MREJ Dec 2016

VOLUME 32, NUMBER 12

©2016 Law Bulletin Publishing Co.

December 2016

As interest rates rise, commercial financing enters a new phase

by Dan Rafter

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Marcus & Millichap: Apartment market still sizzling as 2016 ends

by Dan Rafter

E

mployers added more than 147,000 jobs from July through September in the Indianapolis market. That’s good news for apartment owners and developers: These jobs are drawing new people to the region, and these new residents need housing.

Often? That housing comes in the form of rental apartments.

This is one of the main reasons for the continuing

strength of the multifamily market in Indianapolis, according to the latest research from Marcus & Millichap.

The company’s fourth quarter market report said that tenants in the fourth quarter absorbed the largest supply of new apartments in Indianapolis in two years. This has kept the vacancy level in this sector at its lowest level since 2000.

And here’s the best news of all: Indianapolis is far from the only Midwest city enjoying low vacancy rates and higher rents in the apartment sector. Marcus & Millichap Apartment to page 13

o one knows yet just what kind of president Donald Trump will be.

But one immediate result of his election was a quick rise in interest rates. And that has already brought a change to way developers and investors are borrowing money to fund their commercial real estate developments and acquisitions.

Minnesota Real Estate Journal recently spoke with a pair of commercial finance pros – Sue Blumberg, senior vice president and managing director at NorthMarq Capital, Blumberg and John Petrovski, managing director and head of U.S. commercial real estate lending with BMO Harris Bank – about the steps that developers and investors are taking today to secure the financing for their Petrovski projects.

Rates to page 20

Destination suburbs: redefining live-work-play for the sophisticated millennial generation

By Steve Shepherd, Vice President, Colliers International MSP “I just want to cook a ham for the holidays and be surrounded by family and friends,” says one aging millennial, who of late, is interested in finding balance and establishing roots.

A

s millennials age (or younger Gen-Xers for that matter), the livework-play mantra will naturally morph into live-work-educate as their focus changes to providing educational and

enrichment opportunities for their children. Good schools, a back yard with room for Fido, and expanded living space will become more important lifestyle factors than proximity to the nearest micro-brewery.

Shepherd

Suburban “urban-hubs” Can the suburbs serve as an enticing option for a generation who wants it all

and is used to having it all? Not surprising to the people who study population migration patterns, the answer is yes.

Serving the needs of both millennials and boomers, the suburbs are embracing the integration of the types of amenities that draw people to urban centers.

Attractive mixed-use developments are surfacing in many suburban communiSuburbs to page 16

December 2016

Contents

Minnesota Real Estate Journal

2DECEMBER 2016 • VOLUME 32, NUMBER 11

Page 3

Departments PEOPLE

4

NEWS

6

12

THE RENT SQUEEZE: ARE NEW-CONSTRUCTION APARTMENT RENTS PUSHING TOO MANY RENTERS AWAY?

Minnesota Real Estate Journal (ISSN 08932255) Copyright © 2016 by the Minnesota Real Estate Journal is published for $85 a year at 12 times per year by Jeff Johnson, 13700 83rd Way North, Suite 206, Maple Grove, MN 55369. Monthly Business and Editorial Offices: 13700 83rd Way North, Maple Grove, MN 55369 Accounting and Circulation Offices: Jeff Johnson, 13700 83rd Way North, Maple Grove, MN 55369 Call 952-885-0815 to subscribe. For more information call: 952-885-0815.

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STUDENT HOUSING HAS STRONGEST SALES YEAR YET IN THE MIDWEST?

©2016 Law Bulletin Publishing Co. No part of this publication may be reproduced without the written permission of the publisher.

1

MARCUS & MILLICHAP: APARTMENT MARKET STILL SIZZLING AS 2016 ENDS AS INTEREST RATES RISE, COMMERCIAL FINANCING ENTERS A NEW PHASE DESTINATION SUBURBS: REDEFINING LIVE-WORK-PLAY FOR THE SOPHISTICATED MILLENNIAL GENERATION

DESPITE THE HYPE FOR DOWNTOWNS, UNITED STATES REMAINS LARGELY A SUBURBAN COUNTRY 18

FALLING VACANCY RATES. RISING DEMAND. INDUSTRIAL MARKET GETTING EVEN STRONGER

Page 4

Minnesota Real Estate Journal

December 2016

People a division of Law Bulletin Publishing Co.

