MREJ Feb 2023

Office success stories? They still happen.

The E in the Twin Cities market proves it

By Dan Rafter, Editor

Of all the sectors hit by the COVID-19 pandemic, none is suffering more today than office. Companies are still struggling to bring their workers back to their cubicles. Building owners are dealing with sky-high vacancies. And no one knows yet just how much office space companies will need as the work-from-home movement continues.

But these challenges didn’t stop City Center Realty Partners from closing 2022 by signing four new tenants at The E, a 107,000-square-foot office tower in the Twin Cities suburb of Edina, Minnesota.

The new leases brought The E to 75% leased. That’s quite an accomplishment: The office tower, jointly owned by City Center Realty Partners and Contrarian Capital Management, started 2022 completely vacant.

OFFICE (continued on page 18

Another rough year for Twin Cities office market? The numbers suggest it might be in the offing

The office sector is struggling across the country. But a new report says that sales and leasing activity in the Midwest office market is especially weak, with the Twin Cities’ office sector in particular off to a sluggish start in 2023.

That’s the news from CommercialEdge’s February National Office Report.

According to CommercialEdge, the St. Paul-Minneapolis office market closed January with an average asking rent of $25.85 a square foot, falling 0.8% when compared to December of last year. CommercialEdge said that this rate ranked among the fourth lowest in January in the country’s major markets, along with Chicago (an average office

By Dan Rafter, Editor

rental rate of $27.80 a square foot), Phoenix ($27.58) and Orlando ($24.75).

The Twin Cities’ office vacancy rate was high, too, inching up 0.12% in January to 15.07%. On a year-over-year basis, this rate was up 0.55%.

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OFFICE SUCCESS STORIES STILL HAPPEN. THE E IN THE TWIN CITIES MARKET PROVES IT: Of all the sectors hit by the COVID-19 pandemic, none is suffering more today than office. Companies are still struggling to bring their workers back to the office. Building owners are dealing with sky-high vacancies. And no one knows yet just how much office space companies will need as the work-fromhome movement continues.

ANOTHER ROUGH YEAR FOR TWIN CITIES OFFICE MARKET? THE NUMBERS SUGGEST

IT’S TRUE: The office sector is struggling across the country. But a new report says that sales and leasing activity in the Midwest office market is especially weak, with the Twin Cities’ office sector in particular off to a sluggish start in 2023.

COLLIERS REPORT: QUALITY MATTERS. INDUSTRIAL MIGHT HAVE PEAKED. AND INVESTORS ARE STILL SINKING THEIR DOLLARS IN MULTIFAMILY: A continued flight to quality office assets. A slowdown in demand for industrial properties. A multifamily sector that remains the darling of investors. These are some of the highlights from Colliers’ Global Investor Outlook.

HEALTHCARE’S RETAIL VIBE ISN’T GOING AWAY: Patients increasingly want their healthcare delivered in outpatient facilities: Although they make up only about 30% of the U.S. population, people 55 and over are the biggest consumers of healthcare services in the United States. At the same time, the number of people who are 80 or older is expected to rise by nearly 50% in the next 10 years.

LONG-HAUL COVID INFECTS HEALTHCARE REAL ESTATE: While the Covid pandemic is subsiding, the impact of the demands put on the healthcare system from those events continues. Compounding that are supply chain constraints, staffing challenges and changes in reimbursements from insurance to providers.

DEVELOPMENT SHOWCASE: MINNEAPOLIS’ RBC GATEWAY: FROM A QUIET PARKING LOT TO A SKYSCRAPER FILLED WITH LIFE: The numbers show just how important the RBC Gateway office, hotel and residential development has been to the Twin Cities.

BRING ON THE WATERWORKS: They’re surprisingly common among people who have moved, at least according to the latest research from real estate data company Clever. And some people are so stressed that they can’t help but burst into tears.

MULTIFAMILY’S SECRET WEAPON AGAINST RECESSION? PROPTECH: In 2022, the Federal Reserve raised interest rates seven times, prompting industry leaders to anticipate further hikes in 2023. With inflation remaining high, a recession was anticipated to be on the horizon. As a result, multifamily owners began taking preemptive actions to reduce costs to prepare for a difficult economic period.

WORKERS WANTED … STILL. AGC SURVEY POINTS TO LABOR SHORTAGES AS BIGGEST CHALLENGE FOR CONSTRUCTION COMPANIES IN 2023: The biggest challenge facing the construction industry in 2023? Finding enough workers to staff their job sites.

SO MANY NEW SPEC BUILDINGS, TENANTS JUST CAN’T FILL THEM FAST ENOUGH… RIGHT? Industrial has continued to hold its own, yet record-fast spec deliveries are equaling a vacancy rate that keeps on climbing, according to Colliers’ 22Q4 Construction Review. But just how long is so much valuable space predicted to remain on the market?

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Colliers report: Quality matters. Industrial might have peaked. And investors are still sinking their dollars in multifamily

By Dan Rafter, Editor

Acontinued flight to quality office assets. A slowdown in demand for industrial properties. A multifamily sector that remains the darling of investors.

These are some of the highlights from Colliers’ Global Investor Outlook, a look at investors’ sentiments regarding commercial real estate in 2023.

We recently spoke with Steig Seward, U.S. head of research for Colliers, about the report’s findings and the state of commercial real estate in 2023. Here is some of what he had to say.

Colliers’ report shows that investors, like tenants themselves, are interested in the highest-quality office properties today. Is that a trend that is still going strong?

Steig Seward: There has been a prolonged flight to quality in the office sector. Companies are engaged in a war for talent. HR departments are doing what they can to retain their top talent and attract new talent. Having office space that makes people want to come back to the office is a high preference for leadership teams and HR departments. Many companies are upgrading their addresses to help combat that talent drain.

Some of these companies might reduce their office footprint once they move. But they will pay a higher rent. If you net it out, their total operations costs remain the same, but they still get to upgrade their address and, hopefully, attract the best talent.

In the markets that we cover, newer, class-A office space is seeing the lowest vacancy rates.

Seward: These newer buildings are designed differently. There is a shift in these newer buildings toward more collaborative work environments and more meeting spaces as opposed to dedicated offices. Definitely, the floor plans and layouts of newer buildings are more conducive to that type of work. They also have higher-quality amenities, outside patios, concierge services and perks like that.

What will happen to those older office buildings, though, that lack the amenities that tenants today favor?

Seward: We conducted a study recently of top gateway markets. We found that 35% of all the buildings in those markets are older than 50 years. They are facing functional obsolescence because of time. Not all those office buildings can be converted into something else. They all can’t be converted into multifamily or hotels. Only a small percentage, maybe 10% or less, would be a good fit for conversion. It’s going to be interesting to see what happens with these

OUTLOOK (continued on page 8)

Steig Seward

Healthcare’s retail vibe isn’t going away: Patients increasingly want their healthcare delivered in outpatient facilities

Although they make up only about 30% of the U.S. population, people 55 and over are the biggest consumers of healthcare services in the United States. At the same time, the number of people who are 80 or older is expected to rise by nearly 50% in the next 10 years.

What does this mean? Only that the United States needs more healthcare facilities, and that many, if not most, of these will be outpatient buildings, treating patients away from sprawling hospital campuses.

We recently spoke with Jay Johnson, U.S. practice leader for healthcare with JLL, about the rising demand for outpatient healthcare facilities in the country. Johnson said that this demand isn’t about to slow, and that this means big changes for medical groups, hospital systems and developers.

Considering the rising demand for them, does the country have enough outpatient medical facilities?

