MREJ July/August 2022 by REjournals

The promise of onshoring: Page 8

Don’t bury it yet:

Retail is far from dead By Dan Rafter, Editor

online presences – to succeed in an environment that still remains challenging. And plenty of the retailers doing this are doing business today in the Twin Cities market. Drew Johnson, senior vice president of development with Excelsior, Minnesota-based development firm Oppidan, said that retail real estate remains an important part of the company’s business. And, he says, he sees a bright future for this sector. “By no means is retail dead,” Johnson said. “It is still an important part of our business.” In the Twin Cities area, several retail types are in expansion mode, Johnson said. That includes car washes, fast-casual restaurants and daycare centers. And the Twin Cities has an advantage over some markets: It isn’t plagued with much vacant junior box space, Johnson said. Retailers that have wanted to expand in the Minneapolis-St. Paul market are filling any junior box space they can find as an alternative to building new spaces. The reason? Construction costs are so high today.

Gander Mountain is one retailer that has been expanding across the nation.

hink of the commercial sectors hit hardest by COVID-19. What comes to mind? Office, hospitality and … retail, right?

today. That’s because retailers have adjusted to the new shopping habits of consumers. They’re focusing today on in-store pickup, curbside pickup and increased delivery options.

Maybe. But commercial real estate professionals working the Minneapolis-St. Paul market say that the retail sector in the Twin Cities and beyond is firmly in rebound mode

These retailers are taking the omnichannel approach – focusing both on brick-and-mortar locations and their

As Johnson says, most well-located power centers have filled in any empty space that opened during or before the COVID-19 pandemic. “Of the junior box groups that have left the market, names like Kmart, Sears and Shopco, most of that space has been back-filled,” Johnson said.

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How many deals will rising interest rates wipe away? CRE pros in wait-and-see mode By Dan Rafter, Editor

When the Federal Reserve last month raised interest rates by three-quarters of a percentage point, it ranked as the agency’s most aggressive such hike since 1994.

The Fed made this move to combat inflation. But commercial real estate pros worry that rising interest rates could scuttle deals that were set to close but might no longer make sense now that rates are high. How has this impacted commercial real estate deals so far? It’s still early, but CRE pros say they are keeping a

close watch on deals in progress. Many are still closing, they say, but others will certainly crumble. The consensus, though, is that interest rates have the possibility to slow the momentum that commercial real estate enjoys today, if the Fed is overly aggressive in boosting interest rates. “I agree that a 50-basis-points to 75-basis-points increase is appropriate, but the Fed needs to be careful not to overcorrect,” sadi Joshua Simon, chief executive officer of SimonCRE, in a statement. “Inflation is going to be a lagging indicator that needs to be watched. They will

need to raise rates, but at some point, they need to wait to see the results before enacting more increases. There has been major fallout already within transactions and further investments will be delayed.” In his statement, Simon said that the Fed reacted late in its efforts to combat inflation. This means that it must now enact larger rate hikes to make up for its earlier inaction.

FINANCE (continued on page 12)

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JULY/AUGUST 2022

MINNESOTA REAL ESTATE JOURNAL

DON’T BURY RETAIL YET: Think of the commercial sectors hit hardest by COVID-19. What comes to mind? Office, hospitality and … retail, right? Maybe. But commercial real estate professionals working the Minneapolis-St. Paul market say that the retail sector in the Twin Cities and beyond is firmly in rebound mode today.

HEALTHY OFFICES NOW A MUST-HAVE, NOT A NICE-TO-HAVE, FOR BUILDING OWNERS, EMPLOYERS: How healthy are offices across the United States? And are employees more likely to return to the office – at least on a part-time basis – if their employers take the steps necessary to boost indoor air quality, improve natural light and surround their work areas with green spaces?

HOW MANY DEALS WILL RISING INTEREST RATES WIPE AWAY? When the Federal Reserve last month raised interest rates by three-quarters of a percentage point, it ranked as the agency’s most aggressive such hike since 1994. The Fed made this move to combat inflation. But commercial real estate pros worry that rising interest rates could scuttle deals that were set to close but might no longer make sense now that rates are high.

HERE’S WHAT EVOLVING HEALTHCARE DELIVERY MEANS FOR CRE: Driven by advancing technology, increasing competition and pricing pressure, healthcare delivery is rapidly evolving to become more consumer-centric, moving off the hospital campus to an ambulatory setting. There is great opportunity for real estate developers to partner with healthcare providers to deliver facilities that align with these ongoing changes in medical care delivery.

UNEARTHING THE RIGHT SITE IN THE RIGHT MARKET: Demand remains so strong for new multifamily units that developing in this space is easy, right? Not quite. There are still challenges in the multifamily sector, despite the still-rising demand for new apartment units.

HOW THE CRE INDUSTRY IS REACTING TO THE FED’S INFLATION-FIGHTING MOVES: Last month, the Fed did something that it had not done since 1994: It raised the fed funds rate by 75 basis points.

HOW AI AND MACHINE LEARNING ARE RESHAPING THE WAY TRANSIT SYSTEMS MOVE TRAFFIC PATTERNS: Of the many ways artificial intelligence and machine learning are poised to improve modern life, the promise of impacting mass transit is significant. The world is much different compared with the early days of the pandemic, and people around the world are again leveraging mobility and transit systems for work, leisure and more.

THE PROMISE OF ONSHORING: The industrial market across the country is enjoying plenty of momentum, with companies’ demand for new industrial space seemingly unquenchable. But a push by companies to open more manufacturing facilities in the United States is only adding fuel to the hot industrial market.

BACK TO THE OFFICE? It’s still up for debate: Do even commercial real estate professionals want to return to the office? That’s the big question that Keller Augusta has tackled in its look at the state of the CRE industry today.

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Succeeding in the multifamily market today: It’s all about unearthing that right site in the right submarket By Dan Rafter, Editor

emand remains so strong for new multifamily units that developing in this space is easy, right?

Not quite. There are still challenges in the multifamily sector, despite the still-rising demand for new apartment units. Rising interest rates. Oversaturated markets. The struggle to get materials to job sites on time. These all make developing and managing a new multifamily development more challenging today. Of course, that doesn’t mean that this sector doesn’t remain a highly attractive one. Renters are still hunting for new apartment buildings with high-end amenities. And those developers who bring them to these renters will be rewarded. The key today, though, is to understand that the multifamily sector has evolved. It’s still a strong one but succeeding in it does require plenty of research. Drew Johnson, senior vice president of development with Excelsior, Minnesota-based Oppidan, said that the key to developing a successful multifamily development, one that attracts a steady stream of renters, is to find the right site in the right submarket. Being disciplined when it comes to controlling costs helps, too. This differs a bit from the last several years. As Johnson says, back then, you could build an apartment building almost anywhere in the Minneapolis-St. Paul area and see strong demand. Today, it’s important for developers to be choosier: The right project will still draw strong demand from tenants. But that “right” part must be in place. “A few years ago, you could make more of a blanket statement that everywhere in the Twin Cities area was red hot for multifamily,” Johnson said. “Now, it’s more important to have the right project, at the right time in the right spot.” An example of this correct formula? Johnson points to the multifamily project in Waconia, Minnesota, that Oppidan began construction on in late June. The 215,000-square-foot apartment building will be built on 11.5 acres of land at the southwest corner of Industrial Boulevard and W. 13th Street. The development will offer 163 market-rate apartments in a four-story building.