NorthMarq Capital names executive vice president in Minneapolis office 13700 83rd Way N, STE 206 Maple Grove, MN 55369 For information call 952-885-0815

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NorthMarq Capital promoted Patrick Minea, the company’s former managing director in its Minneapolis office, to the new position of executive vice president/regional manager.

Minea now becomes a perma- Minea nent member of NorthMarq’s executive committee.

Minea has been in real estate finance since 1987, and joined NorthMarq Capital in 1992. He has been a managing director of the Minneapolis Office since 2000.

Minea is a member of the Minnesota Multi-Housing Association, Minnesota Shopping Center Association, ULI and the MBA. He served as treasurer for the NAIOP Minnesota chapter and on the NAIOP Board for three years. He obtained his undergraduate degree from Saint John’s University.

Minneapolis’ ESG Architecture & Design hires new VP Melissa Metzler has joined Minneapolis’ ESG Architecture & Design as vice president and co-director of interiors. In her role as co-director, she will be partnering with Ann Fritz, partner and current director of interiors, to man- Metzler age client accounts and lead a growing team of 23 interior designers at the 109person firm.

Metzler has been working in the Twin Cities design community for more than 19 years, and brings valuable experience to the team at ESG. She most recently worked at BKV Group as senior interior designer and partner from 2006-2016, where her role included co-leading the interior design group, client marketing, client management and project management. She oversaw

the interiors on several notable and award-winning projects, including Schmidt Artist Lofts in St. Paul, and Else Warehouse and the A-Mill Artist Lofts in Minneapolis.

In her new role at ESG, she will team with Fritz on managing client relationships, co-leading the interior design team, and leading interior design efforts on multi-family, hospitality and corporate project types throughout the US.

Kraus-Anderson EVP named Business Person of the Year

by Minnesota chamber The Burnsville, Minneapolis, Chamber of Commerce has named Dennis Diessner its 2016 Business Person of the Year. Diessner is the executive vice president and chief operating officer of Kraus-Anderson Diessner Insurance.

Diessner was honored at the Chamber’s 2016 holiday gala for his active involvement in the Burnsvillearea business community for more than 25 years.

Diessner joined Kraus-Anderson in 1983 as a property manager for KrausAnderson Realty, overseeing all KA’s commercial office properties. He was promoted to vice president in 1991. In 1993, he took over the management of Kraus-Anderson Insurance. He has grown the agency to 68 employees with annual sales of more than $100 million.

Diessner’s community involvement in Burnsville includes serving as chair of the Burnsville Chamber’s board and Community Action Council (now 360 Communities); and president of the Elliot Park Business and Professional Association and the Burnsville Rotary.

He also was on the board of Homeward Bound, a nonprofit for special needs children, and a recent member of its Capital Campaign Committee, which raised more than $3 million for Burnsville’s new Fairview Ridges Hospital. In addition, he currently serves on the Scholarship Fundraising Committee for the Association of General Contractors.

Minneapolis’ CMA names new project manager Cory Billig has been promoted from project lead to project manager at Minneapolis’ CMA. Billig joined CMA in 2010 as a project coordinator, and was promoted to project lead in 2013.

Billig has more than 10 years of Billig experience in architecture. He has worked on projects for clients such as Carver County, Torrid, Best Buy Mobile and True Religion. He now manages several accounts for CMA, including Skechers, Lucky Brand, Fastsigns and Dogtopia.

Minnesota’s Coldwell Banker Fisher Group hires business broker April Femrite has joined Coldwell Banker Commercial Fisher Group in Mankato, Minnesota, as a licensed business broker. She now provides representation to clients who are selling or buying a privately held business.

Femrite Femrite brings with her years of experience as a small business owner and manager along with a master’s degree in business administration from Minnesota State University, Mankato.

Femrite served most recently as the first Entrepreneurship and Innovation Fellow for the MSU-Mankato College of Business. She has completed her designation as a Certified Business Intermediary from the International Business Brokers Association, a certification that less than 10 percent of all business brokers have achieved.

Page 6

Minnesota Real Estate Journal

News United Properties plans move to 7th & Nic. in downtown Minneapolis Company caps milestone year with plans for its third HQ move in a century United Properties will move its headquarters from Bloomington to its new location, recently renamed 7th & Nic., in downtown Minneapolis, the company announced today. Currently located in the Northland Center in Bloomington, United Properties will relocate to the fourth floor of the building formerly known as Gaviidae Common, at 655 Nicollet Mall. The move will take place in early 2017.