Jay Johnson: That depends on what you mean by “enough.” But the short answer is “no.” We are going to continue to see growth in outpatient facility types and locations.

What are the reasons behind the rising demand for these facilities?

Johnson: The broad reason is that the population continues to grow and it continues to age. Then there’s the fact that patients have successful health results when they get treatment at outpatient facilities. And patients prefer these outpatient settings. Because of these reasons, my expectation is that we will continue to see growth in the number of these facilities.

There are some countervailing forces to this, though. The biggest is the growth of telehealth and home health. Can people take care of their medical needs via a virtual consultation with their doctors? We saw that dramatically shoot up during COVID. The popularity of that has come down since COVID has lessened. Behavioral health is a notable exception. Telehealth seems to work well in that space. The growth of telehealth, then, could dampen some of the need for outpatient facilities.

Do you think telehealth will slow the demand for outpatient facilities?

Johnson: The health systems and groups that I’ve talked to don’t seem to believe that telehealth will dramatically change their outpatient needs. The continued aging of the population and the preferences from

patient consumers means that demand for outpatient facilities will continue to rise.

We did a survey last year at JLL geared toward patient consumer trends. It gauged these trends for the last six months of 2021 and we published the results in 2022. We surveyed more than 4,000 people who had a healthcare encounter during that sixmonth period. There was an impact from telehealth, but 74% of respondents said that they had received care at a physical location. And this was during two COVID surges. People were still going in for physical visits. A total of 62% of respondents had exclusively received care in a physical location.

What do patients like about the outpatient care model as opposed to receiving care at a central hospital campus?

By Dan

Johnson: In that same survey, we asked patients about their feelings of convenience regarding that side of care. For about 70% of the respondents, the convenience of the location was important to them. That includes 35% who considered location extremely important. People have to drive longer distances to get to hospitals. It can be very congested with parking. Finding your way around the hospital campus can be stressful. Navigating the maze of the campus can be very challenging. The outpatient care side is much easier to get to and more convenient for patients. It is easier to park. It is easier to navigate once they get into the facility.

With the rise in outpatient facilities, what role will hospital campuses play today?

Johnson: We will never shift all the care away from the hospital campus. Hospitals

will never go away. The trend is that outpatient facilities are moving farther and farther away from the hospital campuses and out into the neighborhoods in which patients live. The result has been that the care delivered at hospital campuses is of an increasing acuity. The highest type of care will not migrate away from the hospital to the outpatient setting.

The outpatient care portion is a very important component to the hospitals in terms of how they fund their businesses. Hospitals must think carefully: Do they let outpatient care be picked up by their competitors or do they engage in it themselves? If they are just focusing on higher-acuity inpatient services, that has the potential to throw off or harm their revenue streams. If they want to cover their costs and take care of their business, hospitals must invest in providing outpatient care.

As you can imagine, the facilities that exist on the campus of a hospital are the most expensive real estate in the whole healthcare system. The infrastructure is super strong in terms of being able to withstand natural disasters. They have redundant utility supplies. The buildings are usually multi-story. These are all the most expensive facilities. That is part of what has been driving the shift to outpatient facilities. Care can be delivered cheaper. That is appealing to both patient consumers and employers.

Not all care is suitable for outpatient facilities. But the care that these facilities provide is superior care. You see better health

HEALTHCARE (continued on page 8)

Rafter, Editor

Jay Johnson

“The trend is that outpatient facilities are moving farther and farther away from the hospital campuses and out into the neighborhoods in which patients live.”

outcomes for patients. They are more convenient, cost less and deliver better results. It is hard to argue with this.

What are some of the more common type of outpatient facilities being built?

Johnson: The doctor’s office in the community has been around for a long time. The number of those continues to grow. You are also seeing more ambulatory surgery centers or outpatient surgery centers. They can do surgeries, but not procedures with as high an acuity as those you’d see done at a hospital. Those have proliferated. Companies have risen that specialize in that kind of service.

There are urgent care clinics and minute clinics, immediate care clinics. Those employ a kind of retail strategy, a retail feel. They are often located in retail settings such as strip shopping centers. The walkup clinics that you can go into for minor medical needs, like colds and flus, have

proliferated. We are also seeing a lot of freestanding emergency rooms. Unlike the urgent care clinics, they have a doctor on staff at all times. They deal with a higher acuity-type of emergency. They might take care of some issues that traditionally you might have gone to a hospital emergency room to treat.

A lot of these facilities are going in former retail space, right?

Johnson: There is definitely a retail vibe around all this. Retail has been at different times overbuilt in this country. There have been too many locations built. Supply surpassed demand. With tech changes, such as Amazon coming and pulling some retail away from physical locations and into the online environment, that has only exacerbated the problem. We have a lot of under-utilized retail across the country. It is ripe for alternative uses such as healthcare. These spaces are often located in a way that is convenient for consumers. They have lots of parking. They have good signage and easy accessibility.

Are there challenges in converting retail space to healthcare use?

Johnson: The way retail landlords lease their space creates challenges for healthcare

users in terms of the way they construct their leases. You have to work with a retail landlord who is willing to think outside the box. That is increasingly happening. Sometimes retail landlords might think that alternative uses other than retail can hurt the value of the overall shopping center or facility. That is a trade-off that they have to figure out. How much vacant space can they tolerate before they look at alternative uses?

Do patients who go to healthcare facilities in retail settings spend time before or after doing other shopping nearby?

Johnson: If patients are going for a medical need do they combine that trip with another purpose? Do they go to the grocery store and then to the clinic? There has been some research done on that by the International Council of Shopping Centers. There is some kind of multi-purpose trip-making there. They are doing more than one thing when they go out for healthcare. They do other errands, some of which they complete at that same retail center.

buildings. I suspect that most of them over time will lose their tenant base. At some point, when the financial conditions are right, their owners will scrap the building and put up a highest- and best-use type of property instead of trying to reconfigure the whole building. That’s not good from an environmental standpoint, but it is a cheaper way to get to the end results.

What about the multifamily market?

In Colliers’ global report, it says that investors today consider multifamily the top asset class for their dollars, with multifamily being seen as even more attractive than industrial.

Seward: Multifamily has been the darling of investors for quite some time. It used to be that office was king and multifamily was next, then industrial and retail. As things have turned, multifamily has been thrust into the spotlight. It is definitely where people want to invest. It is having its share of difficulties, too, with today’s interest rate environment. But if you talk to people out there, they all list multifamily as a key asset class that they are most interested in scooping up.

When it comes to multifamily, what are investors looking for?

Seward: It depends on the investor’s profile. You have some investors who are only interested in higher-amenitized Class-A properties. Others are perfectly content with investing in affordable housing. Investors play in different areas. Different investors favor downtown over suburban. It is not a universal movement in which all the investors are moving in the same direction.

Industrial has been a strong sector for a long time. Do you think, though, that investor demand for industrial assets has reached its peak?

Seward: Demand is starting to slow for industrial assets. The industrial market was on a rocket ship just after the pandemic started. There was all this demand for online shopping. It caused a ripple effect with retailers. They had to increase their warehouse space to handle all this merchandise. Industrial has been on an absolute tear the past two years. We are starting to see that demand is slowing a little bit. But it’s not like it has completely fallen off. Demand for industrial assets is still stronger than it has been historically. When you compare demand to what we saw in 2021, it’s not as strong. But 2021 was a record year when it comes to net absorption numbers. And 2022 was the second-best year for absorption on record. It’s natural to see demand trimming down a bit.

The last two years have been so strong for industrial that we might have gotten a bit spoiled, it seems.