Oppidan is building a new multifamily development in Waconia, Minnesota, to meet the demand there for new apartment units.

This part of the region needs new apartment units. And the demand for market-rate units is especially high. These factors make this project a stronger bet for success. “If you were just getting into one of our strongest markets now, markets that featured a lot of new multifamily product, you might be taking on a risk, especially with the higher construction costs of today,” Johnson said. “You have to be careful if you are thinking about delivering new units in a submarket that might already be full and overly competitive.” There are other challenges in the multifamily market today, too. The biggest is the struggle so many developers are having with getting materials to their job sites on time. Johnson, though, said that he has seen some positive signs: Oppidan has seen materials that they thought would come in late – roofing and insulation, for example – arrive at job sites earlier than expected. “It is still an issue,” Johnson said. “But we have learned that not everything is so bleak.” And what about rising interest rates? Will they slow the demand for new multifamily units? Johnson said that so far, it is too early to tell. Projects that are breaking ground today, probably aren’t impacted by higher rates. The developers behind these projects have already locked up strong interest rates back from when these rates were lower. Rising rates, though, might impact devel-

opers that are just beginning a multifamily project now and are in the process of getting a construction loan. “In that situation, you will be hit with higher interest rates,” Johnson said. “But even with the increase, interest rates are still at historic lows. I think the impact on the multifamily market remains to be seen.” The multifamily sector has been evolving in another way, too: Renters today, especially in certain submarkets, want a higher class of building amenities. With so many renters still working from home, Johnson said, developers are adding additional nooks to unit interiors. This gives renters the chance to set up a home office. Other renters want smart locks and thermostats that they control from apps on their phones. Then there are the common-area amenities. Renters want on-site fitness centers and swimming pools. Many want bike-storage rooms, lockers that can keep their Amazon deliveries safe and dog-walking areas. “I don’t think what people want has drastically changed,” Johnson said. “From Oppidan’s point of view, though, we want to be better than the surrounding competitive space. It’s been more of an evolution than a revolution. It’s about high-quality, thoughtful design, about being conscious of what we are designing both inside and outside the rooms.”

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Asymmetrical risks? How the CRE industry is reacting to the Fed’s inflation-fighting moves By Ryan Severino, JLL

ast month, the Fed did something that it had not done since 1994: It raised the fed funds rate by 75 basis points.

the economy. Because central banks like the Fed can exert little or no direct control over the supply side of the economy, they raise rates to increase the cost of borrowing, negatively impacting the prospects for interest-rate-sensitive industries such as housing, financial services and durable goods.

Leading up to the announcement, the Fed reiterated that it intended to raise this rate by 50 basis points. The Fed stated that it changed its approach to address high, persistent inflation. Ultimately, that claim seems substantiated. But more directly, it appears that the Fed changed its mind because markets signaled that the Fed was not doing enough to control inflation. Equity markets fell into bear market territory and fixed income yields pushed higher as bond prices declined. The Fed won’t admit so, but it seems that the markets forced the Fed into doing something that it otherwise wouldn’t have done, even with May’s upside inflation surprise. The Fed also raised the terminal fed funds rate in its forecast by 100 basis points to

As those industries experience lower revenues and slower job growth (if not outright job losses), growth in the economy starts to slow as those businesses and their employees (or former employees) spend less.

3.8%, well past our estimate of r-star (neutral) at about 2.5%, with the Fed taking a harder stance that more squarely pits in-

terest rates against inflation. Both sides of that battle carry risks, which might prove asymmetrical. Inflation leads Let’s take inflation first. Empirical research dating back decades proves that inflation upsets consumers (overall) more than other economic phenomena, including high unemployment and job losses. But we do not need to reach into the distant past for evidence of this. In early June, consumer sentiment reached its lowest level on record. Yet, empirical research also demonstrates that unless inflation reaches very high levels, it tends to have a negligible cost and impact on economic growth. Our own humble contribution to this research reaffirms this position. That raises the obvious question: “Why is the Fed so concerned with inflation?” There seems little chance of inflation rising to a high-enough level to impair economic growth. But concerns about inflation, especially outsized ones like we observe now, could influence behavior in a way that negatively impacts the economy. If consumers believe that inflation will cause economic trouble in the future (i.e. a recession), they might alter their behaviors in anticipation of such an outcome, and in the process bring about a self-fulfilling prophecy. While that risk is likely increasing, it remains far from certain that it would manifest. In the absence of such an outcome, risk of higher inflation on economic growth remains incredibly limited. Interest rates follow What about the other side of this battle? Higher interest rates attempt to reduce inflation by impacting the demand side of

That helps to bring demand and supply back into balance. But the risk here is much clearer. If the Fed raises rates too much, the probability of a recession increases significantly because the decline in spending spirals into further job losses in other industries and an even greater reduction in overall spending. Most post-war recessions in the U.S. occurred because the Fed overshot interest rates. Can the Fed actually reduce inflation? Against such a backdrop, it might seem foolish for the Fed to start pushing even harder on interest rates. Many have noted such risks since last week’s Fed meeting. But another key question remains unanswered: Can the Fed actually reduce inflation? And here the evidence also seems suspect. During the last four tightening cycles dating back to the 1990s, the data appears to show limited efficacy. Using the Fed’s preferred inflation measure, the core (excluding food and energy) personal consumption expenditures (PCE) index, monthly inflation did not trend downward during periods of Fed tightening. The monthly data appear somewhat random, and not indicative of deceleration brought about by higher rates. Moreover, in the current environment, inflation is increasingly driven by food and energy, partially because of war in Europe and partially because of lack of capacity in energy production and refining. The Fed exerts almost no control over these. Therefore, the Fed is targeting what it can – the labor market. The Fed sees excess demand for labor (most clearly in the 11.4 million open jobs) and believes it is contributing to the inflation problem. Even though wage growth and core inflation have both decelerated in recent months, the Fed seems willing to weaken the labor market to attempt to reduce headline inflation. The Fed would likely accept a higher unem-

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“If the Fed raises rates too much, the probability of a recession increases significantly because the decline in spending spirals into further job losses in other industries.”

ployment rate, slower job gains and even job losses to tamp down inflation. Yet that path tends to be a slippery slope to recession. To be fair, on multiple occasions the Fed has successfully managed to slow the economy and bring down inflation without causing a recession. It does not receive enough credit for this. But the course that the Fed charted last week could lead to a troublesome destination if it is not careful.

