Renters still embracing multifamily living in the Twin Cities
By Dan Rafter, Editor
Demand from renters is still far outpacing the supply of multifamily units in the Twin Cities and its suburbs, according to brokers working in this sector.
There are plenty of reasons for this. It’s difficult to buy a single-family home today, with the average price of a for-sale home now above $400,000 and mortgage interest rates still averaging more than 6.4% for a 30-year, fixed-rate mortgage.
These financial challenges have turned many potential homebuyers into renters.
And the CRE professionals in Minneapolis-St. Paul and its suburbs say that the demand-supply imbalance for apartment units isn’t about to slow anytime soon, especially considering that high construction costs and interest rates have slowed the development of new multifamily properties in the region.
Josh Wilcox, president of development, finance and investments with St. Louis Park, Minnesota-based Enclave, says that his company, an investment firm with in-house development, construction and management
services, focuses on the second- and third-ring suburbs of the Twin Cities.
And multifamily leasing activity here? It’s strong.
“In the suburbs, we are still seeing healthy demand for all the projects that we are delivering now,” Wilcox said. “There is a slight uptick in some incentives that might be required to keep up the leasing velocity. That is driven by all the new supply that was delivered during the last six months.
The Opus Group bucks the trend with new spec industrial facility in Minneapolis-St. Paul market
By Dan Rafter, Editor
Blame high interest rates, economic uncertainty and slowing demand, but whatever the reason, spec construction has slowed to a crawl in the industrial sector. But there are exceptions. That includes The Opus Group, which is building its own speculative industrial project in Minneapolis’ northwest market. The Opus Group on July 8 began construction on a distribution and light manufacturing facility in Dayton,
Minnesota, about 30 miles from the Twin Cities. The 132,200-square-foot speculative facility is rising at 17600 Territorial Road in Dayton, a 10-acre site easily accessible from the new Dayton Parkway Interchange and Interstate 94.
And further bucking the slowdown trend, the new facility has already landed a major tenant. TurbinePROs, a leading North American provider of field services for
rotating equipment manufacturers, has signed a lease for more than 87,000 square feet at the facility. This leaves about 44,000 square feet available for lease. Joe Mahoney, senior director of real estate with Opus Development Company, said that Opus long had confidence in the site’s location. The opening of the Dayton Parkway Interchange, though, only enhanced the location.
Current33, an apartment project in Hastings, Minnesota, from Enclave. (Photo courtesy of Enclave.)
Renters to page 26
CONTENTS
1
1
4
Renters still embracing multifamily living in the Twin Cities: Demand from renters is still far outpacing the supply of multifamily units in the Twin Cities and its suburbs
The Opus Group bucks the trend with new spec industrial facility in Minneapolis-St. Paul market:
Blame high interest rates, economic uncertainty and slowing demand, but spec construction has slowed to a crawl in the industrial sector. But there are exceptions.
The Twin Cities’ office sector? It’s a complicated one: When US Bank moved out of the Meridian Crossings office development in Richfield, Minnesota, it left behind 340,000 square feet of now-vacant office space.
8 Collaboration is the key to solving the workforce housing crisis:
The U.S. needs 5 million more homes than it currently has. And even those who have homes are struggling
10
Traditional healthcare remains strong, despite medtail attempts:
Some drugstores decided to experiment with the combination of product and service. The idea was to make healthcare more accessible for people.
6
So many hurdles: Lack of affordable housing remains a serious problem for Twin Cities renters, buyers
The United States doesn’t have enough housing. And it certainly doesn’t boast enough affordable housing. Not surprisingly, the same can be said of Minneapolis-St. Paul market and its suburbs.
12
14
Demand for new data centers keeps on rising:
Demand for data centers has never been higher, evidenced by a record-breaking first half of 2024.
Demand for new data centers keeps on rising:
The number of store closings in the United States has outpaced the number of openings through early August of this year
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Managing Director
National Events & Marketing Kaitlyn LaCroix kaitlyn.lacroix@rejournals.com
The Twin Cities’ office sector? It’s a complicated one
By Dan Rafter, Editor
When US Bank moved out of the Meridian Crossings office development in Richfield, Minnesota, it left behind 340,000 square feet of now-vacant office space. And that move is one major reason for the rough second quarter experienced by the Minneapolis-St. Paul office sector.
7767 Elm Creek Boulevard, Suite 210 Maple Grove, MN 55369
In its second quarter Minneapolis-St. Paul Office Market trends report, Newmark reported that the local office market saw negative absorption of 498,187 square feet from April through the end of June. Much of that negative figure, of course, came from the space left behind by US Bank.
US Bank’s move, though, doesn’t account for all the Twin Cities’ office woes. Newmark reported that office leasing activity in the Minneapolis-St. Paul market slowed to 886,793 square feet during the second quarter. That is down significantly from an average of 1.6 million square feet a quarter during the previous five quarters.
The reason? Newmark said that most companies are reducing the amount of office space that they occupy. They are also making longer-term decisions by either committing to new office spaces or renewing leases for longer terms.
Jim Damiani, executive managing director with the Minneapolis office of Newmark, said that despite these numbers, leasing activity remains resilient in the Twin Cities market. That’s especially true in the region’s higher-quality office spaces.
“What we are seeing, though, is that people are taking less space,” Damiani said. “We are still seeing leasing activity. But because companies are leasing less space, our absorption for the entire office market is negative right now.”
Damiani, though, said that office leasing activity might be rising soon. During the early years of the COVID-19 pandemic, tenants were closing six-month or 12-month office leases. Many of those companies are now ready to sign longer-term leases and end their string of shorter-term office leases.