Seward: It’s important to remember what an outlier 2021 was. But in 2022, we still saw almost 480 million square feet of net absorption in the industrial market across the country. That is still well above average. If we didn’t have 2021 as an outlier and just saw 2022, we’d say, ‘Wow. What an amazing year.’ But we were comparing 2022 to a phenomenal year.

The Colliers’ report also said that investors are still interested in last-mile distribution properties.

Seward: All the retailers and logistics providers see that the most important last step to the distribution chain is getting to that last mile. That can make or break delivery timelines. We are seeing more of these distribution centers popping up closer to those big population hubs. Companies can reduce their delivery times with these centers instead of relying

on one or two giant super centers. We will see more of these last-mile facilities pop up. Companies are spreading their total square footage over more locations.

Overall, do investors still consider commercial real estate a good home for their dollars, even with the higher interest rates?

Seward: Real estate has always been considered a good hedge for inflation. Commercial real estate is still doing well. We are coming from a very low interest rate environment. Because the interest rates were so low, investors were still able to obtain a large, impressive margin. At the same time, rent growth was rising and vacancies were down. Now that the cost of capital is more expensive, that margin of profitability is beginning to shrink. A higher cost of capital is squeezing that profitability margin. You also have buyers who want a steep discount. Sellers, then, are holding onto their assets. Unless they are forced through some type of event, most of these sellers are going to hold their properties and ride this out. We have a disparity between buyers’ and sellers’ expectations at this time .

Does that mean we’ll see fewer transactions in 2023?

Seward: The first half of 2023 will be relatively quiet. Deals will get done, but not at the pace that we experienced last year. But once the markets get a better handle on what the interest rate environment will be, when we feel we are at that peak where the Fed is no longer going to be increasing its federal funds rate, that will establish a floor. Then the industry can begin to recover and everyone can factor in exactly what the cost of capital is going to be going forward.

OUTLOOK (continued from page 4)

“It’s important to remember what an outlier 2021 was. But in 2022, we still saw almost 480 million square feet of net absorption in the industrial market across the country.”

“We have a lot of under-utilized retail across the country. It is ripe for alternative uses such as healthcare.”

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Long-haul Covid infects healthcare real estate: Supply chain, nurses’ strike and revenue constraints collide

By Steve Brown,

While the Covid pandemic is subsiding, the impact of the demands put on the healthcare system from those events continues. Compounding that are supply chain constraints, staffing challenges, and changes in reimbursements from insurance to providers.

Many of those issues arose quickly, creating challenges that the healthcare industry hadn’t seen previously, creating a “shock to the healthcare system.”

This has had an effect in multiple areas of healthcare, since most systems have contributing employee issues of burnout following non-stop working through 2022, pressure from nurses’ and ancillary care workers’ unions and low overall unemployment. It’s obvious that healthcare is in the middle of a crisis.

Now add the physical locations needed for healthcare. While some healthcare can be delivered virtually, the vast majority need an in-person visit in a physical location.

Revenue continues to trend downward

Those locations bring costs that many other businesses face – interest rate increases, an inflationary environment impacting the costs of products, equipment and increasing property taxes -- but come with decreasing revenue from reimbursements. This isn’t new. For the past 10 years, controlling operational expenses has become a greater challenge for healthcare systems to accomplish their objective of providing exceptional patient care.

A recent Healthcare Financial Management Association survey showed the median percentage of revenue coming from inpatient services will fall to 25% by 2030. In 2019, that figure was 40%. This trend has been underway for the past 15 years and represents a continued decrease in overall inpatient care (care provided in a hospital setting).

For a variety of reasons, a hospital’s role in providing healthcare will continue to shrink or be redefined as we continue moving toward an ambulatory care-based model (medical services performed on an outpatient basis, without admission to a hospital or other facility).

Locations move away from the mothership hospital

Another trend that has steadily continued is the move to an ambulatory strategy placing care and services closer to the patient in a more convenient setting and structure.

This has resulted in many of the services once being provided in a hospital setting being now being provided in these more accessible facilities.

These more accessible settings are typically located in the suburbs and exurbs in areas that include high residential growth, retail properties, stand-alone urgent cares and independent specialized clinics, (orthopedics, gastro-intestinal, podiatry, primary care, etc.) creating a more decentralized landscape for healthcare.

The intent of this strategy is to catch the patient in a location that is convenient to them for the basic and routine healthcare needs and drive the more acute and critical care needs back to the hospitals. Prior to 2010 when healthcare reform took center stage, hospital campuses were the “center” for healthcare and typically the real estate was more expensive because of its adjacency to the hospital for patient convenience.

Prior to the pandemic, a suburban location was also less expensive than a hospital-connected campus location because

of land costs. Off-campus locations base rent could be $5 to $8 a square foot less in addition to having lower operating expenses and real estate taxes. Based upon the post-pandemic market dynamics discussed earlier, while the strategy is still the same, the cost for these facilities is no longer less than a hospital campus.

In addition, these outpatient facilities are following the lead of retail and multi-family sectors over the last 10 to 15 years with more focus on the end user. That focus extends to new amenities, comfortable waiting rooms with a focus on hospitality including coffee or grab-and-go food options, ample free parking for patients and visitors, shower and locker facilities and natural lights to draw in and enhance the experience and engagement of the patient and their family members and caregivers. When systems engage with their patients, the patients are more likely to engage with the systems and proactively seek care.

Advancements in technology combined with a desire to make healthcare more accessible to the patient has repositioned

Steve Brown

how healthcare facilities are located and what they look like. This shift has impacted real estate needs and created opportunities for healthcare systems, their patients and all those in the real estate sector.

Importance of a real estate strategy

Because of the confluence of the impacts mentioned above, hospitals and health systems want to be able to best optimize their resources; their real estate strategy is a big part of that focus. Like many professional services wondering if employees will come back to work and if their footprint can be reduced, healthcare systems are taking a closer look at back-office and administrative tasks such as medical billing and coding.

Can these functions be moved to a remote position reducing the need for the space? Are there underutilized areas that a system can partner with to provide some of these amenities such as pharmacy, food and beverage? Is there excess land that can be developed or sold outright? What about the opportunities to partner with a capital partner for a sale-leaseback, allowing the healthcare provider a cash influx while they are able to maintain their space for a long period of time?

Many creative solutions can leverage the real estate assets, which can be evaluated by an independent real estate advisor. That advisor can help hospital systems and clinics align their real estate with the business functions to support strategic, operational and financial goals.

Steven Brown is principal of Forte Real Estate Partners in Bloomington, Minnesota.

Forte Real Estate Partners

“For a variety of reasons, a hospital’s role in providing healthcare will continue to shrink or be redefined.”

Minneapolis’ RBC Gateway: From a quiet parking lot to a skyscraper filled with life

By Dan Rafter, Editor

The numbers show just how important the RBC Gateway office, hotel and residential development has been to the Twin Cities.

First, consider 508. RBC Gateway, developed by United Properties, stands 508 feet tall, making it the tallest mixed-use tower to be built in the Twin Cities in nearly 20 years. Then there’s 222, the number of rooms in the Four Seasons Hotel Minneapolis that serves as one of the centerpieces of the tower.

Finally, there’s 34, 531,000 and $480 million. RBC Gateway is home to 34 luxury condos operated by Four Seasons. The building offers 531,000 square feet of office space. And that $480 million? That’s how much the development cost, which makes it the most expensive Minneapolis commercial project ever developed without the use of public dollars.

It’s little wonder, then, that the RBC Gateway project has generated so many headlines and so much praise since opening last year. The building, located at the intersection of Hennepin, Nicollet and Washington avenues in the Nicollet Mall

area of downtown Minneapolis, has brought new life to a long under-used parcel of land in a key location.

