwest Crossing

The Linden The Shale

Redevelopment - Education & Training Interior Design – Urban Office Saint Paul Port Authority Headquarters WINNER! SUPERHUMAN Two22

Interior Design – Retail / Restaurant / Hospitality Carrick Tonka Bay Centre Village Condos WINNER! VUE AT BLUESTONE

WINNER! ABUBAKER AS-SADDIQUE ISLAMIC CENTER Foss Swim School at Southdale Square Kid Zone Early Learning Center - Hopkins U A Plumbers Union Local 15 Relocation

CONGRATULATIONS KELLY DORAN For receiving the Minnesota Real Estate Journal Lifetime Achievement Award.

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BUILT FOR THE MIDWEST Recently Sold

The Quinn at Plymouth

Springs at Kenosha

The Summit at Heritage

Plymouth, MN

Kenosha, WI

Grimes, IA

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RALPH DEPASQUALE Managing Director ralph.depasquale@berkadia.com

Senior Director richard.evans@berkadia.com

MOLLY PODRATZ

Director molly.podratz@berkadia.com

JACK MALONEY

Associate Director jack.maloney@berkadia.com

B E R K A D I A . CO M © 2021 Berkadia Proprietary Holding LLC. Berkadia® is a trademark of Berkadia Proprietary Holding LLC. Commercial mortgage loan banking and servicing businesses are conducted exclusively by Berkadia Commercial Mortgage LLC and Berkadia Commercial Mortgage Inc. This advertisement is not intended to solicit commercial mortgage loan brokerage business in Nevada. Investment sales / real estate brokerage business is conducted exclusively by Berkadia Real Estate Advisors LLC and Berkadia Real Estate Advisors Inc. Tax credit syndication business is conducted exclusively by Berkadia Affordable Tax Credit Solutions. In California, Berkadia Commercial Mortgage LLC conducts business under CA Finance Lender & Broker Lic. #988-0701, Berkadia Commercial Mortgage Inc. under CA Real Estate Broker Lic. #01874116, and Berkadia Real Estate Advisors Inc. under CA Real Estate Broker Lic. #01931050. For state licensing details for the above entities, visit www.berkadia.com/legal/licensing.

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Redevelopment - Office

Retail

WINNER! CLOVERFIELDS BUILDING

WINNER! ASIA MALL

One Southwest Crossing Small Business Center in Brooklyn Park Two22

Cry Baby Craigs Lakeville Liquors Keokuk Prince at MSP Airport

Redevelopment - Retail & Hospitality

Senior 55+ Active

Asia Mall

WINNER! APPLEWOOD POINTE - EDEN PRAIRIE

WINNER! A-SIDE PUBLIC HOUSE Grove Plaza Rand Tower - Marriott Tribute Hotel

Education & Daycare

Bren Road Station Elmwood Apartments The Fields at Arbor Glen The Linden

WINNER! ABUBAKER AS-SADDIQUE ISLAMIC CENTER

Senior Assisted Living

Foss Swim School at Southdale Square Jardin Spanish Immersion Academy - Apple Valley Kid Zone Early Learning Center - Hopkins

WINNER! CASSIA HAVEN HOMES SENOR HEALTH & LIVING

Amira Choice Bloomington

The Pillars of Grand Rapids

Restaurant

Single Family / Townhome - For Sale

Butcher & The Boar

WINNER! NORTH LAKE RESIDENCES, WAYZATA

WINNER! HAZELWOOD FOOD + DRINK, SAINT LOUIS PARK

more sustainable, by design

• development • lease up • property management

solhem.com • 612.216.2825 • 724 n 1st st ste 500 minneapolis mn 55401

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Urban Multifamily - Northeast WINNER! FRANCES APARTMENTS Lucille Apartments The Huxley Verso

Urban Multifamily - St. Paul Cordelle Apartments Morrow WINNER! THE ALVERA The Hill Apartments

Suburban Multifamily - Inside the Loop Elmwood Apartments Isaac Parker Station Flats Pivot Apartments WINNER! THE QUENTIN

Suburban Multifamily - Outside the Loop Altair Beyond Apartments WINNER! CARRICK TONKA BAY

Emrik SV The Massey

COMPANY AWARDS

Urban Multifamily - Minneapolis

Adolfson & Peterson Amcon Construction Crawford Merz Doran Construction Greystone Construction Ironmark Building Company

General Contractor of the Year

240 Park Avenue WINNER! ELEVEN Noko Apartments The Larking

Urban Multifamily - North Loop

WINNER! MCGOUGH

WINNER! THE ARCHIVE Viridium

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DREAMS AREN’T BUILT ALONE.