“This is an exciting new chapter for United Properties,” says Eva Stevens, president and chief operating officer, who, together with Bill Katter, president and chief investment officer, assumed their co-president roles earlier this year.

“We are moving forward on several fronts, and the headquarters move is just another example,” she said, adding that this marks just the third time in the company’s 100-year history that it has

moved its corporate headquarters.

Privately held United Properties has been creating deep roots in the Twin Cities since 1916. Two iconic Minnesota families have owned the company in its 100-year history: the Hamm family of St. Paul, and the Pohlad family of Minneapolis. Formed in 1916 by the owners of Hamm’s Brewing Company, United Properties managed the family’s real estate assets from its downtown St. Paul location in the Hamm Building for more than 60 years. From its second location in Bloomington — in the Northland Center, a building complex United Properties developed in 1981 — the company has grown into a commercial real estate powerhouse, shaping the skyline of cities throughout Minnesota and Colorado. The Pohlad family of Minneapolis, owners of Pohlad Companies, acquired United Properties in 1998 to broaden their business interests.

Similar to its previous moves, United Properties will occupy office space that it owns. United Properties purchased the third and fourth floors of Gaviidae Common in June 2016, following its acquisition of the first and second floors in

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December 2016

early 2015. Katter said the company will take the majority of one floor for its own use, and will seek office tenants for the remainder of the space.

“As we look forward to our 101st year and beyond, we’re excited about the opportunities our new downtown location will bring,” says Katter. “Like the needs of the clients we serve, our own space needs are changing. Our move downtown will allow us to reinvent the space we occupy and provide inspiring new opportunities for our growing team.”

The move will also help streamline coordination and communication between United Properties and the Pohlad Cos., located in the nearby RBC Plaza.

During its anniversary year, United Properties has been busy in both of its hometown cities. In St. Paul, it is redeveloping the former St. Paul Saints Midway Stadium into an industrial building.

In Minneapolis, United Properties is involved in several high-profile projects, including the Gateway development/Nicollet Hotel Block.

Dougherty Mortgage LLC closes $18 million Fannie Mae loan for Pecan Grove and Azalea Ridge Dougherty Mortgage LLC, a full service national mortgage banking firm, recently closed an $18 million Fannie Mae loan for the acquisition and refinance of Pecan Grove and Azalea Ridge, respectively, totaling 352 market rate multifamily apartment units located in Walls, Mississippi. The Fannie Mae 10-year term, 30-year amortization loan was arranged through Dougherty’s Brentwood, Tennessee office for borrower Azalea Ridge Apartments, LLC.

MARCUS & MILLICHAP ARRANGES THE SALE OF A 6-UNIT APARTMENT BUILDING Marcus & Millichap (NYSE: MMI), a leading commercial real estate investment services firm with offices throughout the United States and Canada, today announced the sale of 1743 Randolph Avenue, a 6-unit apartment property located in Saint Paul, Minnesota, according to Craig Patterson, regional

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Page 8

manager of the firm’s Minneapolis office. The asset sold for $756,000.

Dan Linnell, Mox Gunderson, Josh Talberg and Evan Miller, investment specialists in Marcus & Millichap’s Minneapolis office, had the exclusive listing to market the property on behalf of the seller, a private investor, as well as secured and represented the buyer, a private investor.

Speaking with Mr. Miller, “This was truly a perfect storm with the high level of interest on this well-kept asset due to, not only a rare opportunity in the Mac Groveland neighborhood, but attracting investors of all shapes and sizes through our expansive marketing campaign.

This investment, which yielded a price per door of $126,000, has rarely been seen in the market with a product of this age, style, and level of original condition. This original owner and developer realized the benefits of selling their first asset because of the small size of the property and the strength of this competitive apartment market.”

Minnesota Real Estate Journal

MARCUS & MILLICHAP ARRANGES THE SALE OF A 9-UNIT APARTMENT BUILDING IN DINKYTOWN Marcus & Millichap (NYSE: MMI), a leading commercial real estate investment services firm with offices throughout the United States and Canada, today announced the sale of 860 10th Avenue SE, a 9-unit apartment property located in Minneapolis, Minnesota, according to Craig Patterson, regional manager of the firm’s Minneapolis office. The asset sold for $1,300,000.

Josh Talberg, Mox Gunderson, Dan Linnell, Adam Haydon and Abe Roberts, investment specialists in Marcus & Millichap’s Minneapolis office, had the exclusive listing to market the property on behalf of the seller, a private investor, as well as secured and represented the buyer, also a private investor.