The building serves as the U.S. headquarters of RBC Wealth Management and is also home to seven of the Pohlad family of companies and JLL’s Minneapolis office. The Four Seasons hotel located in the property is Minneapolis’ first fivestar hotel. And the building, which was nearly five years in the making, now ranks as one of the 10 tallest in downtown Minneapolis.

To say that RBC Gateway, then, has transformed this slice of downtown Minneapolis? That’s an understatement.

Bill Katter was president and chief investment officer with United Properties when the company was developing RBC Gateway. Today, Katter is partner with Eden Prairie, Minnesota-based Interstate Development. But he still looks back fondly at the time in which he spearheaded the construction of what became the tallest new skyscraper in downtown Minneapolis in 20 years.

Katter says that he is proud of what United Properties and all the companies working on the RBC Gateway project have brought to the city’s downtown.

“RBC Gateway delivered some key benefits that were needed in downtown Minneapolis,” Katter said. “It increased interest and activity and solidified the north end of Nicollet Mall. This project showed that with the right set of occupants in a building, you could create a tremendous, exciting plan. Before RBC Gateway, this was a parking lot. It was a place nobody went to.”

Today, this stretch of Nicollet is a busy one. As Katter says, the mixed-use RBC Gateway building is a 24/7 property. People live there. A steady stream of hotel guests check in each day.

“This property doesn’t go dormant at night. It is always alive and on,” Katter said.

Nick Kreutziger, project manager at St. Paul-based McGough, the project’s general contractor, said that location matters when talking about RBC Gateway. The plot of land on which the new project stands has an important history in the Twin Cities.

A new Nicollet Hotel, though, opened in 1924 at the cost of $3.2 million. This version offered 637 guest rooms in a 12-story building. Again, notable figures stayed here, including John F. Kennedy, Dwight Eisenhower and Harry Truman. Musicians such as Glenn Miller, Tommy Dorsey and Artie Shaw played in its Min

nesota Terrace lounge.

This land once served as the home of the Nicollet Hotel, originally built in 1858. Named for Joseph Nicollet, a French geographer famed for mapping the upper Mississippi River basin during the 1830s, the hotel quickly became a Minneapolis landmark. It provided lodging to such notable figures as John Pillsbury and William Washburn, a U.S. Senator serving Minnesota.

In 1922, Minneapolis city inspectors ordered the hotel’s owners to install a sprinkler system. The owners decided that this was too expensive. One year later, construction crews demolished the hotel.

Over time, though, the hotel began to age and become obsolete. In 1991, it was demolished for good.

When McGough began building RBC Gateway, the former home of the hotel was a parking lot with a bus station. It was hardly an inspiring transition point from downtown to the North Loop neighborhood.

The vision

Credit RBC Gateway to the vision of the Pohlad families and the planning skills of developer United Properties’ top executives.

-

Left: The Four Seasons Hotel Minneapolis is one of the few hotels in the area with both indoor and outdoor pools. Right: The guest rooms at the Four Seasons Hotel Minneapolis are some of the most stylish in the market.

“RBC Gateway delivered some key benefits that were needed in downtown Minneapolis. It increased interest and activity and solidified the north end of Nicollet Mall. Before RBC Gateway, this was a parking lot. It was a place nobody went to.”

RBC Gateway, though? That has revitalized this important piece of land. It’s also a much more welcoming transition point between the busy hubs of downtown and the North Loop.

“I remember being there the day they knocked down that big bus station,” Kreutziger said. “At the time, we weren’t even sure what we were going to build. I think the name ‘Gateway’ reflects both the nature and location of this project. You are right there on the river. The Hennepin Bridge is there. To the west, you have the North Loop neighborhood, a prestigious place to hang out. This project is such a nice bridge between the business district and North Loop.”

A beacon in downtown

Kreutziger said that RBC Gateway, with its shimmering glass facade, has already become a landmark on the north side of downtown. The property also acts as an extension of the Minneapolis skyline, Kreutziger said.

The location, and the views it offers, are a prime draw to office tenants, Kreutziger said.

“There is not a bad view from that building,” Kreutziger said. “You can see the river. You can see the downtown skyline and the sports stadiums. There’s not a bad view in the house. Then there’s the fact that this is a state-of-the-art facility with highend finishes. You walk through those lobbies and it just feels clean and new. If you work in an office, your space is associated with other great names such as Four Seasons. It’s a nice, clean, upbeat and stylish place to go to work every day.”

The office market has been struggling since COVID-19 first grabbed headlines in early 2020. Companies are still trying to bring their workers back to the office. Others are puzzling out how much office space they need today.

Kreutziger, though, said that higher-class buildings with top amenity packages, such as RBC Gateway, are performing well today, despite the challenging office sector. Companies that are looking for new office space are more frequently choosing Class-A buildings in walkable neighborhoods that offer a host of amenities for their workers.

That description fits RBC Gateway. It’s why as of the writing of this profile, most of the office space in the property has already been leased, with namesake tenant RBC taking up much of it.

“Everyone expects that buildings like this will bring workers back to the office,” Kreutziger said. “We are starting to see it already in downtown. We were down there through the thick of the pandemic. It was extremely quiet. Now you already see more of the hustle and bustle returning. The Skyway is getting full again. You’re grabbing lunch and it is flooded with people. It is an exciting, energetic vibe, and RBC Gateway is contributing to that.”

Why has the office space in RBC Gateway leased up so quickly? Katter points to its quality. The space features 10-foot ceiling heights and floor-to-ceiling windows. Conference rooms are equipped with the latest technology.

Location matters, too. As Katter says, RBC Gateway is located near plenty of restaurants. A public park is nearby. Monthly parking spaces are within a short walk of the building.

The outdoor amenity deck is a highlight of the Four Seasons Hotel Minneapolis.

This combination of amenities and a walkable neighborhood makes RBC Gateway an attractive destination for office users.

“It’s just good office space,” Katter said.

Katter said that the timing of RBC Gateway mattered, too. It was important to bring a new office, hospitality and residential project to downtown Minneapolis during the height of the pandemic. It was important to do this, too, following the protests surrounding the murder of George Floyd.

“We were having a tough time. The whole world was having a tough time,” Katter said. “Having this property delivered during that timeframe didn’t resolve any of those other problems. But it did help create some positive energy in the community. It was a source of energy during the pandemic seeing that building go up. It inspired me to get to work during the pandemic.”

Kreutziger said that the Four Seasons hotel portion of RBC Gateway is a draw for downtown Minneapolis, too. Kreutziger and his team worked on the Four Seasons portion of the building when construction moved to the interior phase of the development. This meant that he worked daily with the Four Seasons staff.

What he saw from these staffers was impressive, he said.

“It is impressive when you see what they do to take care of their guests and to make sure that the hotel is functioning at the level they expect,” Kreutziger said. “Their standards are amazing. They offer a whole new perspective on hospitality.”

The Four Seasons’ amenity deck is especially impressive, Kreutziger said. During a grand-opening event, the construction and development teams celebrated on the deck. The outdoor pool, spa tub, greenery, fire pits and lounge chairs bring a true resort feel to downtown Minneapolis, he said.

Overcoming the challenges

Now that RBC Gateway and the Four Seasons hotel are open, Kreutziger can look back at the challenges that the construction and development teams both faced. The biggest was working through the height of the pandemic and dealing with the materials delays that this brought.

“Coordinating 500-plus people on the job site every day with a global pandemic going on was a challenge in itself,” Kreutziger said. “Making sure we were running a safe and clean site was not easy. I credit our superintendents and field staff. They were all over it. We never faced any shutdowns.”