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A P R I L / M AY 2 0 2 2

Property Management Company of the Year

Mortgage Broker / Banker of the Year

Davis Property Management

Dan Trebil, Northmarq

WINNER! ZELLER

WINNER! DAVE RASMUSSEN, GRANDBRIDGE

Developer of the Year

Kyle Jemtrud, Greystone Marsha Goff, Merchants Capital

Ackerberg Doran Properties Group Oppidan Roers Companies

Broker of the Year Avery Ticer, Cushman & Wakefield Joe Owen, Colliers Judd Welliver, CBRE

WINNER! RYAN COMPANIES United Properties

WINNER! MARSHALL NGUYEN, CASPIAN GROUP

Professional Service Company of the Year

Steve Chirhart, Tatonka Steve Michel, Michel Commercial Real Estate

Katey Bean & Company Michaud Cooley Erickson Rokos Advisors

Emerging Leader of the Year

WINNER! WINTHROP & WEINSTINE, P.A.

Danny McNamara, Cushman & Wakefield Erik McLaughlin, Roers Companies Griffin Myslivecek, Ebenezer

Wipfli LLP

PEOPLE AWARDS Architect / Engineer of the Year

WINNER! JOSEPH PERIS, RYAN COMPANIES Lauren Dahlke, Zeller

WINNER! DAMARIS HOLLINGSWORTH, DESIGN BY MELO Jeffrey Schoeneck, Cuningham Ward Isaacson, Pope Architects

THE MISSION In 1917, Ebenezer was created to provide housing and care for seniors… with compassion, dignity, and integrity.

WHY CHOOSE EBENEZER?

THE RESOURCES Ebenezer is the largest senior living operator in Minnesota. As part of Fairview, we have the supply chain, the infrastructure, and the financial stability to support our communities. THE SUCCESS STORIES To see the difference we’ve made in the lives of our residents, scan the QR code or visit ebenezercares.org/ebenezer-success-stories.

SENIOR LIVING | 612-874-3460 | EBENEZERCARES.ORG

A P R I L / M AY 2 0 2 2

2 0 2 2 M I N N E S O T A R E A L E S T A T E J O U R N A L A WA R D S

Woman of the Year - Brokerage and Leasing Carrie Charleston, Mall of America Jill K. Rasmussen, Davis WINNER! RA’EESA MOTALA, ROKOS ADVISORS Sharry Schmid, Edina Realty

Executive of the Year

Real Estate Lawyer of the Year

Chris Rohrer, Rokos Advisors Jeff Koch, Roers Companies Jeremy Jacobs, Colliers

WINNER! BLAKE NELSON, HELLMUTH & JOHNSON

WINNER! JON LUNDBERG, EBENEZER

Kyle S. Willems, Bassford Remele Paul Anderson, Messerli & Kramer

Kate Grutzmacher, Cities Management Tate Krosschell, Avison Young

Award-winning and trusted by businesses across the country, the Messerli Kramer Commercial Real Estate Group represents retailers, landlords, real estate investors, and property managers.

MESSERLIKRAMER.COM (612) 672-3600

Our experienced attorneys are here to provide sound advice, minimize risk, and bring projects to completion on your timeframe. Whether you’re looking to acquire, operate, manage, or sell real estate, our team is here to be responsive to your needs.

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Owner / Landlord WINNER! ACKERBERG At Home Apartments Frauenshuh, Inc. Greystar Management Metropolitan Airports Commission

A P R I L / M AY 2 0 2 2

Woman of the Year - Development and Construction

Most Significant Investment Sale Transaction in 2021

Heather Weerheim, Greiner

Anselm House at 718 Washington Avenue, Minneapolis

WINNER! JACKIE KNIGHT, ACKERBERG Maggie Linvill Smith, Linvill Properties Maureen Michalski, Ryan Companies

WINNER! CENTERSPACE KMS TRANSACTION

WINNER! ALLISON FISCHER, ROERS COMPANIES

TRANSACTION / CITY AWARDS

Most Significant Lease Transaction in 2021

Andrea Zenobi, CBRE Genevieve Liesener, Cushman & Wakefield Jason Van De Wiele, Oppidan

Most Significant Industrial Sale Transaction in 2021

Property Manager of the Year

Woman of the Year - Real Estate Services WINNER! ANDREA ZENOBI, CBRE Barbara Schuba, Suntide Dannielle Lewis, Wipfli Kate Grutzmacher, Cities Management

Thrivent Headquarters

CBRE - Cigna WINNER! NEWMARK REPRESENTED DELUXE CORP.

WINNER! CBRE - CORE LOGISTICS PORTFOLIO

Rokos Advisors-Shanghai Wholesale - Fairview Business Center

Minneapolis Industrial Infill Portfolio NorthPoint Purchase of land in Cottage Grove

City of the Year City of Brooklyn Park WINNER! CITY OF FARIBAULT City of Lakeville City of Maple Grove

Congratulations There aren’t enough ways to say congratulations when there are so many to congratulate. Stewart Title applauds you and your success in the Minneapolis area commercial real estate marketplace.

We are honored to be your trusted service partner. Stewart Title Minneapolis Commercial Office VP – Business Development Kathleen Geherin 612.834.7107 kathleen.geherin@stewart.com 333 S Seventh St, Ste 2420 Minneapolis, MN 55402 stewart.com/minneapolis

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