As Damiani says, tenants were “kicking the can down the road” instead of making long-term decisions during the pandemic. That has changed, and a growing number of companies are ready to lock into long-term leases today.
“We are going to see a lot of lease expirations coming at the same time,” Damiani said. “That is good or bad, depending on who you are.”
Newmark reported, too, that now that the North Loop Green mixed-use development is complete, there is no new office space under construction in the Twin Cities market.
But what about the future? Newmark predicts that office vacancy rates throughout the Twin Cities market are expected to continue to rise through 2028. Newmark forecasts that the local office vacancy rate will top out at more than 30% at this time.
Not all office properties will experience the same challenges, though. Damiani said that higher-quality office space with modern amenities is attracting more tenants. It’s the older properties that don’t boast modern amenities that are struggling the most.
Office space is filling quickly at North Loop Green. (Photo courtesy of North Loop Green.)
Jim Damiani (Photo courtesy of Newmark.)
So many hurdles: Lack of affordable housing remains a serious problem for Twin Cities renters, buyers
By Dan Rafter, Editor
The United States doesn’t have enough housing. And it certainly doesn’t boast enough affordable housing. Not surprisingly, the same can be said of Minneapolis-St. Paul market and its suburbs.
Renters and buyers alike are struggling today to find affordable housing in their communities.
Blame it on the high prices for single-family homes. The higher mortgage interest rates aren’t helping, either. Both are preventing many renters from making the leap to homeownership. This only increases the demand and need for more multifamily housing.
But when this housing is built? It’s often targeted to wealthier renters. That’s because it’s so difficult for developers to recoup their money on affordable housing. They simply can’t charge high enough rents to offset their construction and operational costs.
What are the solutions? Minnesota Real Estate Journal spoke with two affordable-housing advocates about the challenges in this arena and about what can be done to increase the supply of affordable multifamily units in the Twin Cities market.
Here is some of what they had to say.
Anne Mavity Executive Director
Minnesota Housing Partnership
St. Paul
Can you tell our readers a little about what the Minnesota Housing Partnership does?
Anne Mavity: Our mission is to make sure that everyone in Minnesota has a home. We conduct housing research and use that research for policy development. We help lead coalitions dedicated to bringing more housing to the state.
We are a hub in the state for driving affordable-housing solutions at the state level and in the state legislature. We provide direct technical assistance for rural communities and Native American communities across the state. We provide housing experts for communities that are too small to have that expertise. We help communities identify solutions to their housing needs and help them write applications for new housing.
Sound on 76 in Edina. (Photo courtesy of Aeon.)
The Vision To See Banking Differently
Discover Bridgewater Bank.
Collaboration is the key to solving the workforce housing crisis
By Donald Bernards and Jolena Presti
The United States is experiencing an affordable housing crisis.
The U.S. needs 5 million more homes than it currently has. And even those who have homes are struggling, as 40% of renters are cost-burdened, while housing prices are rising faster than wage growth in 80% of U.S. markets, according to the Kenan Institute of Private Enterprise.
People may disagree about what the path forward looks like, but any path forward must include cooperation. The federal government, state governments, local jurisdictions, the private sector, not-for- profit organizations – there is plenty of opportunity to work together to manage the housing crisis. Yet, there is no one-size-fits-all solution. Collaboration between the housing industry and all levels of government remains the key to determining a tailored solution to the housing emergency facing each individual community.
Examining a critical connection
Understanding the relationship between the workforce housing crisis and local economic development needs is an important first step toward ultimately developing a plan, policies and solutions to bridge the gap and providing housing options for our workforce. If communities do not have sufficient housing for their workforce, there will be an ongoing challenge to achieve economic growth.
At a high level, cities need affordable, available housing to attract workers to their community in the first place. A city can have hundreds of schools, daycares, entertainment complexes and restaurants, but if
perspectives: our public sector practice and our housing development practice. Our specialized teams understand and empathize with communities that are rapidly trying to come up with answers amidst unique situations, seeking to digest and manage all the complexities related to housing development, including site reuse and redevelopment for housing, public sector programs and incentives, project financing,
Collaboration to page 22
Image by ddzphoto from Pixabay.
Traditional healthcare remains strong, despite medtail attempts
By Jake Allen, Matthews Real Estate Investment Services
In recent years, some drugstores decided to experiment with the combination of product and service. The idea was to make healthcare more accessible for people. Someone could walk into a store to pick up necessary homecare or grocery items for the week, while also attending to their medical needs during the same trip.
Walmart, Walgreens, and CVS were some of the major retailers that began taking part in this experiment. Walmart launched Walmart Health in 2019, with the goal of delivering affordable healthcare to its customers. This launch included the opening of 51 health centers that focused on medical, dental, and behavioral health services across five states, along with virtual care options.
CVS created MinuteClinic facilities to branch out its healthcare operations. The first locations opened in the Midwest, and have since expanded across the country. Services here include family healthcare that is overseen by nurse practitioners. The business model for MinuteClinic locations is to meet consumers’ demand by offering accessible medical care that is high quality.
Walgreens began its expansion into the medical segment by acquiring VillageMD in 2021. The firm invested more than $10 billion in this acquisition to begin the development of doctor-staffed clinics at its pharmacies. This trade granted Walgreens a stake of more than 60% in VillageMD, which operates the clinics.
Development of retail health clinics
Walmart
In launching Walmart Health, Walmart’s goal was to create a super center for healthcare, such as primary care and dentistry, by adding clinics to its retail stores. The firm also announced it would include transparent pricing with its health model, which meant that the price of its services would be added to its website for customers to view.
The first of these clinics opened in Georgia in 2019, with expansions as far as Arizona occurring in 2023. Walmart Health’s model was attractive to customers at first because it was a subscription service that wasn’t reliant on insurance; however, as the clinics continued
to be developed, it transitioned into a more insurance-based model.