Speaking with Mr. Haydon, “The property is located in Dinkytown and generated a lot of interest from the local investment community. I think the amount of activity showed there is still a big need for updated, yet affordable, units. Vacancies in the class C and B

apartment market around the University area remain very low.”

860 10th Avenue SE is located in Minneapolis, Minnesota. The building was constructed in 1990 and features large two- and three-bedroom layouts or 24 beds.

Dougherty Mortgage LLC closes $14.8 million Fannie Mae loan for Westwind Dougherty Mortgage LLC, a full service national mortgage banking firm, recently closed a $14.8 million Fannie Mae loan for the acquisition of Westwind, a 231-unit market rate multifamily apartment property located in Horn Lake, Mississippi. The Fannie Mae 10year term, 30-year amortization loan was arranged through Dougherty’s Brentwood, Tennessee office for borrower Westwind D&T, LLC.

Dougherty Mortgage LLC closes $14 million Fannie Mae loan for River Pointe and Cypress Lakes Dougherty Mortgage LLC, a full service national mortgage banking firm,

December 2016

recently closed a $14 million Fannie Mae loan for the acquisition of River Pointe and Cypress Lakes, totaling 312 market rate multifamily apartment units located in Robinsonville, Mississippi.

The Fannie Mae 10-year term, 30-year amortization loan was arranged through Dougherty’s Brentwood, Tennessee office for borrower Cypress River, LLC.

ICM REALTY GROUP ACQUIRES One Corporate Center IV ICM Realty Group, the international real estate investment and management firm, announced today that it has purchased the 112,000 square foot One Corporate Center IV office building, located at 7301 Ohms Lane, Edina, MN. The purchase represents ICM’s third investment in the Minneapolis area and was made on behalf of ICM’s (IX) Real Estate Trust, a fully discretionary private equity fund focused on acquiring and developing office, retail and medical office properties.

Located in the coveted “close to everything” Edina submarket, One Corporate Center IV maintains a prestigious

Page 10

roster of tenants with immediate proximity to housing, hotels, shopping, dining and entertainment. Situated just off the Highway 100 and I-494 interchange, the property enjoys prominent visibility, provides convenient access to major highways and is walking distance from area amenities.

In addition to its hallmark design utilizing center core efficient floor plates, the building boasts an exceptional parking ratio of approximately 5 parking spaces per 1,000 square feet. “One Corporate Center IV appeals to local and national tenants across numerous industries” said Andrew Webb, ICM’s Managing Director. “Truly great service is at the heart of who ICM is, and our plans for One Corporate Center IV will allow us to provide the building’s tenants with uncompromising quality and significant value.” As part of the investment’s business plan, ICM intends to continue the building-wide renovation started by the prior owner, which will include common area improvements and adding building amenities.

Minnesota Real Estate Journal

“One Corporate Center IV is an excellent addition to the ICM portfolio and a superb opportunity for ICM to add immediate value,” said ICM CEO Bruce Timm. In order to deliver the best service possible, ICM has partnered with Hines Interests for the property management and enlisted the services of Brent Robertson and Jack Ryan with JLL for leasing the remaining vacant space.

Dougherty Funding LLC Closes $9.2 million loan for Gardenview Assisted Living and Memory Care Dougherty Funding LLC has closed a $9.2 million bridge loan for the refinance of Gardenview Assisted Living and Memory Care, a Class “A”, 39unit/55 bed senior living facility located at 26096 Elm Street in Calumet, Michigan. The financing was arranged for Calumet Facility, LLC and Calumet Operating, LLC. Dougherty Funding serves as lead lender and servicer for the loan

Dougherty & Company LLC to acquire Cronin & Co., Inc. Dougherty & Company LLC, a fullservice investment banking firm founded in 1977, is pleased to announce it has signed a definitive agreement to acquire Cronin & Co., Inc. (“Cronin”), a Minneapolis based municipal bond dealer.

Much like Dougherty & Company, Cronin has been a constant presence in the local Twin Cities financial community for over 40 years.

“I’ve admired Cronin from the very first day they opened their doors,” stated Mike Dougherty, Founder and Chairman of Dougherty Financial Group LLC. “Like us, they are a survivor of all the change that has occurred within our industry over the last 40 years. Strategically, Cronin will nicely round out the business we do at Dougherty & Company by giving us access to new customers and deepening our trading skills. It’s a natural fit.”