Lookout! Errr ... outlook The upshot? The 75-basis points increase by itself does not mean much. Rates remain low. But the forecast for the fed funds rate creates greater concern. If the Fed follows through, it will almost certainly push past the neutral rate into contractionary territory. How long the economy could sustain such rates without a recession remains murky. And the Fed does not need to adhere to its own forecast. For those looking for a silver lining, the Fed has a terrible track record of following through on its own forecasts. If the Fed

went too far, the Treasury market would likely signal so, much as it did during the last business cycle. That could prevent the Fed from hiking too much.

market has not yet lost faith, but because things are changing so quickly, market participants are taking an extra beat or two to ensure that they are not making a mistake.

For now, our base case shows moderate growth for the economy, driven by a strong labor market and robust consumer spending. But the Fed’s increasingly hawkish interest rate forecast is raising recession risk.

Interest remains high, but the rapidly changing environment requires extra homework. Borrowers, lenders, buyers, sellers, landlords and tenants are all assessing rapidly changing conditions, trying to avoid making a costly error. Participants are weighing longer-term confidence in the asset class against short-term uncertainty.

What it means for CRE Commercial real estate is digesting all the changes from recent months, including last week’s Fed decision and forecast. The

Ryan Severino is chief economist with JLL.

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The promise of onshoring: As companies bring manufacturing back to the U.S., demand for industrial space soars even higher By Dan Rafter, Editor

he industrial market across the country is enjoying plenty of momentum, with companies’ demand for new industrial space seemingly unquenchable. But a push by companies to open more manufacturing facilities in the United States is only adding fuel to the hot industrial market.

CRG has faced this challenge, too, of course. But McKee said that the company’s integrated model – CRG acting as developer on projects, its construction firm Clayco building them and its in-house architecture firm handling the planning – has helped it keep projects on schedule, even when faced with supply and labor shortages.

During the earliest days of the COVID-19 pandemic, consumers were shocked to find plenty of empty shelves at their local grocers and retailers. At the same time, those ordering exercise equipment, electronics and clothing from Amazon and other online retailers noticed that these products were taking longer to show up at their doors.

“We are not negative when it comes to the shortages. It is what it is,” McKee said. “We are all facing this issue, and we are better suited than most to handle it. It is not something I stress and worry about every day. We focus on what we have to do each day to solve our customers’ problems.”

Companies don’t want this to happen again. Because of that, many are bringing their manufacturing operations back to the United States. What does this mean? Only that the onshoring of manufacturing back to the United States is providing yet another boost to the already sizzing industrial market.

“The idea just made sense,” Smietana said. “HARIBO’s customer base in North America is very large. They were shipping and manufacturing their gummi bears from 10 countries around the world to North America. it was time for them to open a facility here to help meet the demand.”

Chris McKee, principal and chief development officer for St. Louis-based real estate development and investment firm CRG, said that the demand for manufacturing space in the United States has consistently been on the rise since the start of the pandemic. And it’s not just onshoring that is behind this. He said many companies are also modernizing their manufacturing base and are seeking newer, more modern facilities.

This facility will rank as the largest capital investment in HARIBO’s history.

McKee said that this trend isn’t about to slow.

McKee pointed to two reasons for this increase in demand. First, companies are working hard to keep their products on store shelves. To help avoid some of the product shortages that the country saw during the early days of COVID, companies are committing to manufacture more of their products in the United States instead of overseas.

“There are more users in the market who are manufacturers than at any point in my 20-year career,” he said. “The manufacturing sector is one of the strongest sectors in the industrial market. It’s been picking up steam for the last 12 months and has some legs.” Robert Smietana, vice chairman and chief executive officer of Chicago-based HSA Commercial Real Estate, said that his company is still mainly developing industrial warehouse space. But he, too, has seen an uptick in the number of companies looking for manufacturing space, too. A good example? HSA has been working with HARIBO, the company that makes all those multi-colored gummi bear candies, on its first North American manufacturing plant that will open in Pleasant Prairie, Wisconsin.

“With this substantial investment, we’re strategically setting our business up for long term growth in the U.S., and we are looking forward to a bright future,” said Hans Guido Riegel, managing partner of the HARIBO Group, in a statement. COVID-fueled

At the same time, companies want their manufacturing facilities to be closer to their customers. They also want more control over the quality of their products. Locating manufacturing facilities in the United States instead of in overseas locations helps companies meet both goals. “What happened in China, with heavy-duty COVID lockdowns, took companies in the United States by surprise,” McKee said. “That is a big driver for this move. I also think part of it is the modernization of manufacturing. Companies that want to modernize their manufacturing processes are looking for space in the United States.”

“I hope this is a trend,” Smietana said. “It seems that having your manufacturing space near your distribution space near your customer has become more important. If you look at 20 years ago, companies were moving toward just-in-time deliveries and moving their manufacturing across the ocean. We’ve all found out during the past several years that this model is flawed.” It’s also more cost-efficient for companies to manufacture products near their customer base, Smietana said. Even with labor being cheaper in many overseas locations, increased shipping and distribution costs make manufacturing overseas a more expensive proposition today. And as fuel prices remain high, these costs will only continue to rise. “A lot of companies were looking at onshoring before COVID,” Smietana said. “The pandemic just reinforced their concerns. Right now, every manufacturer and distributor of goods is taking a hard look at their options, and many are considering moving their operations back to the United States.” Supply issues McKee said that this demand for new manufacturing space in the United States has been yet another boon to the industrial sector. Onshoring creates more demand, something that drives industrial development throughout the country. Of course, more demand puts even more pressure on the construction and development industries. It’s still a challenge for builders and developers to get the construction supplies they need, with several key components still taking months to show up to job sites. Onshoring will only exacerbate these challenges.

McKee said that while the shortages continue, there is more stability in the construction process today than there was last year and earlier this year. The shortages already rippled through several material types. Steel was the first material that became difficult to get. Then the industry saw shortages in insulation, roofing materials, roofing fasteners, electrical switch gear and concrete. By relying on the integrated model of construction and development, though, CRG has been able to more efficiently navigate these shortages, McKee said. “The issues in the supply chain have been significant for all of us,” he said. “And we don’t see these issues ending anytime soon. We have been fortunate, though, in that rents have continued to rise to support the increased costs of construction. If we get to the point where that stops, then we’ll see a significant downward pressure on construction starts.” No end to the demand? McKee said that the demand for industrial is highest in markets in which there are high barriers to entry, large populations or growing populations. Demand remains high in the Northeast portion of the country, McKee says, because that slice of the United States has such a large population to serve. The Northeast also has high barriers to entry and long entitlement processes, with projects sometimes taking a year to complete. That makes this market extremely hot, McKee said. The Southeast and Southwest regions of the country are experiencing strong population growth. Part of this is because people had more choices of where they could live during COVID. Many no longer had to live close to where they worked. This led to many people choosing the warmer temperatures of the southern part of the

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country. This booming population has led to a surge in demand for industrial space, whether manufacturing or distribution. The Midwest is not a boom market, but it is still a strong region for industrial demand, McKee said. Industrial users like the Midwest because it’s easier to find skilled labor here. The Midwest is also a steadier market, not experiencing the same boomand-bust cycles that many of the country’s hotter markets do. “Most of the growth in demand in the Midwest is driven by a need for manufacturers and end users to be closer to their population centers,” McKee said. “There’s also a cheaper cost of living here. It’s easier to live in the Midwest than it is to live on the coasts. The Midwest has a lot going for it. It might not be booming like what we’re seeing in the Southeast and Southwest, but it still is doing tremendously well when it comes to industrial activity.” As Smietana says, the hottest industrial markets will never be located in the Midwest. This doesn’t mean, though, that this region isn’t attractive to industrial end users. He says that today, there is plenty of demand for industrial space in markets such as Columbus and Nashville. Smietana said that Chicago is always a strong industrial market and that Minneapolis, too, is seeing rising demand for industrial space.