The shift to a new model was due to the company stating that the subscription service was not meeting the goal of Walmart Health. There were too many differences between the Walmart Health model and the Walmart stores. This shift is one reason that could have dissuaded customers from seeking out health clinic services here.
After five years of operation, Walmart Health made an announcement in April 2024 that it would be closing all 51 of its health centers, as well as its virtual care option. The company decided that its clinic operations were not a sustainable
to page 23
Traditional
Image by HeungSoon from Pixabay.
Demand for new data centers keeps on rising
By JLL
Demand for data centers has never been higher, evidenced by a record-breaking first half of 2024. These facilities are foundational to how modern society functions, placing increasing importance on ensuring land, power and talent are available for continued operations.
According to JLL’s new U.S. Data Center Report – Midyear 2024, the colocation data center market doubled in size in the last four years amid growing concerns that this rapid growth is straining an already-taxed U.S. power grid and an impending talent cliff.
This booming demand shows no sign of slowing down at mid-year. Vacancy set a record low of 3%, and occupancy has increased at a 30% compound annual growth rate (CAGR) since 2020. Asking rents increased between 13% and 37% year-over-year, depending on the lease size.
“There appears to be no ceiling for how high this data center demand is going to reach,” said Andy Cvengros, Managing Director, Co-Lead of U.S. Data Center Markets, JLL. “Nearly all existing data center capacity is leased up, and pre-leasing currently stands at 84%. We anticipate vacancy will continue to trend to 0% over the next few years. This level of demand is currently unmatched by any other property type, and I cannot stress enough the importance of planning and being proactive about your IT needs years in advance.”
Insatiable demand translates to record-breaking first half
At midyear, the U.S. has 12 GW of existing colocation data center capacity, which doubled since 2020. Northern Virginia continues to reign supreme as the
largest U.S. market by a factor of four and accounts for nearly half of the capacity growth in the last four years. Southern and western markets like Austin/San Antonio (309% growth), Salt Lake City (218% growth), Atlanta (119% growth) and Las Vegas/Reno (137% growth) were the fastest growing on percentage basis.
Colocation completions increased to a record 1.3 GW in the first half of 2024. The Northern Virginia delivered 519 MW, leading in completions again. Additionally, the Northwest and Austin/San Antonio markets delivered six and four times their traditional levels, respectfully.
Absorption in the first half of 2024 reached a record of nearly 2.8 GW, a ninefold increase over 2020 levels. Absorption was concentrated in four markets, Atlanta, Northern Virginia, Chicago and Phoenix. This is the first time Atlanta took the top spot (815 MW), surpassing Northern Virginia (603 MW).
Atlanta is also the top market for colocation capacity under construction for the first time following several years of heightened investor interest, while Northern Virginia slipped to 5th place amid power grid constraints.
Image by Akela999 from Pixabay.
Coresight Research: More retail store closings than openings so far in 2024
By Dan Rafter, Editor
The number of store closings in the United States has outpaced the number of openings through early August of this year, according to a new report from Coresight Research. These closings have been fueled by a rise in bankruptcy filings by retailers.
According to the Aug. 9 report, 4,548 stores had closed so far this year. That number slightly beats the 4,426 announced store openings during the same period.
Coresight Research runs a weekly tracker charting the number of store openings and closings in the United States. The Aug. 9 report marked the first time this year that retail store closings are outpacing openings.
One big reason for the higher number of closings? This most recent Coresight report included the news that Columbus, Ohio-based Big Lots plans to close 302 stores in 2024.
Other big-name companies announcing store closures this year include Conn’s HomePlus, Rue21, Express and restaurant chain Buca di Beppo.
The Conn’s closures are significant. The furniture chain filed for bankruptcy protection in July and announced that it plans to close more than 500 of its stores. Family Dollar, though it has not filed for bankruptcy protection, plans to close 620 stores this year, while national pharmacy chain CVS says that it plans to close 315.
These store closings doesn’t mean that we are entering a retail apocalpyse, with the number of closures this year far smaller than what the industry has seen in the past. Consider 2020, the height of the COVID-19 pandemic. In that year, retailers closed 9,698 stores while opening just 3,704, according to Coresight.
In recent years, though, retailers were opening more stores than they were closing. Coresight reported that in 2023, the country saw 5,843 openings of retail stores compared to 5,548 closings.
Photo courtesy of Pixabay.
Damiani said that he sees this trend in downtown Minneapolis. He pointed to the recently completed North Loop Green mixed-use development. The office component of this project is doing well, attracting a steady stream of tenants.
Then there’s the 10 West End office development in suburban St. Louis Park. This new office property is filling up quickly, Damiani said. Demand here is so strong that the property’s owners have been able to charge higher-than-expected rents.
“Those office properties that give companies a chance to offer their employees the best experiences are doing well right now,” Damiani said. “We are seeing a demand for quality office space. If companies can now fit into 20,000 square feet when before the pandemic they needed 50,000, they can now spend more per-square-foot and take the nicest space in town.”
And what about the workforce? Are employees more likely to commute to their Twin Cities-area office
if the space in the building is of a higher quality? Are they more likely to come into the office at least on a part-time basis if they are commuting to a building with on-site healthy food choices, a high-end gym and comfortable collaboration spaces?
Damiani said that they are.
“You have to ‘earn the commute,’ as they say,” Damiani said. “You want to make sure that you can give your employees something that they can’t get at home. Maybe they don’t have that walkability at home.
North Loop Green is an example of a mixed-use development with a successful office component. (Photo courtesy of North Loop Green.)