David Juran, Executive Vice President of Dougherty & Company added,

December 2016

"This acquisition will be a positive for our Investment Banking group and our clients as it will strengthen our abilities in both the trading and sales areas at Dougherty & Company."

The firms have never been direct competitors, and when combined, customers of each firm will have access to a wider variety of products. “We view this combination as a huge win for our clients,” said Jay Hiniker, President of Cronin. “We will continue to provide them with excellent service while broadening their product choices across all fixed income products.”

No changes in Cronin personnel are expected as a result of the transaction, which is expected to close in the first quarter of 2017.

Midtown Global Market, Keg and Case Part of Growing Food Halls Trend in United States Cushman & Wakefield Global Study Tracks Growth of Culinary-Centered Retail Concepts; Explores Rise of News to page 22

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Minnesota Real Estate Journal

December 2016

The rent squeeze: Are new-construction apartment rents pushing too many renters away?

I

t’s no secret that newly built apartments in urban areas are commanding high rents. But newly released numbers from MPF Research show just how costly new construction apartment units are compared to older, less desirable stock.

According to the firm, the most expensive Class-A apartment units — mostly located in newer buildings in the center of urban areas — rent for $1,663 a month on average in the country’s 100 largest metro areas. That is double the average monthly rents for lower-priced Class-C apartment properties.

In the Midwest, this rent stratification is seen most clearly in Chicago.

MPF Research says that the average Class-A apartment in the city — again, made up largely of units in newer buildings in Chicago’s urban areas — rents for $2,170 a month. The average Class-C apartment unit, usually older stock located in less desirable or trendy neighborhoods, rents for just $886 a month.

This means that Class-A apartment rents boast a premium of 144.9 percent over Class-C apartment rents in the city. MPF Research ranks Chicago fifth

in this type rent discrepancy.

Boston and the Bridgeport/Stamford/Norwalk area of Connecticut top MPF Research’s list. Class-A apartments in these two markets rent for 169.5 percent more on average than do Class-C units.

Expect the rental divide between older and newer apartment units to continue, too. Research from RENTCafe found that 75 percent of all new apartments built in 2015 were high-end luxury ones.

These higher-end buildings, boasting extensive amenity packages, appear to be drawing a greater number of wealthy individuals to the rental market. The apartment search site said that about 1.2 million wealthy households became renters in the United States in the last 10 years. The company reported that from 2005 to 2015, the number of renter households that earn more tahn $150,000 a year jumped by 217 percent.

The trend, then, is clear: As a growing number of wealthy individuals and households choose to rent, landlords target these big-dollar customers with more expensive apartments in the middle of cities.

“There are people in these cities who can afford these monthly rents,” said Nadia Balint, real estate writer for RENTCafe. “The number of highincome renters is increasing. There is room to grow in the high-end market.”

To prove this, Balint crunched some numbers showing just how many renter households in certain Midwest cities can afford to rent these higher-end apartments.

In Chicago, for instance, the average monthly rent for high-end apartment units is $2,500. Going by the rule of thumb that households should spend no more than 30 percent of their incomes on rent, households that earn more than $100,000 a year should be able to afford this luxury-market rent. RENTCafe found that more than 33,000 renter households in the Chicago market earn more than $150,000 a year and can afford these higher-end apartment units. In the Chicago market, there are roughly 33,000 apartment units classified as high-end by RENTCafe. This means that there are enough wealthy renter households to serve this supply, Balint said.

In Detroit, the average rent for highend apartment units is $1,520, accord-

ing to Balint. Households, again going by the 30 percent formula, would need to earn about $60,800 a year to afford this rent. Balint said that there are 1,229 households renting now in the Detroit area that earn more than $150,000 a year.

There are also about 3,000 renter households that earn from $100,000 to $150,000 a year and 3,960 that earn from $75,000 to $100,000, meaning that there are plenty of households that can afford these higher-end rents. In the Detroit area, there are now 2,622 high-end units either on the market or under construction. The numbers show, then, that there are plenty of potential customers for these more modern, expensive units.

In Minneapolis/St. Paul, the average monthly rent for high-end apartments is $1,763, Balint said. To afford this, households would need to earn $75,500 a year. There are 4,934 renter households that make more than $150,000. The number of households that are renting and making $75,000 a year comes out to more than 26,000.