And not only did McGough and United Properties have to work through materials delays, they also had to navigate the challenging process of getting these materials to a worksite in downtown Minneapolis.

The RBC Gateway job site spanned roughly one city block. That’s a small working area. Getting materials to the site entailed planning truck deliveries down to 10-minute intervals to make sure that the site’s tower cranes could efficiently move materials from one side of the job site to the other.

“What it came down to was planning, planning, planning,” Kreutziger said. “Every morning, the field staff would meet. We would walk through the big deliveries we were expecting. What is the tower crane going to be doing throughout the day? Everyone knew daily what was scheduled to be happening. At the height of construction, we got into evening deliveries. Guys were working night shifts. That was the best time to keep things on schedule and on track. You get creative with the process and develop a plan to make it work.”

The importance of connectivity

One of the key amenities that office tenants demand today? Connectivity that never fails. That’s where Andrew Masur, owner of Minnetonka, Minnesota-based Mobili-Fi, LLC, comes in.

He was tasked with designing the Distributed Antenna System -- better known as DAS -- that provides voice and data connectivity for the tenants of RBC Gateway.

The key here is that A DAS network isn’t the same as Wi-Fi service: A DAS is a network of antennas that sends and receives cellular signals. This means that workers and guests at RBC Gateway will be able to make and receive calls, search the Internet and text their co-workers and friends without worrying about less-reliable Wi-Fi going down. As mobile connectivity becomes ever more important, A DAS network provides a more consistent, reliable and secure wireless service, one in which tenants and employees are far less likely to experience disruptions.

United Properties was so committed to providing the best wireless service that the developer commissioned Mobili-Fi to serve as the consultant on all mobile aspects of RBC Gateway.

This included making sure that RBC Gateway was fire-code compliant with the wireless needs of emergency responders such as the local fire and police departments. As Masur says, public-safety officials will rely on RBC Gateway’s public safety DAS (aka ERRC or ERRCS) once they enter the property. It’s important, then, that their two-way radios and other communication systems function properly on the site. A public safety DAS ensures that this will happen.

Just as important, though, is the cellular service that tenants receive on site, Masur said. It’s both a public safety issue from the perspective of being able to call 911, but also almost a must-have for future prospective tenants.

“It was important to United Properties that there was a Class-A cellular experience at this building,” Masur said. “Most developers today view cellular coverage in a building as a utility, not just an amenity.”

When designing RBC Gateway’s DAS network, Masur held extensive discussions with cellular carriers, brokering the contract language for all three major carriers to participate in the system. This included working with them to make sure that each carrier was happy with the design of the network.

This involved sending the carriers the specifics of the network design, making adjustments as requested and coordinating all onsite vendors to install the final product. The carriers then reviewed the network design, bring in their own group of preferred vendors and require a signal test sight walk and closeout before deeming it acceptable.

“At the end of the day, we built out a distributed antenna system that would serve both public safety officials and the tenants of the building,” Masur said.

What’s unusual about RBC Gateway’s DAS is that one network serves both local public-safety entities and the tenants and guests of the property. This is rare because the public-safety AHJs, or authorities having jurisdiction, often don’t want to share DAS networks. Masur, though, educated the local AHJ about how RBC Gateway’s network is unique in architecture, and showed them that the public safety DAS could remain fully functional even if the cellular/carrier DAS providing service were to lose functionality.

This saved significant money for United Properties: Instead of having to install two separate DAS antenna networks, the developer now only needed to focus on one.

This doesn’t mean that getting the DAS network designed and approved was an easy task. Mobili-Fi faced some significant challenges. For one, construction on RBC Gateway started in 2019. Then the COVID-19 pandemic hit. Shortly after that, protests and violence broke out in downtown Minneapolis following the murder of George Floyd.

Because of these issues, the cellular carriers with which Masur was negotiating lost their focus on indoor coverage and in this case, the RBC Gateway project.

“The carriers weren’t as interested in making sure we had in-building coverage,” Masur said. “They were worried about people working from home and providing additional outdoor service. We solicited the carriers in 2019. We didn’t hear a thing from them after COVID hit.”

But Masur was persistent, as was United Properties. Construction of the building continued throughout the pandemic. And Masur continued reaching out to the carriers. Eventually, the local cellular carriers approved the DAS network. Today, that network is functioning as it was designed, providing uninterrupted coverage to the building’s tenants.

“It was definitely a battle, but the carriers did come in and participate,” Masur said. “It was a unique situation with the politics, the riots and COVID all happening in the middle of the project.”

Building tenants now have reliable connectivity throughout the RBC Gateway property, Masur said. And this coverage remains consistent no matter where on the property employees and guests roam.

“With regular Wi-Fi service, you typically don’t have problems when you’re on the main floor of a building,” Masur said. “It’s when people get on the elevator or go into the parking garage. That’s where you lose coverage if you don’t have a DAS network in place. You’ll drop a call in the elevator lobby or when you’re walking to your car in the parking lot. We all know the pain of being on a Wi-Fi call and suddenly that call drops off. If building owners want reliable service, they need redundancy. If Wi-Fi is failing, the cellular service can take over.”

A first-class hotel

RBC Gateway is more than an office building. It’s also home to the Four Seasons Hotel Minneapolis and private condominium residences operated by the Four Seasons company. This portion of the tower is important, too, providing both top-class living and lodging facilities in this section of downtown.

Florian Riedel, general manager of the Four Seasons Hotel Minneapolis, says that this lodging is more than just a hotel: He says it is a beacon, one that draws people together.

It also draws people to downtown Minneapolis. The Twin Cities’ urban core offers plenty of quality hotels. But the Four Seasons brand is different. It signifies luxury. And it’s a declaration that downtown Minneapolis now offers a world-class hotel, one that wouldn’t be out of place in any international destination.

Left: The Four Seasons Hotel has brought new dining options to downtown Minneapolis. Right: RBC Gateway offers stunning views of the city (Photo courtesy of architecture firm Smallwood.)

“We are so happy to be here, and we’re filled with a great sense of possibility for the future,” Riedel said. “Even before opening our doors on June 1 of last year, we made a commitment to our community to be the change we wish to see in Minneapolis and the world. This starts with being a great neighbor.”

Riedel said that the Four Seasons is also targeting new business that has previously gone to other cities.

“We are very confident about what we can do, and we have a great story to tell,” Riedel said. “One of the very best urban Four Seasons Hotels in our portfolio is in a vibrant community with wonderful people, an incredible food scene and world-class activities. This is a winning combination. We will be bold in telling our story. It’s how we elevate our market, boost tourism in the area and attract new business to the Twin Cities.”

What amenities set the Four Seasons Hotel Minneapolis apart from competitors? Riedel points first to its location.

The hotel sits close to the Mississippi River, sports stadiums, concert venues and the always busy North Loop neighborhood. As Riedel says, guests are a short walk away from countless activities.

It helps, too, that the hotel is in a mixed-use building, Riedel said.

“That makes it a great place to bring people together,” he said. “Residents, guests, office tenants, neighbors, visitors to our restaurants, cafe and spa, they are all gathering here.”

The hotel is a go-to location for area businesses, too. Its entire second floor is ded icated to event and meeting space, and each room on this floor comes equipped with high-end technology. This second floor connects to the Minneapolis Skyway System, weaving the hotel into the heart of the city’s downtown.

The hotel is also home to high-end dining options, another perk. The Mara Restaurant & Bar offers the culinary creations of chef Gavin Kaysen, a native of Minneapolis and a James Beard Award winner.