HARIBO broke ground on its first North American manufacturing facility in 2020.

“The Midwest has always been a steady-Eddie market,” Smietana said. “The highs in the Midwest are never as high as the highs in the coasts, but the lows are never as low.”

“I don’t think companies with these major plans are going to be wavered or hindered by these current economic headwinds,” Smietana said.

But what about rising interest rates? Is that one development that could slow demand for industrial space?

The strong demand for industrial assets means that it can be difficult for companies to find space in many markets. That’s led to a rise in spec industrial construction.

Smietana said that this is a possibility. But many companies realize that they have a need to open manufacturing facilities in the United States, even if interest rates here are higher today.

has already been built rather than wait through the build-to-suit process. “There is no vacancy in many markets,” McKee said. “Users look and look and look and they struggle to find anything. Users must be very aggressive and make decisions about space quickly. They must take the space when it is available.”

As McKee says, when users need the space, they need the space. It’s why so many are willing to move into industrial space that

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RETAIL (continued from page 1)

Stefanie Meyer, principal and senior vice president with the Minneapolis office of Mid-America, said that many retail deals that were put on hold during the early days of COVID-19 did not die. Instead, many closed after the worst days of the pandemic passed. Today, high construction costs and rising interest rates pose new challenges for the retail sector, Meyer said. This might lead to another pause in retail deals in the Twin Cities market. But most of the retailers that are poised for a break? They’re the mom-and-pops, Meyer said. Most national retailers are still set to expand throughout the rest of this year, she said. “Overall, it’s been positive in the retail sector,” Meyer said. “There has been good activity. As of the last month or two, these challenges have become more prevalent. It is interesting to watch how this is playing out.” Other retailers that are doing especially well today include discount retailers like T.J. Maxx, Burlington and Ross Dress for Less, Meyer said. These retailers are now moving into smaller markets, serving as a replacement for retailers such as JCPenney and Shopco, which have left many of the same markets. Ross, for instance, announced that it planned to open 100 new locations in 2022. Retailers such as Five Below and Ulta Beauty are expanding, too, Meyer said. The exception? Larger spaces in malls. These spaces are more difficult to fill not only because malls themselves are often struggling, but because there are so many additional regulations about which retailers can fill these spaces. Mixed-use developments that feature retail spaces are also performing well throughout the Twin Cities market. The key, though, is that the developers of these spaces must find sites that work for all the uses at them. Developers who are building a multifamily tower with first-floor retail, for instance, need to make sure that they are building this development in an area where there is enough demand for both retail and apartment units. “If something is a bona fide site that works for both the retailers and the apartments, you can make it work,” Johnson said. “It has to be a really good site. Pulling off these projects is a little bit harder than developing straight retail or straight apartment buildings. For the right site, for an experienced developer, mixed-use can certainly work.” Johnson said that more mixed-use developments should pop up across the country, including in the Minneapolis-St. Paul market. Cities are expecting these types of developments, Johnson said. Minneapolis, for example, has a zoning ordinance that pushes for mixed-use projects.

Grocery-anchored retail continues to perform well.

“The city and the larger employers are trying to get people back downtown.” “When the project has a strong anchor tenant and the rest of the space is built around that tenant, that is usually a good investment in the community,” Johnson said. “But when you don’t have tenants in place and a city wants you to build a lot of retail space into a multifamily project, and the space is not well-thought-out, that can lead to problems. Developers might be susceptible to overbuilding the amount of retail space.” Meyer said that this is a lesson that successful retailers have learned long ago. “It seems that all the different types of retailers have realized that they need the omnichannel approach,” Meyer said. “They need to focus on their online presence and bricks-and-mortar. Retailers have been working through how those two sides of the business connect.” As Meyer says, online retailers have learned that they need bricks-and-mortar locations to support them. Others have learned the opposite, understanding that bricks-and-mortar locations need an online presence, too.

“Retailers are not feeling doom and gloom because of the Internet,” Meyer said. “There is more pressure on retailers today to get that right, to decipher how the online side of the business works with the bricks-andmortar side.” Retailers have had little choice but to embrace the online world, Meyer says. They need to offer enhanced delivery services, in-store pick-up and cubrside pick-up today to succeed. Consumers have embraced these services since before the start of COVID. The pandemic, though, only increased their appetite for these conveniences.

Neighborhoods near the CBD, such as the North Loop and Northeast Minneapolis, are thriving with plenty of retail activity, though. Meyer also pointed to the Highland Park neighborhood of St. Paul as an urban area that is seeing strong retail activity. The hope, though, is that downtown Minneapolis will rebound, if slowly at least steadily. Already, more people have returned to downtown offices for work. As that trend gains strength, activity should steadily return to downtown, helping the retailers and restaurants working in this market.

Retailers that don’t adapt to consumers changing shopping habits? They won’t last long.

The lack of labor remains a challenge, too, for retailers in the urban core as well as the suburbs of the Twin Cities, Meyer said.

“These consumer habits are going to stay,” Meyer said. “When it comes to quick-service restaurants or grocery stores, people want curbside service. They want people to bring their orders to them when they drive up, or they want to drive up to a pickup window after placing their order online.”

And there’s little hope that finding workers will get easier anytime soon, she said.

As in most cities, Minneapolis and St. Paul do face challenges when it comes to the retail sector. This is especially true in downtown Minneapolis, which is still recovering from the impact of COVID19, a lack of workers in downtown offices and the protests following the murder of George Floyd. At the same time, the specter of rising interest rates, combined with materials shortages and labor shortages, are combining to make life challenging for retailers, even those that have mastered the omnichannel approach. “Right downtown, in the heart of the CBD, retail has struggled,” Meyer said. “With the high vacancy rates in downtown offices, retail is struggling. The city and the larger employers are trying to get people back downtown. The more success they have, the better retail will perform in downtown.”

“It’s just such a struggle for retailers and restaurants today to get enough workers,” Meyer said. “You are seeing shortened hours from restaurants and retailers. The big malls have adjusted their hours. They are trying to get retailers to stay open later. But you need the staffing to do that. The retail market remains a little unpredictable because of the staffing issues.” And what about the rest of 2022? Will the retail market perform well in the Twin Cities area, even as inflation and rising interest rates spook consumers? Meyer said she expects a strong finish to the year, even with the ever-evolving challenges that retailers face. “Even though people aren’t back in the office, employers are continuing to hire,” Meyer said. “People have money and they are going to continue to spend. I don’t see any slowdown in the retail sector for the next couple of years.”