The supply of high-end apartments in Rent to next page

December 2016 Rent from previous page

this metro area now stands at 16,439, meaning that there is plenty of room here, too, for builders to add a greater number of higher-end apartment units

Apartment From page 1

recently released data on Midwest markets from Milwaukee to Minneapolis, and the one common element? All of these cities are enjoying a booming apartment market.

In Indianapolis, the multi-tenant vacancy rate will end 2016 at 5.4 percent, according to Marcus & Millichap. That’s down 150 basis points from the same quarter in 2015. Rents here climbed 4.5 percent in 2016 to an average of $821 a month. That sets a new local high, according to Marcus & Millichap.

Builders were busy here, too.

Marcus & Millichap reported that developers were on track to bring 2,780 new apartment rentals into service in 2016, with downtown Indianapolis and Carmel, Indiana, scheduled to receive the biggest portion of the new aparment units.

That’s just one market doing well. What about Milwaukee?

Marcus & Millichap reported that the average effective apartment rent in this market rose 4.1 percent in 2016 to $1,005 a month. That makes the fifth consecutive year for apartment rent growth in the Milwaukee market.

In Minneapolis/St. Paul, the apartment vacancy rate fell 70 basis points in 2016 to 2.2 percent.

That is one of the lowest apartment vacancy rates among major U.S. metropolitan areas. At the same time, the average effective rent is expected to soar 5.7 percent by the end of the year for an average of $1,161 a month, Marcus & Millichap said.

Marcus & Millichap reported that apartment vacancy rates fell 10 basis points in 2016 in Detroit to 2.6 percent. This happened as net absorption reached nearly 2,650 units in the Detroit marketplace this year. Marcus & Millichap says that effective apartment rents will have jumped 5.7 percent to an average of $910 a month during the year in the Detroit market. That is the highest growth rate in Detroit-area apartment rents since 2012.

What about in the biggest Midwest market? Marcus & Millichap reported that the apartment vacancy rate in the Chicago market fell 10 basis points this year, reaching 3.7 percent. Rents here will increase 5.4 percent during the year to $1,380 a month, according to Marcus & Millichap’s research.

Minnesota Real Estate Journal

without straining the demand for them.

But what about the demand for market-rate or affordable apartment units?

Plenty of renters are seeking out less expensive apartment units, and they’d like to find them in the middle of cities where all the restaurants, public transportation and entertainment options are.

These renters will struggle to find new-construction apartments, said Sam Radbil, an author with online apartment search company ABODO. That’s because the new apartments that developers are adding to the middle of big cities fall overwhelmingly into the high-end category, Radbil said.

“The national homeownership rate is falling. More people are choosing to rent,” Radbil said. “It makes sense, then, that landlords would raise the

pricing of their apartment units, especially in markets with tighter inventory.”

Brian Graham, certified residential appraiser with the Cincinnati office of Colliers International, said that it is just too difficult for developers to build new market-rate or affordable apartment buildings and make a profit at the same time. The only way this can happen, generally? They need to receive financial incentives or tax breaks from local governmental agencies.

That does happen. But most developers still choose to build high-end apartment buildings in downtown areas, Graham said.

But what about the suburbs? Can renters looking for higher-end amenities find them for lower costs if they move away from the center of cities?

Page 13

Graham said that the apartment market in the suburbs of Cincinnati is strong today, featuring plenty of new construction. And the new apartments being built here, like in the center of the city, feature strong amenity packages. The rents at some of these buildings are lower than in the city, but don’t exactly qualify as affordable-level.

“We are seeing new projects in the suburbs that are very high-intense on the amenities,” Graham said. “They are catering to renters that don’t want to go into an apartment community that is 10, 15 or 20 years old. They want to rent, but they like nicer things, nicer amenities. They want all the amenities and features that you’d expect of a new high-end development.”

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Minnesota Real Estate Journal

December 2016

Despite the hype for downtowns, United States remains largely a suburban country

by Dan Rafter

Student housing has strongest sales year yet in the Midwest

by Dan Rafter From 2013 through the end of 2016, the Midwest will have seen 111 sales in the student-housing market. And those sales will have generated more than $3 billion in total sales volume, according to data from Triad Real Estate Partners.

Triad says that 26 of these sales will have occurred in 2016, and that these student-housing sales will result in more than $1.046 billion in sales volume.

How strong is that? Triad says that 2016 will replace 2015 as the busiest year ever in terms of total studenthousing sales in the Midwest.