They can’t walk to a coffee shop or restaurant. If you move your company to an area with walkability, that might be something you can give your employees that they currently don’t have access to.”
Damiani points to the building from which he works. The property has a large third-floor space with couches, fireplaces and a rooftop deck. It’s a nice place to get away for an hour to catch up on emails.
“The hybrid work schedule is here to stay,” Damiani said. “You need to find some way to bring your employees back to the office at least on a hybrid schedule. These amenities are one way to do it.”
Damiani said that some office building owners are getting especially creative when it comes to creating spaces that will entice employees into the office and tenants into their buildings.
He said that some building owners are adding pickleball courts to their properties, while others are adding hotel rooms in their buildings to accommodate workers that might be flying in from out of town.
“They are thinking out of the box,” Damiani said. “They are coming up with new, creative ways to make the office experience that much better.”
The newly completed North Loop Green is a good example of an office property that is designed to attract both tenants and employees. The property contains a hotel with a rooftop pool and fitness center. Office tenants in the building get access to these amenities. North Loop Green also offers parking, another key perk for employees today.
10 West End in St. Louis Park boasts a high walkability factor, located close to restaurants and retailers, another perk that is attractive to both tenants and their workers. 10 West End also offers free parking while its interiors are flooded with natural light, creating a healthier working environment.
But what about older office buildings that lack these amenities? What is happening to them?
Damiani said that some of the older office stock in downtown Minneapolis has been converted to multifamily residential. The problem with this solution is that so few office buildings work for conversions: They need the right floorplate and location. Not every outdated office building, then, can be converted to a different use.
And some of the most troubled office properties in the Twin Cities region are large suburban office campuses, which can’t be easily converted to multifamily use.
“You used to get 5,000 people into these campuses. Then COVID hits and only 100 people are coming in. That’s a big challenge,” Damiani said.
While many of these larger suburban office complexes aren’t prime candidates for conversion, Damiani did point to the former Prudential office campus in Plymouth. The Plymouth City Council earlier this year approved plans to turn the office campus into a mixed-use development that will include multifamily properties, healthcare uses and a grocery store.
“Mixed-use developments are very successful today,” Damiani said. “The live/work/play concept is popular. It’s just an example of how creative developments can succeed today, even with the challenges developers face.”
How hard is it for renters and buyers to find affordable housing in Minnesota today?
Mavity: Across the country we do not have enough housing. We are seeing this in Minnesota, too. In every county in Minnesota, we need more housing. We need housing of every kind in every corner of the state.
The Twin Cities area is a hub of the state. It’s also a hub that showcases the disparities of what people can afford and how much housing costs. We track several data points to understand when people are paying too much for housing. Overpaying for housing is a big issue in the Twin Cities. It doesn’t just stress a family’s budget. It stresses our larger community, too. When people are spending too much on housing, they don’t have enough money for transportation and health-
care. That makes it hard for kids to thrive in schools. It makes it hard to develop a good workforce.
It makes sense that those with lower incomes are the most stressed. In the Twin Cities market, 83% of low-income people are paying more for housing than they can afford. That is a stunning statistic.
Why is the problem so severe today?
Mavity: We are in this mess because of things that happened almost 20 years ago. We are still trying to make up for the collapse in the production of new housing units that happened during the recession in 2006 through 2008. We are trying to catch up to that housing gap. The housing gap is particularly acute with our lowest-income households. It’s difficult for them to find rents that they can afford.
We track the most in-demand jobs. Where is job growth happening? This is the first year in which those working in the higher-paying jobs were not earning enough to afford a basic two-bedroom rental apartment. This is the first year in which a registered nurse is not earning enough to access homeownership. Whether we are looking at homeownership or rentals, we are not producing enough homes. The squeeze is happening both in single-family and multifamily homes.
How have higher interest rates and construction costs exacerbated the problem?
Mavity: It’s tightened the flow of capital that can go into projects. Everything costs more because of higher labor costs, materials costs and property insurance. Property insurance is a big one.
There is a nervousness in the housing market. There are all these higher costs and not as much money flowing from the banking system because interest rates are so high. Everything has slowed down.
In Minneapolis, part of the slowdown is also because of the court review and hold on the 2040 plan. That plan gives the city the tools it needs to increase density in certain neighborhoods and build more housing. The Minnesota Court of Appeals earlier this year reversed a decision by a lower court to put a hold on that plan. It’ s good that the city can move forward on that plan now. Minneapolis was a leader in creating units of housing. That ruling by the lower court froze hundreds of housing units that were in the pipeline. Minneapolis is such a driver for what is happening in this region. If housing is slowed in Minneapolis, it impacts the entire region.
Goldenrod Glen in Big Lake. (Photo courtesy of Aeon.)
Do developers need financial assistance from government and public sources to build affordable housing?
Mavity: There is a book called Homelessness is a Housing Problem (by Gregg Colburn and Clayton Page Aldern) that says that of all the factors that people think cause homelessness none of them are as statistically significant as the supply of available housing. The supply of housing is the biggest determinant of homelessness. The problem here is that the market can’t produce enough housing, with all the costs that it takes to produce that housing, for what someone working a full-time minimum-wage job can afford to pay. That is the gap that needs to be filled.
Yes, developers do need assistance to build these projects. But it’s more than just that. We are losing the battle to create these homes project by project. The neighbors might say that a project doesn’t fit the character of their community. That sort of neighborhood opposition is one of the barriers that is preventing the market from unleashing market innovation and production to address this housing shortage. Our whole system is set up in a way that gives the power to stop a project to the person down the block.