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fice, there is still no consensus on whether workers will comply. Collett said that this approach will work for some major companies, but others might lose employees who find jobs that offer more flexible working conditions.

FINANCE (continued from page 1)

“This means we should see a slowdown in activity to some extent, primarily in floating-rate deals,” Simon said. “Construction will have to slow down.”

“Flexible schedules are here to stay,” Collett said. “That will impact the demand for office space. Multifamily, industrial, seniors housing and healthcare remain the best investments. They have been the best investments for the last five years.”

A shock to the system Hal Collett, chief operating officer with the Minneapolis office of Colliers Mortgage, said that it was unrealistic to expect interest rates to remain as low as they had been. Such low rates were unprecedented. But that doesn’t mean that such a sudden rate hike by the Fed doesn’t hurt, he said. “It is a bit of a shock to the system,” Collett said. “We all anticipated that we wouldn’t be at all-time low interest rates for the rest of our lives. But it is shocking how quickly they moved.” As Collett says, Colliers Mortgage uses the 10-year Treasury to price many of its deals. That rate more than doubled after the Fed’s move. “That was a bit of a shock,” Collett said. “The cost of capital went up. Refinance activity that might have been in place suddenly went away.” Dan Trebil, managing director and senior vice president with the Minneapolis office of Northmarq, said that commercial real estate boasts some advantages that should help keep the deals and financing requests flowing, even with higher interest rates. As Trebil says, investors still need to put their money somewhere, and commercial real estate remains a favored investment type. “The good news is, there is still a lot of money out there,” Trebil said. “Real estate fundamentals are still good. People’s properties are still operating well. A quick run-up in interest rates like this has put the brakes on some refinances that might have made sense before but don’t make sense now. But there is still demand for commercial real estate.” Trebil, though, is realistic. He says that the rising rates have caused some investors who were ready to acquire new properties to pause their plans. These investors are waiting to see the full impact higher interest rates might have on commercial real estate. “There is a price discovery going on now between buyers and sellers, and lenders, too, on where to price debt now that rates have risen,” Trebil said. Collett describes the commercial finance market as a bit more tempered today than it was before the Fed made its big move. “People have had to recalibrate,” he said. “It has slowed down a little. It’s not as frothy as it was. But there is still a lot of business getting done out there.”

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Collett said that how investors view today’s higher interest rates might depend on how they long they have been sinking their dollars in commercial real estate. As he says, the last 10 to 15 years of lower interest rates has been the anomaly. Today’s higher rates? They are closer to the historic norm. Again, though, it’s been the suddenness of the jump in interest rates that has spooked many investors. “Interest rates of 2% or 2.5% on big commercial deals is not normal,” Collett said. “People are just surprised when it goes from 2.5% to 4.5% within 90 days. You would’ve loved to have seen the Fed get ahead of inflation and raise rates naturally. That way, there would have been no shock to the system. But that didn’t occur. The shock of the sudden increase sent people spiraling for a minute.” Financing requests still coming in With that being said, Northmarq remains busy, and commercial financing requests continue to roll in, Trebil said. And Trebil said that he expects this to continue. “It goes back to the fact that people still view real estate as an attractive asset class,” Trebil said. “A lot of money is still available out there.” At the same time, commercial real estate remains a safe place for investor dollars. This is especially true with the multifamily and industrial sectors. But Trebil said that more financing requests are coming in for hospitality assets today, too. He’s even seen an increase in requests for retail properties. The office sector? That one still faces plenty of uncertainty, Trebil said. And because of that uncertainty, there aren’t as many financing requests today for office investments or new developments. “A lot of the questions about office are still there,” Trebil said. “But a lot of properties are working through that as tenants’ leases expire. They are resizing. Their space needs might or might not have changed. As companies work through that, there

will be less unknowns about this sector. The big question is what those tenants who signed office leases before COVID will do now that their leases are coming up for renewal. Will they take 50% less space? Will they stick with what they have?” Even with office’s challenges, Trebil sees plenty of positives in the commercial financing business. He said that the progress he’s seen in the hospitality industry is especially impressive. “We weren’t talking about hotels at all a year ago, except as problems,” Trebil said. “The hospitality market is doing surprisingly well today. We are also seeing more financing requests for manufactured housing and self-storage. We are seeing a much broader spectrum in terms of the property types we are working with.” Still, multifamily and industrial continue to account for the majority of financing requests today, Trebil said. And that doesn’t look to change any time soon. Trebil said that multifamily remains especially strong, even in markets such as Minneapolis in which monthly rents haven’t been soaring quite as much. “The rental market has been really strong,” Trebil said. “Minneapolis doesn’t have the same kind of apartment rent growth as you see in a lot of other markets across the country. A lot of markets, especially down south, are seeing huge rent increases on a year-over-year basis. We don’t see those big numbers, but we are still an attractive market. We are a stable, steady multifamily market.” Collett agrees that multifamily and industrial remain the biggest draw for financing dollars. He said, too, that healthcare and seniors housing are also generating a greater number of financing requests today. In little surprise, Collett agreed that financing requests for the office sector were coming in at a far slower pace. While many big companies are demanding that employees come back to the of-

The hot housing market has boosted demand for multifamily assets, Collett said. Single-family home prices continue to rise. Renting for an extended period, then, makes financial sense for many. And because of this, developers are building more apartment developments and investors are gobbling up these assets as monthly rents rise. “Back in the day, people would get married, get a house, have 2.5 kids and get a dog,” Collett said. “That’s no longer the case. People wait longer to get married. They want to live near places with lots of amenities. They want a short commute to work. It’s all led to more demand for multifamily. From an investment perspective, multifamily is a very attractive option. It holds up very effectively.” Industrial is thriving today, too, and the requests for financing to fund projects and acquisitions in this sector continue at a steady pace. Collett said that he expects this sector to remain hot throughout the rest of this year and into 2023. “Industrial is a resilient asset that comes at a reasonable cost,” he said. “You don’t have a lot of overhead like you do with office assets. Industrial is an efficient investment. There are plenty of opportunities for investors in the industrial side.” When considering financing requests, and whether to approve them, Northmarq looks at several factors, Trebil said. Some of this has changed now that interest rates have risen. As Trebil says, depending on the financing source, it’s no longer possible to always get to 75% or 85% leverage on deals. “We are recognizing that we might not be able to get to the same dollar amounts because of where interest rates are,” Trebil said. “One of the factors we have to consider, then, is if the dollar amount being requested is realistic.” Otherwise, Northmarq still considers the same basic factors when evaluating financing requests: How strong is the sponsor and is the project being acquired or developed in a quality location?

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Back to the office? Do CRE workers want to return to their desks? By Dan Rafter, Editor

t’s clear when looking at the quieter streets in downtowns across the Midwest that many office workers have still not returned to their cubicles and conference rooms. It’s equally clear that no one knows when workers will once again fill these office buildings.

the property level. When COVID hit, it became challenging when only emergency personnel were allowed to go properties.” Those CRE workers who were allowed to do their jobs remotely found that they liked the flexibility of working from home, Kincaid said. They no longer had to make long commutes each day. They could spend more time with their families. They had more time to exercise.