Studnent housing has become a sought-after investment type. Triad reported several major transactions in this space in the Midwest alone. The 481-bed University Mills in at the University of Northern Iowa sold for $16.4 million, while the Wolf River Portfolio of 195 beds sold for $15.2 million at Michigan State University.

At Western Illinois University, the 639-bed Campus Pointe and Campus Manor student-housing developments sold for $22.9 million. At Michigan State University again, the 342-bed Hunters Ridge Apartments sold for $14.3 million.

The urban centers of cities are getting most of the press today, with countless stories focusing on the growing number of people — young and old — who want to rent and live in downtown metropolitan areas.

But the truth? The United States remains a mostly suburban nation.

That’s the news from a new report from the Urban Land Institute, Housing in the Evolving American Suburb.

According to the report, 79 percent of the population in the United States’ 50 largest metropolitan areas live in the suburbs. So do 78 percent of the households in these large city areas.

The report found, too, that from 2000 through 2015, suburban areas accounted for 91 percent of the population growth and 84 percent of the household growth in the top 50 metropolitan areas in the United States.

And that’s not all. The Urban Land Institute reported that as of 2014 67.5 percent of the employment in the 50 largest metropolitan areas was in suburbs.

Those living in the suburbs tend to have higher incomes, too. The median household income in the suburbs is $71,000, according to the Urban Land Institute. The median household income is $49,200 in urban areas. The suburbs are also home to 85 percent of children aged 18 and younger and 75 percent of young adults from the ages of 25 to 34.

It’s true that urban areas have become trendier places for people to live, especially those who are choosing to rent. But don’t forget that the suburbs are still important, and are still key areas for commercial real estate growth.

Page 16

Minnesota Real Estate Journal

Suburbs From page 1

ties with the profile of centralized walkable hubs that offer ease of accessibility, community gathering space, entertainment, shopping and dining.

In the Twin Cities, suburban locations like West End, France Avenue, Ridgedale, Wayzata and Golden Valley are well positioned to offer this desirable mix of walkable amenities to both millennials and employers seeing to hire millennials. It’s not only investors, developers and urban planners who are hip to this trend, office owners alike are figuring out how to reposition aging stock with creative, open, collaborative space to fulfill the “work” needs commanded by today’s transitioning workforce. Savvy office owners know that in order to keep pace with modern demands and remain viable, they must differentiate by aesthetic in order to attract businesses focused on recruiting and retaining talent.

Reinventing suburban assets Under the ownership of Hillcrest Development, Pentagon Park, located at Hwy. 100 and I-494 in Edina, is an example of a repositioned office prop-

Before and After: Pentagon Park, Hwy. 100 and I-494 in Edina, MN erty that undertook the task of reinventing itself in order to avoid the hollow echo of abandoned offices, conference rooms and hallways.

“Reinvention of a 1960’s era office park requires attention to detail,” explains Scott Tankenoff, Managing Partner at Hillcrest Development, LLLP. “Our investments in the buildings were prioritized to promote energy efficiency, enhanced natural light and the development of adjacent tenant amenities. Further renovations focused on creating open spaces, raised ceiling heights and exterior common spaces for employees and visitors to enjoy.”

Office options along popular Twin Cities’ commuter routes afford business owners and decision makers who live in the suburbs, especially the afflu-

ent western suburbs, with the convenience of a centralized location. With transit options, accessible amenities, free parking for employees, and the added “cool factor” of a repositioned property, the suburbs are starting to look, and think, like the city.

Looking outside the Loop Arguably our metro’s hottest office market – and not coincidentally a location very popular among millennials for live-work-play, the North Loop has filled up with creative and tech-driven businesses who don’t need to be in the downtown core with access to skyway connections. The North Loop’s delivery of cool, non-traditional, often brick & timber office space at affordable prices of $12 - $14 PSF net became a

December 2016

popular alternative to a downtown address. With that submarket near full and lacking parking options, we are already seeing a shift to other submarket options, like neighboring Northeast Minneapolis.

With local developers chasing projects in Market West near International Market Square, it’s not a stretch to believe that a subset of office tenants looking for new space would consider the right creative project along Hwy. 55 or the I-394 corridor if the value was right.

The jury is still out on whether or not companies are willing to stay in the North Loop as the top end of the market gets pushed closer to $20 PSF net.

Remember, these users have already acknowledged that they don’t need to be located at main-on-main in downtown. We have already seen creative/tech activity at Wirth Corporate Center on Hwy. 55 in Golden Valley where creative space design has been implemented to attract those getting priced out of the Loop.