The Minnesota Housing Partnership is helping to convene a statewide coalition, a multi-sector coalition of people to help address the housing supply and remove barriers that add time and cost and, frankly, often stop good projects from happening. We are working on zoning and land-use reforms at the state level. It’s about trying to ensure that communities can guide
and steer their vision but also make it easier to release market innovations that result in more housing. Are there any positive signs in the affordable-housing market?
Mavity: Housing is now recognized as a top-tier issue in the state. If Minnesota wants to be the best state in the nation for children to thrive, we need more homes. If businesses want to expand, they need housing for their workers. Bringing more affordable housing to the state has support on a bipartisan level. People want to solve this issue.
Here is one easy solution: If an area is already zoned for commercial use, allow multifamily housing to be built there. There is no reason not to allow for that.
There are three big levers that we can use to find solutions. First, we can make land-use and zoning reforms so that it’s easier and faster to get approval for a project. Second, we need robust resources to fund housing solutions for the next generation. If we want housing to be affordable, we need public subsidies to bridge that gap. The third area is rental assistance. Low-income people need help to pay their rents. We helped create a rental assistance program last year in the metro area through the metro sales tax. We have to make sure that gets funded statewide.
Eric Anthony Johnson President and chief executive officer Aeon Minneapolis
Anthony Johnson:
Eric Johnson (Photo courtesy of Aeon.)
that we have provided in the Minneapolis area. Aeon has been around close to 40 years. It came to be when the convention center was built and displaced so much housing. Our mission was to provide housing for the people who were losing their homes. We focus on everything from tax credits and supportive housing to seniors housing. We have about 1,000 affordable units in downtown Minneapolis. We also have units in Brooklyn Park, Edina and Bloomington. We are constantly looking at ways to address affordable housing issues here.
We operate heavily in what is known as naturally occurring affordable housing. These are older buildings built in the mid to late 1960s. We preserve that housing, maintain them and often renovate them. These properties usually come with significant capital-improvement needs. Private investors often buy them, fix them up and raise the rents. We buy those properties when we can. We try to fix them up with the goal of preserving them as affordable housing.
How difficult is it to provide affordable housing in today’s market?
Johnson: There is a supply and demand disconnect. For years, there wasn’t enough housing being built. The shortage is a significant one. We have to build at least 18,000 new units a year just of regular, market-rate housing. Then you drill down further. By 2030, there is a need in the Minneapolis-St. Paul region for 38,000 more units of affordable housing. Some progress is being made, but the challenge is daunting. There is a significant disconnect between the incomes that people here are earning and the cost of housing in this region. Some would argue that we have an income problem. People don’t make enough to pay housing costs.
Part of the problem is that everyone treats this as a zero-sum game. It’s a fight, with developers vs. the
community and the community vs. the government. We need to reset how we engage with each other to find solutions to this housing challenge. That is the big challenge that we are facing. The impact of not having enough housing is so significant. It impacts the economy. It impacts the health of individuals. We have to break free of this zero-sum-game thought pattern so that we can work together in a more creative way. We must create new strategies.
What are some of the more creative approaches that developers, communities and governments can take to solve the housing shortage?
Johnson: We are dealing with a housing system that has been static. On the affordable housing beat, we have a few select tools. We can turn to the Low-Income Housing Tax Credit. But that’s a very competitive process. It’s a limited tool. There’s also the public housing system. Those systems that are still operating have significant backlogs. The bulk of public housing is moving more toward a voucher system. What is left is for local governments to use their limited money to subsidize developers. Unfortunately, there are not enough subsidies to adequately address the need for more housing.
We are in this age of change and disruption, yet there is a serious lack of creativity in the affordable housing space. We have restrictive zoning. We have high land costs and construction costs. We have high labor costs. We face NIMBYism. We have not come up with creative solutions. What we need is a whole other level of education. Policymakers need to work with communities and up our game when it comes to educating people about the benefits of affordable housing. We have to remove some of the subjective nature of this conversation.
We must show courage in coming up with new ideas. Let’s try some pilot programs. Let’s educate
people about the link between affordable housing and economic stability. Let’s identify developer partners and align our resources to get this done. The numbers are staggering, but the way in which we have been attacking this problem is by doing the same things over and over.
You mentioned NIMBYism. How serious of a problem is this for affordable housing?
Johnson: NIMBYism can stop projects in their tracks. People worry that affordable housing will lower their property values. But there is no research that shows that affordable housing will lower the value of your property. NIMBYism can be a very loud voice. Without us educating people, it’s difficult for elected officials to wade through this. Neighbors need to understand that the people who need affordable housing are working at the hospital. They are working regular jobs. For some reason, the narrative around affordable housing is so skewed. The idea of it scares people.
Are the challenges in the single-family housing market putting additional strain on the existing multifamily properties in the Twin Cities?
Johnson: Given the price of a single-family home in the Twin Cities area, I don’t know how people with low to moderate incomes can ever afford to buy a home, unless there is some massive subsidy involved. That says to me that we are going to need quality multifamily units that rent at a price point that people can afford. If you can’t provide that, you will see an increase in homelessness.
There are increased costs to build housing. Insurance costs are going through the roof. Material prices are high. All these issues are making it more difficult to sustain the affordable housing we have and to build new. We hope interest rates will go down. But that’s not guaranteed. You travel all over the country and you’ll see the same thing over and over.
construction risk management and every aspect of real estate.
The intersection of these firm specializations viewed through a workforce housing crisis lens can employ solutions to create a road map for long-term success.
Understanding the specific issues within your community:
1. Recognize that housing is part of economic development. While most people in the economic development industry are focused on growth strategies and re-development planning, it is common for people to lose sight of the housing element. Approaches for community growth in terms of economic and redevelopment strategies and incentives programs can lead the path forward.