Through April 1, guests can also dine at the seasonal Nordic Village at Riva Ter race, which the Four Seasons’ website describes as “Minnesota meets the Italian Alps.” The Socca Café provides a third dining option at the Four Seasons. This casual space offers high-end carry-out items ranging from pastries to grain bowls to Sicilian pizza squares.

Of course, the Four Seasons isn’t just a hotel. It also offers private condominium residences. These, too, are another boost to downtown Minneapolis. These resi dences are filled with the higher-end amenities designed to bring people back to live full-time in the city’s urban center.

As Riedel says, residents of these condominiums have access to all the amenities offered by the Four Seasons Hotel Minneapolis, including a spa, indoor and out door pool, state-of-the-art fitness center and security staff.

“Above and beyond that, our residents have the best views in the city from their own heated terraces and the best staff in the business,” Riedel said.

This staff is led by Mark James Syputa, director of residences at the Four Seasons Hotel Minneapolis. Before taking this position in Minneapolis, Syputa worked at Four Seasons hotels in Abu Dhabi and Riyadh and the Ritz Carlton in Chicago, among other high-end lodges.

What led the Four Seasons to Minneapolis and this location? Riedel says that it started with the vision of United Properties and the Pohlad family.

“At Four Seasons, our mission is to put into practice the Golden Rule, treating people as we want to be treated,” Riedel said. “We felt a kinship with them there. You could say that before we aligned on the business side, we were aligned in terms of our values. Our companies abide by the same principles.”

Riedel said that he is also excited about taking part in the rejuvenation of downtown Minneapolis. He says that the urban center of the city is fortunate to be supported by a strong business community.

“There are so many local leaders with a growth mindset, people who truly care about making a difference and embodying our state motto, ‘The Star of the North,’” Riedel said.

RBC Gateway

Developer: United Properties

General contractor: McGough

Design consultants: Kimely-Horn and Associates, Inc.

Architect: Smallwood

Hotel: Four Seasons Hotel Minneapolis

Mobile solutions: Mobili-Fi

Geotechnical

Construction

What’s behind the success at this building? A $7.5 million renovation, completed at the end of 2021, helped. So have the amenities, everything from a high-end on-site fitness center to the refurbished lobby with fireplace. And the location, in the highly desirable Edina community, has been a bonus, too.

But Eric Anderson, executive vice president with City Center Realty Partners, said that the bulk of this leasing success can be traced back to planning: The owners of this building put in the work to make the space as attractive as possible to tenants and their employees.

“We were pretty methodical in our strategy for The E,” Anderson said. “We set out to buy an asset in a really good location. And we knew we were going to invest in common areas and shared amenities. The amenities we put in create a third workplace. I hate that term, ‘third workplace.’ But we really did focus on creating areas where our tenants can come down and utilize seating that is not in their office. We created these comfortable other spaces for them to work.”

A growing roster

The E’s new tenants are Addison Group; Therapy Suites; Tressler Law Group; and Edina Chamber, Explore Edina and Innovation Lab. Relievant Medsystems and Mitsubishi HC Capital America were the first tenants to move into the building, having completed their tenant improvements last fall.

Other previously announced tenants are Spell Capital and Employer Solutions Group. City Center anticipates that all eight tenants’ offices will be fully built-out and occupied by late spring.

And according to a press release distributed by City Center Realty Partners, the new tenants are not only happy with their space, they are seeing it bring about a steadier stream of employees back to the office.

“It’s fantastic to see our team motivated and excited to come into the office,” said Jim Teal, president and chief operating officer at Mitsubishi HC Capital America, Vendor Services, in a statement. “We’re very happy with Mitsubishi’s new workspace at The E, and also with the well-designed collaborative spaces and terrific amenities. There’s great energy and vitality here already.”

The E’s amenities include an outdoor gathering space; a tenant lounge with multiple seating areas and fireplace; training and conference rooms; a fitness center; and a patio bar.

The E is also home to murals by local artists, a chef-prepared meal program from The Wandering Kitchen and a fleet of shared e-bikes.

“City Center and Contrarian came up with an excellent formula for The E and it’s attracting companies from throughout the greater Twin Cities,” said Brent Erickson, senior managing director at

Newmark, which manages leasing for the property. “The E’s tenants come from the surrounding communities of Edina, Eden Prairie, Bloomington, the West End and downtown Minneapolis. This is bona-fide good news for commercial real estate in the region.”

Anderson pointed to The E’s on-site fitness center as an example of an amenity designed to encourage employees to return to the office. The center boasts spin bikes, a yoga studio, treadmills and rowing machines. The locker rooms include shower areas. The gym even provides towel service for building tenants.

In short, it offers everything that a standalone gym would provide, and might be an enticement to those workers still debating how often they want to return to the office.

“We wanted to create a boutique environment,” Anderson said. “We wanted to give tenants access to the amenities that their employees are looking for today, and we

wanted to do that at an attractive price point.”

Anderson said that the results speak for themselves. As he says, tenants are looking for a healthful office environment that fosters team morale.

“The office sector is going through an era of change,” Anderson said. “Employers are looking to bring their employees back to the office. They want and need something that provides energy, something that will make their employees excited.”

Anderson said that The E’s location in Edina is a key, too. This suburban area provides a good quality of life. And The E is located near the top shopping destinations and attractions in the Twin Cities, Anderson said.

“We had looked at a number of other facilities, but The E is a perfect fit for our needs,” said Chris Geyen, chief financial officer with Relievant Medsystems, a new tenant at the Edina building. “The combination of a new corporate office with the building’s shared workspaces and amenities really helps to foster a positive work culture for our employees.”

The office sector still faces challenges, in the Twin Cities and across the country. But Anderson says that he is slowly starting to see more activity in this sector. Yes, vacancy rates are still too high. And, yes, companies still haven’t decided if they’ll need smaller footprints in the future.

But Anderson says that projects like The E prove that buildings that offer the right mix of amenities and location will still attract tenants.

“Remote and hybrid work will be a part of the future,” Anderson said. “But it won’t be as common as what we’ve seen over the era of the pandemic. I think people want to be back in the workplace. Employers want employees back in the workplace. As we start to come into the spring and summer here, I firmly believe that we are going to see greater demand for office space, not less.”

OFFICE (continued from page 1)

“Employers want employees back in the workplace. As we start to come into the spring and summer here, I firmly believe that we are going to see greater demand for office space, not less.”

Bring on the waterworks: The stress of moving brings plenty of us to tears

By Dan Rafter, Editor

Regrets? They’re surprisingly common among people who have moved, at least according to the latest research from real estate data company Clever. And some people are so stressed that they can’t help but burst into tears.

According to Clever’s survey, 36% of respondents who moved in 2022 told Clever that they had regrets about the move, with 20% wishing they had never moved at all. A total of 20% said they wished they had moved to a larger home. Clever found that 15% of respondents did not like their new home.

Clever surveyed 1,000 Americans on their experiences with moving in the past year. The company also analyzed migration numbers to highlight where people are moving to and where they are moving from.

A high number of respondents -- 33% -also told Clever that they experienced a high level of stress during the move, and a surprisingly high 44% of respondents said that they cried at least once during the moving process.

This stress isn’t surprising. Preparing for a move takes a lot of work. It’s expensive, too. Maybe that’s why 37% of participants in Clever’s survey said that they rented a truck instead of hiring more costly professional movers. The survey found that 26%

of respondents hired professional movers while 31% chose to simply ask friends and family members to help them move boxes to and from a vehicle or storage pod.

Those are just some of the statistics released by Clever. The company also pointed out that the most popular moving destination

in 2022 was Florida, while the state that people most often moved away from was California. Texas was a popular destination, too, ranking as the second most popular state for people on the move in 2023.