But what about those working in the commercial real estate industry? Are they returning to the office? And do they want to? That’s what Keller Augusta, a search and advisory firm focused on commercial real estate, wanted to find out. The firm recently conducted its second Workplace Reboot Survey, charting the opinions of 600 CRE employees and employers on whether brokers, developers and other CRE pros are returning to the office, if now is the right time for this and what a return to the office will look like. What did this survey find? First, those working in commercial real estate are largely like most employees: They’re not eager to return to the office full time. Keller Augusta found that nearly half of all surveyed employees wanted to work one to days a week in the office.

This has forced many CRE employers to search for ways to provide at least some of that flexibility now, even as the United States has, hopefully, worked through the worst days of the pandemic. This might mean offering all CRE employees the option to work on a hybrid schedule, even those working in property management.

The conflict? Only 20% of the employers surveyed by Keller Augusta mirror that hybrid schedule. Kaitlin Kincaid, senior managing director with Keller Augusta, said that these results aren’t overly surprising. The COVID-19 pandemic changed the way many people think about work, and that includes those working in commercial real estate.

“Most commercial real estate salespeople and client-facing people were not sitting at a desk all day long before COVID,” Kincaid said. “But that doesn’t mean that commercial real estate companies didn’t face challenges with work-from-home. How do you manage a building from home? How do you build a building from home? How do you interact with tenants from home? A big part of the real estate industry is at

And employers who don’t give their workers some say in how many days a week they must come into the office? They might struggle to find and retain employees. “A company that isn’t doing this could lose strong employees to a different opportunity,” Kincaid said. “The flexibility and hybrid schedules are a major retention tool for companies today. Employees are prioritizing flexibility over compensation

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J U LY / AU G U S T 2 0 2 2 in many cases. Employers have had to respond to that.” Are employers in the commercial real estate world responding to this challenge? Kincaid said that they are. She said that most CRE companies are operating on a hybrid model in which employees work part of the time from home and other days in the office. “The companies that quickly said that we are in the real estate business and we want people back in the office five days a week are losing people at such a high rate that they are backpedaling and are now working on a hybrid model,” Kincaid said. But how permanent is this change? That’s a tougher question to answer, Kincaid said. Kincaid said that she isn’t sure that hybrid work models are here to stay in the commercial real estate business. Many companies might be offering this flexibility on a temporary basis to keep their most talented workers. But the key word here is “temporary.” “Companies might soon start to say, ‘If you can go to restaurants and bars and go on vacation, you can come to the office,’” Kincaid said. “Companies accommodated people who didn’t want to go into the office before we had vaccinations. Then

M I N N E S O TA R E A L E S TAT E J O U R NA L companies kept this flexibility because they knew if they didn’t offer it, they’d lose workers. But when we continue to move past COVID will this working arrangement be here to stay? I don’t know.” In the past, the only employees who asked for remote work were generally people with childcare responsibilities, mostly women, Kincaid said. That is no longer the case. Today, many workers are seeking the flexibility to work from home at least part of the time, with some saying they’ll never come back to the office five days a week. This doesn’t mean that commercial real estate offices are empty. Kincaid said that few commercial real estate companies have not brought their employees back to the office in some capacity. This is important, Kincaid said. Employers want their workers in the office at least part of the time as a way to foster collaboration and brainstorming. When everyone is working from home, that collaboration largely disappears. Even a hybrid work schedule limits collaboration to some extent, Kincaid said. And this is one of the big concerns that CRE companies have. “If everyone is in the office, that works well. If everyone is at home, that can

work, too. But if some employees are at home and others are at work, that results in missed opportunities to have everyone collaborate at the same time,” Kincaid said. “The employees at home miss out on that moment when they are walking by someone’s desk and that person wants to sit and talk about a project. That is the part that is missing. If that one person is not in that day, that person might miss out on that conversation.” Employers are concerned, too, about mentorship and training. It’s more difficult to train younger workers when they aren’t in the office. Those who entered the workforce during COVID have borne the brunt of this, Kincaid said. “They didn’t have the same kind of training,” Kincaid said. “Their internships were canceled. Their first year on the job they worked form their parents’ basement. They are lighter across the board on overall professional experience. They lack some of that mentorship that is so important.” What are CRE employers doing to bring their workers back to the office, at least on a hybrid basis? Kincaid said that many companies are improving the work environment. This might mean something as simple as providing regular lunches and

15 snacks onsite. Others are paying for their employees’ parking, while still others are bringing wellness services – everything from onsite fitness classes to mental health services – to their offices. Some CRE firms are holding more social events to encourage their workers to leave their homes and mingle with their fellow employees. This might mean company lunches and off-site activities. Others are organizing community service events to get employees interacting with each other again. “It’s about bringing people together again,” Kincaid said. “They are trying to recreate those relationships that employees had with their colleagues. They want their workers to say, ‘I enjoyed being with these people today. I want to go back.’” The keys to retaining the top CRE workers, though, remain the same today as they were before the pandemic, Kincaid. It’s about offering not only solid compensation but opportunity, too. “Employees want to feel as if they have an opportunity to advance,” Kincaid said. “It’s about creating a career path that employees can aspire to. Employees that have a desire to do more, will be happier at a company that offers them more professional opportunities.”

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The COVID game-changer: Healthy offices now a must-have, not a nice-to-have, for building owners, employers By Dan Rafter, Editor

ow healthy are offices across the United States? And are employees more likely to return to the office – at least on a part-time basis – if their employers take the steps necessary to boost indoor air quality, improve natural light and surround their work areas with green spaces?

Frank said that companies and their workers today are focused heavily on indoor air quality. It’s important, then, for building owners to improve the air-purification systems and air flow in their buildings. They need to bring more outside air into their workspaces.

These are questions tackled by Joanna Frank, founding president and chief executive of the Center for Active Design in New York City. The center is the operator of Fitwel, a certification system originally developed by the U.S. Center for Disease Control and Prevention that measures how healthy offices are.

This will boost not just the physical health, but also the mental health of building occupants, Frank said.