2. Engage with your employers. An underrated strategy for creating jobs in your community is to organize an open forum that encourages local businesses to talk about what they need.
3. Study the housing market. A thorough housing assessment (including a gap analysis) should help further highlight the current state of the region while determining what the community needs to do from a housing standpoint.
4. Establish a housing taskforce. This taskforce should include representatives from both the public and private sector and not-for-profit organizations. Together, the taskforce should form an action plan with specific strategies that the local government and housing developers can take to turn the community’s issues into action.
5. Determine the funding options. Configuring your ability to leverage different funding options is like solving a puzzle. You must get creative and examine every alternative to maximize your funding options.
6. Prepare the developers for success. Along with clear processes, communities can also set the stage for workforce housing development through updated zoning codes and considering ways in which higher-density housing and other factors play a role in increasing development.
Communication-based solutions
1. Community awareness. Housing professionals should sound the alarms throughout the community, making it clear that a lack of workforce housing will ultimately result in fewer jobs and less growth in the community.
2. Strategic networking. Staying connected with economic developers is a necessary step. If you make a concerted effort to bring them into your community, you’ll quickly find that economic developers have many similar interests.
3. Connect with statewide housing agencies. Statewide housing agencies are a key resource for connecting the state and local governments with the economic developers in the region.
Next steps
These are basic ideas of how to get started, but obviously the workforce housing dilemma isn’t going to be solved with easy answers or simple steps. Connect with our specialized teams If you would like to discuss tailored solutions for your community and address your workforce housing challenges.
Donald Bernards is principal in the real estate group of Baker Tilly, working from the company’s Madison, Wisconsin, office. Jolena Presti is managing director with Baker Tilly’s public sector advisory practice and works from the company’s Milwaukee office.
business model. It also stated that the escalating operating costs to continue Walmart Health created a lack of profitability that made its healthcare business unsustainable. Upon announcing the closure of Walmart Health, the company declined sharing possible losses of the closed clinics.
Walgreens
Apart from Walgreens’ notable acquisition of VillageMD, the company also partnered with Pearl Health in 2023 to aid its retail healthcare model. Pearl Health is a tech company that aims to provide insightful solutions to healthcare. Its model is based on primary care physicians transitioning away from value-based payments in order to reduce the cost of care for patients.
Pearl Health stated that the goal of this partnership was to allow Walgreens to reach communities faster, as well as create affordable care options for patients in those communities.
Despite Walgreens adding VillageMD and Pearl Health to its healthcare expansion, these plans have not been successful for the retailer. During fall 2023, Walgreens announced its plans to close 60 underperforming clinics operated by VillageMD, and it will also exit five markets. These closures are the result of a $1 billion cost-cutting initiative under Walgreens CEO Tim Wentworth.
Although the company saw revenue growth in its U.S. Healthcare division, which includes VillageMD, the unit reported an $83 million adjusted operating loss. Walgreens now aims to create more profitable growth and improve cash management through a
focus on providing patients with the best value possible. The firm’s closures reflect broader strategic shifts as the company seeks to align its cost structure and improve profitability in the drugstore segment.
CVS
CVS began its transition into retail healthcare by opening MinuteClinic. The goal of this business model was to mimic the services Urgent Care provides, but at a fraction of the cost. It included virtual care, as well as services like lab tests, vaccinations and prescribing medications.
MinuteClinic developed more locations than Walmart and Walgreens, with 1,100 locations throughout the country. However, this venture is starting to close down clinics, similar to Walgreens and Walmart. So far this year, CVS has announced that several MinuteClinic facilities will shut their doors. In just the Los Angeles area, 25 locations will be closed.
A spokesperson stated that these closures will support future growth and create the next evolution of community health destinations for the company. After these closures, CVS will now align its practices to ensure it is meeting the needs of its consumers and patients.
Factors contributing to the struggles for MinuteClinic properties include issues with patient referrals, long wait times, and misdiagnoses, leading to dissatisfaction among patients. Some patients have reported being directed to emergency rooms for conditions
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that could have been treated in the clinics, resulting in frustration and additional costs.
Traditional medical locations remain resilient
These retailer experiments only solidify that healthcare remains strongest in dedicated medical facilities, rather than stores that focus on the product over service.
Medical office buildings have always performed strongly as this sector consistently notes positivity, even amid economic headwinds. These locations draw in investors with long-term leases, high occupancy, and stability.
During the first half of this year, properties on average sold for $288 per square foot, which is 42% above non-traditional medical offices that sold for $202 per square foot. Phoenix led the nation in total investment, with $373 million in its trailing four-quarter investment volume as of the first quarter. Atlanta and Washington, D.C. followed, at $366 million and $346 million, respectively.
After the challenges in expanding to retail, most primary care will continue to be delivered where it always has. Health systems can provide the necessary expertise in delivering high-quality care within local communities, while the retailers can provide health system incumbents with expertise in customer service and convenience.
Although CVS, Walgreens, and Walmart have historically aided the traditional healthcare industry by
Traditional to page 25
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Pictured: Twelve22 Apartments, St. Paul, MN
“Colocation capacity under construction in the first half of 2024 has nearly levelled off at 5.3 GW, which still equates to an astonishing $53 billion-plus in asset value,” Matt Landek, Managing Director, U.S. Data Center Work Dynamics and Project Development and Services Lead, JLL. “While leveling off may speak to concerns about power loads, construction is still at extraordinary levels, having increased more than seven times in just two years, and both primary and second markets continue to expand despite a perception of limited power capacity.”
Is the U.S. power grid tapped out?