Illinois made Clever’s report, too, ranking as the state with the third largest number of people moving out.

A total of 61% of respondents moved fewer than 20 miles away from their previous home. This isn’t surprising: 53% of survey participants said that they didn’t think this was a good time to move across the country, most likely because of the high cost of cross-country moves.

This doesn’t mean that all Americans are opposed to making big moves. A total of 12% of survey respondents said that they moved more than 100 miles away from their previous homes last year.

Clever found that 25% of survey participants moved from cities to suburbs while 31% of rural residents moved to suburban areas. A total of 40% of respondents told Clever that they would prefer to live in a city if money were no object.

And why did people move last year? Clever reported that 24% of survey respondents said they moved to boost their quality of life, while 23% sought a lower cost of living or lower home prices. Another 22% of respondents said that they were upsizing, moving to a bigger home. A total of 21% of respondents said that they moved because they wanted to live closer to friends or family members.

“Why did people move last year?

Clever reported that 24% of survey respondents said they moved to boost their quality of life, while 23% sought a lower cost of living or lower home prices.”

Multifamily’s secret weapon against recession? Proptech

By Sylvia Crawford

In 2022, the Federal Reserve raised interest rates seven times, prompting industry leaders to anticipate further hikes in 2023. With inflation remaining high, a recession was anticipated to be on the horizon. As a result, multifamily owners began taking preemptive actions to reduce costs to prepare for a difficult economic period.

Recessions are nothing new to the American economy, and some industries have proven to be resilient during even the toughest of times. The multifamily property industry has shown this resilience through five recessions in the last forty years while also surviving a global pandemic that crippled many other sectors.

What strategies are owners and operators in the multifamily industry employing today to maintain their profit margins in the face of volatile economic times? Here are some of the ways they can sustain success in the multifamily industry despite uncertain financial conditions.

Recession pushes multifamily toward prop tech

With a possible recession looming, the future of the multifamily property industry may appear uncertain. But if past performance is any indication, the future is brighter than you might think. Owners and operators will inevitably need to implement cost-cutting measures to survive. However, a recession presents a unique opportunity that, if seized, can help businesses secure long-term growth and sustained profitability.

After two years of remarkable growth, the multifamily industry is now experiencing the effects of a slowdown. While rents had been steadily rising, they are now stabilizing, leading owners to search for ways to recover their diminishing operating income.

One solution that many owners are gravitating to is PropTech. PropTech is an effective way to increase efficiency and appeal to tenants, allowing property owners to stay competitive in the market despite economic changes. This is evidenced by the fact that 82% of residents want to live in apartments with smart devices.

Investing in smart amenities, such as smart access control, smart thermostats and self-guided tours, became popular during the COVID pandemic, while more than 62% of property managers consider optimizing their operations to gain efficiencies as one of the biggest challenges they face. Smart tech-enabled automation can lead to increased operational efficiencies and reduced staff payroll, all while still effectively maintaining the property.

Self-guided tours also allow for extended viewing hours, and more prospects can be hosted on average. This generates more turn-around opportunities, which can lead to an increase in lease signings and help properties stay competitive despite market turbulence.

PropTech doesn’t just address resident demands. It addresses the needs of owners and operators to reduce costs, appeal to tenants and streamline operations.

Stability during volatility

As the market fluctuates and rents flatten, business owners in every sector will look to cut costs however they can. Time

and time again, multifamily owners have restructured their operations with smart tech to maximize property efficiency and solidify their resilience in uncertain conditions.

Smart automation technology, for instance, allows owners to centralize their leasing operations and decrease the number of employees needed to run each of their communities. Powerful self-guided touring technology and smart access control systems allow staff to grant prospective residents on-site access remotely and with just a few clicks. No longer do properties need to over-hire to maintain their performance; in fact, many communities experience greater NOI after automating just a portion of their day-to-day operations.

This concept also applies to site-wide energy management. Smart thermostats can be placed inside vacant units and modified by staff remotely, reducing the labor required to manually adjust settings. More significantly, each property can dramatically reduce its energy consumption in these unoccupied units by toggling smart thermostats off when not in use. These immediate savings are a valuable way to offset the negative effects of a recession.

Residents will also be able to save on their energy bills if they have smart thermostats installed in their apartments. They can precisely manage their year-over-year energy usage to deduct as much as 10%

to 12% from their heating bills and 15% from their cooling bills. By providing value to your residents in the form of these savings, you’ll increase your retention rate, which becomes even more critical to your success when attracting new residents becomes more difficult.

Recession equals opportunity growth

Multifamily owners can earn an advantage over their competitors during a recession by upgrading their legacy buildings with smart tech.

While a pool and tennis court are nice community perks, data consistently shows that today’s renters are primarily attracted to smart tech amenities that make their day-to-day lives easier. Smart tech appeals to today’s renters because it offers them instant conveniences without stress, and from anywhere. Meanwhile, owners who implement smart tech manage their assets more efficiently, retain more residents on average, and decrease operational drag and overhead costs.

Given its unique value and benefits, smart tech should no longer be considered a “secret weapon,” but an essential tool for multifamily owners and operators to implement, regardless of market conditions.

Sylvia Crawford is senior director for marketing strategy and planning at Arize, which provides smart apartment solutions.

Sylvia Crawford

Workers wanted … still. AGC survey points to labor shortages as biggest challenge for construction companies in 2023

By Dan Rafter, Editor

The biggest challenge facing the construction industry in 2023? Finding enough workers to staff their job sites. That’s one of the key findings from the 2023 Construction Hiring & Business Outlook report released earlier this year by the Associated General Contractors of America (AGC).

A total of 80% of respondents cited in the AGC report said that they are struggling to fill some or all their salaried or hourly craft positions. Only 8% told the AGC that they were having no difficulty in finding enough workers.

This challenge shouldn’t be a surprise to anyone who’s followed the construction industry. Ken Simonson, chief economist with the Associated General Contractors of America, said that the construction industry’s hiring challenges stretch back decades, starting when schools began scrapping their vocational education programs and guidance counselors and parents began steering students to college degrees and indoor jobs.

“It’s been a chronic issue,” Simonson told Minnesota Real Estate Journal in an interview.

The issue has persisted even though the construction industry has generally paid its workers well for entry-level jobs, Simonson said. He pointed to numbers from the Bureau of Labor Statistics showing that for 20 years through 2019 construction jobs paid a premium of about 21.5% to people entering the workforce directly after high school.

When the COVID-19 pandemic hit, the demand for restaurant, delivery and warehouse workers surged. That led these employers to boost their pay rates, too. That reduced the premium that construction workers were earning, with Simonson saying that the wage premium for construction jobs fell to as low as 15% during the height of the pandemic when compared to other jobs that employees could land directly after high school.

This dip in the wage premium further reduced the number of workers interested in jumping into the construction industry, Simonson said.

The pay for construction jobs is rising again, increasing at a faster rate than is the pay for other work, Simonson said. Simonson cited Bureau of Labor Statistics’ numbers showing that the average hourly wage for construction jobs was up 6.1%

from December of 2021 to December of last year. During this same period, the average wage for all jobs in the private sector jumped by just 5%.

Even with these higher wages, though, construction firms are struggling to fill their openings, Simonson said. Simonson said that throughout 2022 the number of job openings at the end of each month set a record for that month.

In the AGC survey, 69% of respondents said that they expect to increase their headcount of employees in 2023. At the same time, though, these respondents recognize that doing this will be challenging. A total of 58% of respondents said that hiring will continue to be hard or will become harder. Only 15% said that filling open positions will become easier.