The health of indoor working spaces is a hot topic today, thanks in part to the COVID19 pandemic and the desire of employers to bring their workers back to the office after so many have worked remotely for more than two years. Consider these facts from the Center for Active Design: • Indoor air pollutants are generally two to five times greater than outdoor levels of air pollution. • Poor light quality and uninspiring views in offices cause employees to miss more time from work with illnesses. • Employees greatly benefit from natural, green surroundings, which are often a small investment for companies and building owners to make. Frank said that employers and building owners should invest in ways to improve the health of indoor office spaces, especially if they want to bring their workers back to their conference rooms, cubicles and desks. To do this, though, owners and employers need to understand what makes a building or office space healthy. Frank said that there are three keys. No one-size-fits-all solution First, building owners must address of the needs of the occupants of a building. “This lets you know that this is not a onesize-fits-all solution,” Frank said. “You have to respond to the needs of the users of a space.” Secondly, it’s important for employers and owners to enact strategies that have already been proven to produce cleaner air, happier employees and a more productive workplace. Employers should search out the evidence to prove that the investments in

High-quality natural light is important, too, for the physical and mental health of occupants, Frank said. And offices need outdoor light to flood their spaces, not artificial. Frank said that studies have shown that natural light is directly related to employee productivity.

healthy spaces they are making will provide results. And maybe most importantly, employers and building owners must measure the impact of their healthy workspace initiatives. They must also share these results with their tenants and employees. This means that building owners must be able to show their tenants that healthy initiatives are helping them attract and retain employees and that these workers are more productive now that healthy initiatives are in place. And employers must show their workers that their indoor air quality ratings are high, more outdoor light is bathing their offices’ interiors and that employees are calling in sick less often. The key here? Companies are not likely to pay more to lease office space just because it is healthier. And building owners are not likely to invest in green space, air-purification spaces and indoor gathering spaces just to be nice. Owners and tenants need to see that these healthier additions will pay off, whether this means giving owners additional tools to attract more tenants and charge higher rents or giving tenants the amenities they need to convince employees to return to the office or attract and retain the best talent. “The more research-based strategies you have promoting health, the higher the degree of tenant satisfaction,” Frank said. “The more things you do to promote health, the more likely you are to retain workers. You must be able to demonstrate those business outcomes if you are a building owner. Real estate needs that proof. Real estate demands that you can show that return on investment.”

Fortunately, Frank said, this isn’t difficult to prove. As she says, there has always been a direct correlation between the health of a business’ workers and their productivity. What has changed since COVID, though, is demand: Workers are now demanding healthier office environments. “People are now demanding that their companies be able to demonstrate how they are promoting and protecting their health,” Frank said. “Before COVID, we weren’t seeing individuals asking for a healthier work environment. That has now changed. That is a game-changer. We knew how to create healthy office spaces before COVID. We had a massive body of evidence showing how to do this. The difference now is that the workers are demanding this, which is persuading companies to explore their options.” And employees want proof that companies are taking steps to promote their health, Frank said. It’s no longer enough for companies to say that they are taking steps to boost indoor air quality, for instance. Today, they must show their workers actual statistics and test results proving that their claims are true. “It has changed from health being a niceto-have before COVID to being a musthave today,” Frank said. “It used to be that building owners would think about healthy building measures after they took care of everything else. But now, owners can lose their Class-A tenants to other buildings that are demonstrating how they are promoting health and wellness.” Creating the healthy workplace What are some of the steps, then, that building owners can take to boost the health of their tenants?

Another key is that building occupants have access to nature and green spaces. This could be a small rooftop garden or even the addition of indoor plants. “You can do this in any building,” Frank said. “It doesn’t have to be new construction. You can bring nature into a space very effectively by using green walls, plantings, whatever you have. Bringing nature into the office is very important for employees’ mental health and feelings of well-being.” What also matters is building trust, Frank said. This means that building owners and employers must show workers real numbers showing how effective their healthy measures are. And they must share these numbers even if they show that a particular measure isn’t having as much of an impact as they had hoped. And if the numbers show bad news? Employers and building owners must share their plans for replacing or improving whatever measures aren’t working, Frank said. Consider indoor air quality. Building owners and employers can’t just say that they are using a certain level of filtration. They must explain why they are using it, Frank said, and what their air-quality goals are. “People have become very educated about indoor air quality,” Frank said. “You need to provide details. You need to tell tenants about how much outdoor air you are bringing into the building. You need to be measuring indoor air quality in a consistent way. And what will you do if you are not achieving the results you want? That is a tough one for building owners. There is risk involved. You need to have policies in place explaining how you will respond if your system provides less-than-optimal air quality.”

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Healthcare delivery is evolving. Here’s what that means for CRE

By Curt Pascoe

Site Selection, Development in Ideal Locations

riven by advancing technology, increasing competition and pricing pressure, healthcare delivery is rapidly evolving to become more consumer-centric, moving off the hospital campus to an ambulatory setting. With this in mind, there is great opportunity for real estate developers to partner with healthcare providers to deliver facilities that align with these ongoing changes in medical care delivery. In short, the healthcare real estate landscape is being reconstructed to:

Finding large land parcels and building a new facility in an established community can present challenges. However, with some creativity, developers can find the perfect location for healthcare systems close to their customers. For example, Ryan recently combined two former residential parcels, secured zoning changes and obtained multiple easements in Mequon, Wisconsin, a suburb of Milwaukee, to make way for the Froedtert & the Medical College of Wisconsin Community Hospital, a 17,000-square-foot micro-hospital with eight in-patient beds and seven emergency room beds that opened earlier this year.

• improve patient accessibility and convenience by adding clinics and ambulatory surgery centers in neighborhood locations, • lower the cost of healthcare by increasing outpatient surgeries and procedures at ambulatory surgery centers, and • attract employees by creating amenity-rich modern spaces in easily accessible locations.

Properties formerly slated for retail use can also be ideal for outpatient clinics. For instance, Ryan developed the Edward-Elmhurst Health Center on a lot originally zoned for a corner retail store.

Convenient Locations for Patients and Employees Consumer preference for a convenient healthcare experience had large healthcare systems moving toward a “hub-and-spoke” model of care over the past few decades. Under this model, the hospital campus serves as a hub while clinics and ambulatory surgery centers (ASCs) serve as spokes and are developed in locations near patients’ homes. Over the past few years, the pandemic accelerated the need to increase the number of “spokes” for healthcare providers as a large percentage of the population suddenly began working from home and placing an even higher value on convenience. In addition, outpatient centers helped patients feel more comfortable about seeking medical care at smaller facilities as hospitals and emergency rooms were perceived to have a higher risk of exposure to COVID-19. Selecting sites close to retail increases visibility for the provider while adding convenience for patients. Proximity to a fitness center, daycare or grocer integrates the site of care into a customer’s typical travel pattern, encouraging proactive and preventive care. The momentum in healthcare real estate development is resulting in creating new outpatient space within busy, visible retail-office corridors to bring healthcare closer to patients at lower costs. However, adaptive reuse of buildings in highly developed areas also offer possibilities for healthcare providers. The Chicago area has seen several vacant grocery and other “big box” retail locations converted into medical space in the past three years. Outpatient Care Facilities to Meet Demand for Lower Costs

Opportunities in Healthcare Real Estate

“The momentum in healthcare real estate development is resulting in creating new outpatient space within busy, visible retailoffice corridors to bring healthcare closer to patients at lower costs.” Locating clinics in communities encourages residents to see their doctor more regularly, making it a more convenient, routine part of life. Insurance companies have also shifted their reimbursements to encourage preventive health care and outpatient services to reduce long-term costs. Edward-Elmhurst Health, one of Illinois’ larger integrated health systems, has been adding clinics to meet these needs.

Ryan is the developer, builder, property manager and owner of Edward-Elmhurst Health Center, which recently opened at the southwest corner of Route 53 and 75th Street in Woodridge. At the two-story, 36,100-square-foot health center, residents can see primary care physicians and specialists as well as receive urgent care, behavioral health counseling, physical therapy, laboratory services and diagnostic imaging.