Data center power loads are increasing, with new projects regularly requiring 100 MW and some new developments eclipsing 1 GW. The data center sector is not alone in its increasing power appetite. Manufacturing reshoring and electric vehicle adoption also challenge the grid. While data center power demand has been growing at a 21% CAGR recently, the sector only accounted for about 3% of total U.S. power in 2023; however, if trendlines hold, that percentage is projected surpass 11% in the next decade.
“In the near term, the U.S. power grid is not in danger of running out of capacity, but investments need to be made in expanding the existing and adding new substations in critical areas for data center development,” added Cvengros. “The process of power procurement needs to be greatly improved administratively and in the field. Egregious power load requests and significant transformer delays are curtailing future data center growth.”
The process of establishing a power connection to the grid currently can take three to five years. As a temporary measure, developers are resorting to interim energy solutions like fuel cells or supplemental natural gas turbines to kickstart projects within shorter timeframes. Furthermore, development is now spreading to secondary markets and rural regions,
where power capacity is more accessible. In certain instances, hyperscalers have acquired power plants to secure long-term and reliable power sources. AI represents large share of demand
AI and Large Language Models (LLM) like ChatGPT have the potential to revolutionize many aspects of our lives. AI capital expenditures in recent years are estimated to be more than $300 billion, with investment levels accelerating in 2024. Industry estimates for current AI data center demand vary widely, from 10% to 40% of overall absorption, with most estimates suggesting that AI represents roughly 20% of new data center demand.
“The growing investment in AI is translating into significant data center demand and revolutionizing the way data centers are designed,” said Andrew Batson, Head of U.S. Data Center Research for JLL. “AI runs on the latest generation GPUs, which require more power to operate and emit more heat, so newer data centers require specialized cooling methods like rear door heat exchangers or direct-to-chip liquid cooling.”
Labor challenges are a growing focus
Finding the right talent remains a challenge for operators, a key issue amid rapid sector growth. An estimated 10% of data center roles at existing facilities are unfilled, more than twice the national average across all industries. Given the technical nature of data centers, only about 15% of applicants meet the minimum job qualifications, and positions can take 60 days or more to fill. Data center development is also expanding into rural areas with limited labor pools, presenting a unique set of staffing challenges. Attrition rates, especially among younger workers, also remain an issue, and 33% of the technical workforce is at or nearing retirement age, a number likely to double due to demographic trends.
“Data centers are a distinctive asset class that demand specific skill sets to ensure optimal performance,” Landek added. “The industry cannot grow for the future if it cannot retain current employees and attract new ones. Employers must focus on providing
positive experiences for employees and implement new approaches to solving staffing challenges while also navigating fierce competition for talent and employee burnout. At the same time, the industry needs to expand the labor pool through secondary education exposure, technical development programs and outreach to underrepresented population segments.”
More opportunities with capital markets
Investor appetite, investment sales activity, and the number of assets on the market are all up from last year’s levels. Cap rates for core transactions remain in the low-to-mid 6% range, subject to debt markets. Assets with a value-add component of existing capacity available remain in strong demand. Additionally, longer-term leased data centers and portfolios have been garnering attention from real estate investors shifting focus from other asset classes.
Debt markets continue to be liquid and active, and data centers are seeing an increase in the lender pool for construction loans and stabilized assets from the banks and life companies at moderate leverage. There has also been a surge in land/predevelopment loan requests due to construction lead times and increased capital requirements. Alternative sources of capital raising are also being considered.
“One of the biggest volume opportunities for data center investors in the next few years will be via core funds,” said Carl Beardsley, Senior Managing Director, Data Center Leader, JLL Capital Markets. “With a compressed development cycle due to preleasing activity, a growing trend of operators recapping stabilized assets to recycle their capital into other developments is expected. There are many upsides to these core investments, such as having a mission-critical investment with a tenant of high renewal probability and a residual asset with power, which is increasingly difficult to procure. The residual value of data center assets is much different than other real estate asset classes and should be analyzed based on amount of power allocated to the site.”
providing a convenient place for consumers to fulfill prescriptions, pick up over-the-counter medications, and other medical household items, the challenges these retailers faced while attempting to compete with the traditional healthcare delivery model indicate primary care must be delivered where it always has—at healthcare and medical facilities.
Healthcare systems and operators have decades, if not centuries, of proven expertise, established synergies with other existing operators, and a proven track record of delivering high-quality care within their local communities that will continue for years to come.
Jake Allen is an associate specializing in healthcare for Matthews Real Estate Investment Services.
Jake Allen(Photo Courtesy of Matthews Real Estate Investment Services)
But there is still healthy demand and leasing velocity. Our market is very healthy in the grand scheme of the national picture and other markets.”
Wilcox said that Enclave is so confident in the Minneapolis-St. Paul multifamily market that it continues to develop apartment projects, despite the higher interest rates and construction costs.
“If you had told me a year ago that we’d still be seeing the demand for apartment space that we are seeing now despite the influx of new product that we’ve seen, I don’t know that I would have believed it,” Wilcox said. “It’s a testament to the strength of the suburban multifamily market.”
Enclave is scheduled to begin four new multifamily projects this year in the Twin Cities market, Wilcox said.
“There aren’t as many projects starting now as there were 36 months or 24 months ago,” Wilcox said. “Because of that, we feel good about starting projects now that will deliver in two or three years. We expect to see good lease-up velocity in those projects because there will still be significant growth in the demand side of the equation even though there won’t be as much product hitting the market. That bodes well for our projects. “
Why is the demand for multifamily space so high in the Twin Cities market? Wilcox points to the area’s growing population. At the same time, it’s become more expensive to buy a single-family home.
And even those who can afford to buy a single-family home are struggling to move from apartment units.