This challenge persists even though almost 75% of firms reported that they increased base pay rates more than in 2021. That’s an increase of the 62% of firms that said that they increased pay more in 2021 than in 2020.

With higher pay rates, what is keeping more workers from taking jobs in the construction industry?

“The pandemic has changed people’s choices in some ways,” Simonson said. “Job openings have been running at record levels. Openings have come down somewhat from the peak but are still running much higher than before the pandemic. Preferences have shifted, too. People have gotten used to working from home or on a hybrid basis with flexible hours. That isn’t possible when you are working on construction sites. Maybe you have a greater need to be close to your kid’s school. You don’t get that if you are at the top of a crane.”

Other challenges

Finding labor isn’t the only challenge that construction companies face this year. Rising construction costs continue to make building everything more challenging, Simonson said.

The good news? Simonson said that rising materials costs are either moderating or tapering. That will bring some financial relief to construction companies this year. But prices are still high. Simonson pointed to data showing that as of November of last year the cost of non-residential construction materials and services was up 10.1% when compared to the same month a year earlier.

At the same time, the rate of inflation was about 7.1%, Simonson said.

“Construction is experiencing steeper cost increases than are consumers and most businesses,” he said.

What has changed is which materials are costing more today. About 18 months ago, the costs of all materials seemed to be on the rise, Simonson said. Today, there has been a drop in the cost of materials such as lumber, steel, aluminum and copper. The cost of other materials, though, is on the rise, including gypsum, he said.

Long lead times continue to be challenging, too. Simonson said that the delivery times for transformers, switch gear and other electrical products have stretched to more than two years in some cases.

“Contractors are optimistic about the construction outlook for 2023, yet they are expecting very different market conditions for the coming year than what they experienced last year,” said Stephen Sandherr, the association’s chief executive officer, in a written statement. “Even as market demand evolves, contractors will continue to be confronted by many of the challenges they faced in 2022, including the impacts of supply chain problems and labor shortages.”

The impact of rising interest rates

As with everyone working in commercial real estate, contractors are worried about rising interest rates. Simonson said that AGC members surveyed said that they were still optimistic about the construction industry overall. But they were less optimistic than they were a year ago.

Simonson said that contractors are confident that even with rising rates, they will still be busy in 2023 with infrastructure and federal projects. Contractors were

especially confident that highway and bridge work will remain busy categories this year. They expected, too, that they would be busy tackling airport, rail and port construction projects.

Where contractors were less optimistic? Private construction work. Simonson said that survey respondents expect the amount of private construction work to slow this year.

Simonson said that he expects a continued slowdown in single-family housing

construction this year. He also said that he expects construction activity to slow in any investor-financed categories, including apartments, warehouse, lodging, retail and office.

On the positive side, Simonson said that he expects higher demand for new manufacturing facilities in the United States.

“We’ve already seen these enormous semiconductor fabrication plants being built,” Simonson said. “We are seeing the construction of elective vehicle plants.

Other forms of manufacturing are being brought back to the United States. Manufacturing is already strong and should get even stronger in 2023.”

Even with these opportunities, though, many contractors are expecting a wilder ride this year. According to the AGC survey, 36% of respondents said that they have had a project delayed or canceled and not yet rescheduled. A total of 13% had already experienced a delay or cancellation for a project scheduled in the first part of 2023.

The Twin Cities’ January average listing rate of $25.85 a square foot was significantly lower than the average for the country, which clocked in at $38.04 a square foot last month. On a brighter note, that average vacancy rate of 15.1% is actually lower than the 16.6% national average office vacancy rate in January.

CommercialEdge said that nationally, 123.6 million square feet of office space was under construction in January. Interestingly, the five markets of Boston, Manhattan, Dallas, Austin and San Francisco accounted for more than one quarter of this construction activity.

CommercialEdge also recorded $1.9 billion in office transactions in January, with properties selling at an average of $202 a square foot. The company’s researchers, though, are predicting that with remote work still popular and higher interest rates, there won’t be much capital available for office transactions this year.

In the Twin Cities, office sales have been sluggish at the start of the year, with CommercialEdge reporting just more than $22 million worth of sales in this sector as of Jan. 31 in the Minneapois-St. Paul market.

There isn’t much new construction activity in this sector in the Twin Cities, either. CommercialEdge reported that the Minneapolis-St. Paul market had 676,369 square feet of office space under construction as of January, representing 0.6% of the market’s total office inventory.

There was only one major market studied by CommercialEdge that had less new office space being built: Tampa, which had just 382,099 square feet of office space under construction as of January of this year.

How low will transaction volume dip across the country? CommercialEdge is predicting that office transaction volumes in 2023 will be at their lowest levels since the years following the Great Financial Crisis of 2007 and 2008.

And in more bad news, CommercialEdge predicts that the office market will see a jump in distressed sales this year, something that could result in a downward price spiral in this sector.

“We know distress activity will increase this year,” said Peter Kolaczynski, senior manager with CommercialEdge. “We are closely monitoring the loans that are coming due and how they are being handled on both the owner and lender side.”

OFFICE STRUGGLES (continued from page 1)

“Job openings have been running at record levels. Openings have come down somewhat from the peak but are still running much higher than before the pandemic. Preferences have shifted, too. People have gotten used to working from home or on a hybrid basis with flexible hours. That isn’t possible when you are working on construction sites.”

So many new spec buildings, tenants just can’t fill them fast enough…right?

By Mia Goulart

Industrial has continued to hold its own, yet record-fast spec deliveries are equaling a vacancy rate that keeps on climbing, according to Colliers’ 22Q4 Construction Review. But just how long is so much valuable space predicted to remain on the market?

Developers delivered 6.5 million square feet of new spec product during Q3 2022 then repeated that total during Q4. Over the course of 2022, 64 spec buildings—20.8 million square feet—were delivered for a 35% increase over the previous record of 15.4 million square feet of spec deliveries recorded in 2019.

Tenants continued to lease space quickly in recently completed spec buildings, as well as buildings still under construction during each quarter of the year, but not fast enough to exceed the pace of deliveries during the latter half of 2022, based on the report, causing the first increase to the

vacancy rate in recently completed spec product since 2019.

In fact, developers delivered more spec space in 2022 than other year in the market’s history—a whopping 20.8 million square feet. While 56% of the space deliv-

ered in 2022 remained vacant at the end of the year, another 95 million square feet of spec product was delivered between 2013 and 2021, which was only 2.7% vacant at the end of the year, according to Colliers.

But patience is all it will take to fill the buildings. Despite the massive uptick in spec development witnessed during 2022, strong demand is predicted to result in most of that space being leased by the middle of 2023.

Developers were underway on 80 new spec buildings (30.2 million square feet) at the end of 2022, setting another new record for the most spec space under construction at one time in the market’s history. Only 10% of that space was pre-leased at the end of the year, but Colliers said strong demand will translate to these buildings as well, especially once a majority of the product built in 2022 reaches a lease rate of 100%.

March 15, 2023

Minnesota Land Development Summit – 19th Annual

April 12, 2023

Minnesota Women in Real Estate Summit – 6th Annual

April 20, 2023

Minnesota MREJ Awards Gala

April 26, 2023

Minnesota Data Center and Cannabis Summit – 12th Annual

May 5, 2023

Minnesota Medical Properties Summit – 19th Annual

May 24, 2023

Minnesota

Southeast Suburban Summit

June 1, 2023

Minnesota

Mid-Year Apartment Summit – 11th Annual

June 8, 2023

Minnesota

Mid-Year Commercial Real Estate Forecast Summit – 11th Annual

June 15, 2023

Minnesota Property Management Summit – 17th Annual

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