Many other factors are driving the development of outpatient facilities as well. The 65-plus population in Illinois is projected to increase 17% by 2030, according to the U.S. Census Bureau. The number of outpatient surgeries continues to rise thanks to advances in surgical techniques, anesthesia and pain management. Same-day surgeries performed at ASCs cost less and have a lower infection rate than having surgery in a hospital, while offering easier parking and access to the facility. As a result, Medicare, Medicaid and insurance companies are eliminating their inpatient-only procedures list and expanding the number of procedures that can be provided at ASCs. Patient growth at ASCs is expected to grow by 25% by 2029, according to Vizient, Inc., a healthcare performance improvement company. For all these reasons, Ryan is aggressively pursuing deals for healthcare real estate development. It is an attractive, stable segment of commercial real estate, and we look forward to continuing to help make the healthcare experience more modern, holistic and wellness-oriented. Curt Pascoe is vice president of real estate development for Ryan Companies US, Inc., providing solutions for healthcare systems and provider groups throughout the Midwest. He advises clients in site selection and acquisitions, permits and approvals, and design and financing.

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M I N N E S O TA R E A L E S TAT E J O U R NA L

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How AI and machine learning are reshaping the way transit systems move traffic patterns By Timothy Menard

f the many ways artificial intelligence and machine learning are poised to improve modern life, the promise of impacting mass transit is significant. The world is much different compared with the early days of the pandemic, and people around the world are again leveraging mobility and transit systems for work, leisure and more.

traffic trends and suggest optimum routing for drivers in real-time based on specific traffic conditions. As a result of drastically improved processing power, transit system technologies are now used in various IoT (Internet of Things) devices to achieve real-time image recognition and prediction that took place in legacy data centers during the last half century. This new decentralized-focused architecture helps increase the implementation of machine learning and AI.

Across the U.S., traditional mass transit systems including buses, subways and personal vehicles have returned to struggling through gridlock, rider levels and congestion. However, advanced AI and machine learning solutions built on cloud-based platforms are being deployed to reduce these frustrations. Transportation presents exciting opportunities with AI Transportation is one of the most important areas in which modern AI provides a significant advantage over conventional algorithms used in traditional transit system technology.

AI promises to streamline traffic flow and reduce congestion for many of today’s busiest roadways and thoroughfares. Smart traffic light systems and the cloud technology platforms they operate on are now designed to

manage and predict traffic more efficiently, which can save money and create more efficiencies not only for the cities themselves, but for individuals. AI and machine learning today can process highly complex data and

Today’s recognition algorithms offer enhanced insight on the mix of density, traffic and overall rate of flow. Furthermore, these optimized algorithms can leverage data points by region resulting in a streamline pattern to reduce traffic problems while redistributing flow more optimally. Municipal transit systems can then make better decision-making power, and the control system TRANSIT (continued on page 22)

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has a much higher degree of failure tolerance as was previously demonstrated in legacy hub-and-spoke systems. AI is already impacting transit systems These technologies are already being deployed around the country. As one example, the Santa Clara Valley Transportation Authority in partnership with the City of San José, California, has been piloting a cloud-based, AI-powered transit signal priority (TSP) system that utilizes pre-existing bus-fleet tracking sensors and city communication networks to dynamically adjust the phase and timing of traffic signals to provide sufficient green clearance time to buses while minimally impacting cross traffic. Because the new platform leverages pre-existing infrastructure, it required no additional hardware installations inside traffic signal cabinets or buses. And unlike traditional, location-based check-in and check-out TSP solutions, the platform processes live bus location information through machine learning models and makes priority calls based on estimated times of arrival. The platform has so far improved travel times on VTA’s route 77 by 18% to 20% overall, equating to a fiveto six-minute reduction in signal delay. The cloud-based transit signal priority system combines asset management and automation to produce a system capable of

M I N N E S O TA R E A L E S TAT E J O U R NA L providing services to an entire region. Unlike hardware-based systems, this platform uses pre-existing equipment and leverages cloud technology to facilitate operations. This removes the need for vehicle detection hardware at the intersection because vehicle location is known through the CAD/AVL system. This enables both priority calls from greater distances away from signals and priority calls coordinated among a group of signals. Furthermore, the system provides real-time insights on which buses are currently receiving priority along with daily reports of performance metrics.

requires just one device for use that is a computer that resides at the “edge” and serves as the protective link between city traffic signals and the platform. It is designed to securely manage the information exchange between traffic lights and the cloud platform. It is the only additional hardware necessary, and depending on the existing city network configuration, the platform may receive vehicular data directly or via the city’s network using secure connections.

The advanced transit signal priority systems available today consist of two parts, a unit in the traffic cabinet and another unit placed on the vehicle. The transit priority logic is the same, regardless of the detection and communication medium. When a vehicle is within predetermined boundaries, the system places a request to the signal controller for prioritization. Since the original systems used fixed detection points, signal controllers were configured with static estimated travel times. Since travel times are dependent on several environmental factors, the industry implemented GPS based, wireless communication systems. With this method, vehicles found within detection zones replace the static detection points and the vehicle’s speed is used to determine arrival time.

The system’s method of placing priority calls to traffic signals is more sophisticated and is not constrained to fixed-point locations. Unlike the current state-of-the-art of placing priority calls from the detection of buses at specific locations that starts a pre-programmed time of arrival, this platform uses a “vectorized” approach. In mathematics, a vector is an arrow representing a magnitude and a direction. In this platform’s software, the arrow points in the direction of the traffic light and the magnitude is the travel time.

The platform allows cities to build upon current investments in infrastructure to deploy city-wide TSP. To enable safe and secure connections with traffic signals, each city

Sophisticated process for prioritizing traffic

When the system is set up, traffic signals, bus routes and bus stops all get a digital representation on this vector. This ends up producing a digital geospatial map where software is then able to track bus progression along bus routes. This results in a system that can dynamically place transit calls regardless of its location. Instead, the system makes precise priority calls based on the expected time of arrival which is the basis for all TSP check-in

J U LY / AU G U S T 2 0 2 2 calls supported by all signal controller vendors. And due to the nature of the tracking algorithm, any significant changes to ETA can be adjusted. For example, if a bus was predicted to skip a bus stop but didn’t, the system will detect the change and adjust the priority call accordingly. The combination of AI, machine learning and cloud-based technology all have great potential to not only improve the current mass transit system but reimagine it all together. This advanced technology is already proving how it can improve coordination between GPS, navigational apps, connected autos, and even taxi and ride-sharing services to efficiently combine into a single transit entity based on real-time data. In the not-too-distant future, it is expected that connected self-driving cars and trucks will be more prevalent on the roads and highways, offering even greater potential for AI to reduce both the duration and risk of rapid mobility. Timothy Menard is the Founder and chief executive officer of LYT, provider of cloud-based smart traffic solutions. LYT makes traffic lights smart by enabling them to see and respond to traffic. By doing so LYT can prioritize first responders and public transportation vehicles so they can get to their destinations faster and safer. The additional benefit is that it streamlines overall traffic flow helping to reduce congestion and emissions in high traffic areas.

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