That’s because the supply of single-family homes for sale remains low. Many existing homeowners aren’t selling because they don’t want to trade their existing mortgages with interest rates in the 3% range for a new loan with a rate closer to 6.5%. Because construction costs remain high, homebuilders aren’t building as many new residences.
These factors have led to a healthy absorption rate in the multifamily sector despite the new product that has been delivered, Wilcox said.
“Then there is a general societal shift of people staying in apartments longer, choosing to rent because they want the flexibility and the amenities,” Wilcox
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said. “They are staying as renters longer before they settle down. That is playing a role, too.”
Those amenities are becoming ever more important for renters, Wilcox said. He said that he and the rest of the executives at Enclave spend a lot of time thinking about the amenities they need to add to developments to attract a steady stream of renters.
Enclave’s multifamily properties always include fitness centers. They usually feature dog-washing stations and outdoor dog runs. Some of the company’s newer multifamily properties come with golf simulators, a trend that Wilcox said has gained momentum
Noble Apartments in Bloomington, Minnesota, developed, built and managed by Enclave. (Photo courtesy of Enclave.)
One new trend that Enclave hasn’t yet embraced? The addition of pickleball courts. Wilcox said that there are already plenty of spaces for fans to play the sport throughout the Twin Cities region. Secondly, residents often complain about the noise coming from these courts.
Wilcox said that Enclave will continue to focus its development efforts on the second- and third-ring suburbs of Minneapolis-St. Paul. As Wilcox said, the demand for multifamily housing remains strong in these communities.
Enclave will soon start new apartment projects in Bloomington, Edina, Shoreview, Rosemount and Plymouth, Wilcox said. The new product in Rosemount and Maple Grove will be rental townhomes, which Wilcox said are becoming increasingly popular among renters who prefer the feeling of a single-family residence.
“We like that there is a lot of good retail that is accessible and nearby for our residents in these communities,” Wilcox said. “We like that it is generally easy to access transportation, thoroughfares, interstates and highways from these locations. It’s easy to get around to the different parts of the metro.”
Since the COVID pandemic, there has also been an increase in the number of renters who want more space, Wilcox said. This is especially true for people who are now working from home at least part of the week. By developing in the suburbs, Enclave can offer these renters the extra space that they desire.
While demand for apartment units remains strong, Enclave and other developers still face challenges when it comes to bringing new product to the market. Topping the list? Higher building costs.
“Developing has gotten more challenging with increased construction costs and higher interest rates,” Wilcox said. “We are fortunate that we can handle construction in-house. We are our own general contractor. That gives us more control over our costs. We also have great relationships with subcontractors, good long-term partnerships that allow us to identify cost savings and ways to deliver a project efficiently. That helps us deliver projects to the market at a reasonable cost.”
Elevate’s strong relationships extend to its financing partners, Wilcox said. That is a key when it comes to fighting back against today’s higher interest rates.
“While rates are higher than they used to be, we still hear that we are getting very competitive interest rates compared to the market overall,” Wilcox said. “I feel like the combination of in-house construction, great subcontractors and great lending partners have allowed us to continue to deliver great projects and meet our investment requirements. It’s challenging today, but we are still succeeding.”
The interior of Enclave’s Noble Apartments. (Photo courtesy of Enclave.)
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Parkway Business Center rendering. (Image courtesy of The Opus Group.)
As Mahoney said, Rogers and Maple Grove both already had their own interchanges. It was time, too, for Dayton to get its access point.
“For a long time, Dayton tended to get skipped over when new development was being planned for the area,” Mahoney said. “Having this interchange has helped unlock this area for industrial projects. That interchange is key to unlocking the available parcels in Dayton for future development.”
The Dayton Parkway Business Center will offer tenants 19 dock doors, expandable to 34; four drive-in doors; a clear height of 28 feet; 136 vehicle parking stalls, expandable to 177; and 14 trailer parking stalls. Additional amenities include natural lighting, motion-activated occupancy sensors and a solar-friendly roof.
TurbinePROs needed a space near the interstate, a need that the Dayton Parkway Business Center met. Because the company signed up for the development so early, Opus was able to construct the property around its needs.
“They were in Rogers a bit further from the interstate. Now they are closer to the interstate and they were able to customize their space,” Mahoney said. “Their business is growing, and they were able to find a solution to help them advance their business.
Why was this the right time for Opus to build, considering the high interest rates and economic uncertainty hitting the country today?
Mahoney said that the Dayton Parkway Business Center will serve a largely underserved niche, end
users looking for space that is smaller than bigger bulk-type warehousing.
And higher interest rates? They are challenging. But by landing a tenant before construction even began, Opus gained the confidence that the time was right to begin construction on the Dayton facility.
“Interest rates are making new construction more challenging,” Mahoney said. “Getting that pre-leasig done helped push the project forward. We have always been gearing up for a construction start this summer. Having that lease in place gave us the confidence that we needed to move ahead.”
Mahoney is confident, too, that demand will be strong for the facility’s remaining 44,000 square feet. There are few blocks of space at that size in the Minneapolis-St. Paul market, he said.
“We are confident that we will find a tenant for that remaining space,” Mahoney said.
Opus is the developer, design-builder, architect and structural engineer of record on the project. Dan Swartz and Austin Lovin of CBRE are marketing the space for lease.
The Dayton Parkway Business Center is slated for completion in early 2025.
“The Twin Cities northwest industrial submarket continues to lead and outperform the balance of the metro with active users and strong demand. The desirable location and ease of access with the addition of the Dayton Parkway Interchange has only increased that activity,” said Nick Murnane, vice president and general manager of real estate development with Opus, in a statement. “With this facility, we will have
the ability to provide a unique offering for users who require smaller footprints in a submarket that has been dominated by larger spaces.”