Can the suburban office package of creative finish, access to amenities and value win out over an urban setting if the value isn’t there? I guess we’ll let the millennials decide.

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Minnesota Real Estate Journal

December 2016

Falling vacancy rates. Rising demand. Industrial market getting even stronger

by Dan Rafter

W

hat’s going right in the O’Hare industrial submarket of Chicago? Just about everything.

John Joyce, principal with the Rosemont, Illinois, office of Transwestern, said that this busy submarket is seeing increased demand from investors and developers, lower vacancy rates and rising rates.

In short, it remains one of the stronger industrial markets in the Chicago area.

“This market is performing so well right now,” Joyce said. “More tenants are looking at this market. It has a strong location. The workforce is good.

The inventory is strong. There’s a reason why this submarket has one of the lowest vacancy rates in the metropolitan area.”

And the best news? The O’Hare submarket isn’t alone. Industrial markets across the country are booming.

John Joyce The e-commerce push Like many industrial markets across the country, the O’Hare submarket is enjoying a boost from the continued growth of online shopping. Joyce pointed specifically to the impact that online giant Amazon is having on this submarket.

“Companies like Amazon are absorbing space in multiple markets,” he said. “They are taking industrial

inventory off the market. Amazon’s footprint is 2 million square feet in Southeast Wisconsin and 3 million square feet in the greater Chicago metropolitan area. A lot of companies are trying to duplicate that effort on a smaller scale. Even small privatelyheld companies are getting in on the action.”

As Amazon and other companies gobble up more space for distribution centers to serve their online customers, it drives up demand for those industrial facilities that remain. This results in lower vacancy rates and higher rents.

This is all good news for industrial landlords. And those landlords in the O’Hare submarket are no exception; they, too, are enjoying a solid bump in demand from tenants on the hunt for modern industrial space.

At the same time, Amazon has become a sought-after industrial tenant. The online retailer has made a habit of consuming large swaths of industrial space. The Chicago area is an important one for Amazon, with its location in the center of the country

allowing the retailer to reach large swaths of its customers from distribution centers here.

Joyce said that the e-commerce rise, though, might result in a smaller number of big-box retail stores. As industrial space is consumed, some of the larger big-box stores will convert into industrial uses, Joyce said.

“We’ll see the industrial market spill into retail,” he said. “The available industrial inventory is still low in the O’Hare market. We’ll start to see some creative use of larger retail space because of this.”

An impact on other markets The low industrial vacancy rate won’t just have an impact on the O’Hare submarket. It will also bring increased activity to tertiary markets.

Joyce said that as possible tenants continue to look for more industrial space, they’ll search tertiary markets such as Northwest Cook and Elgin.

“Because when you get down to a 3 percent vacancy rate in O’Hare, people Rates to next page

December 2016

have to go to the next ring out,” Joyce said. “They have to search in markets that maybe they wouldn’t have considered before.”

Sales on the rise Joyce said that it’s not just lease activity that is rising in the O’Hare submarket. Industrial sales are strong here, too, he said.

Joyce points to his own experience.

As of late November, Joyce had six industrial properties under contract in which he was representing a seller.

Each of those transactions were sched-

Minnesota Real Estate Journal

uled to close before the end of 2016.

That’s solid sales activity. And Joyce is far from alone: The number of industrial sales in this submarket continues to rise, he said.

“There has finally been some appreciation in values after that deep dip from the recession that ended several years ago,” he said. “Now we are seeing an increase in rental rates and higher interest rates. That is the two sides of this. Sellers are taking advantage of an increase in pricing to get out of longheld positions that they couldn’t get out of before.”

On the investment side, investors, both domestic and foreign, continue to chase yield in this market, Joyce said.

The lure of commercial real estate here isn’t quite as strong to foreign investors as it is on the coastal markets, but this is still a much-coveted area, Joyce said.

“The size of the Chicago industrial market is impressive,” Joyce said.

“The proximity to all major interstate arteries and rail lines is a positive. We are in a good location for air and freight routes. People will never overlook the Illinois opportunity because of its location and mass.”

Slim pickings The industrial inventory that is available in the O’Hare submarket isn’t necessarily the strongest, Joyce said.

“A lot of the inventory left is weaker,” he said. “It’s been picked over.

What is left are a lot of properties that have been on the market for a long period of time. A lot of those properties are now seeing action. In many cases, it is all that is left for tenants.”

This means that many developers are renovating these lesser properties to attract potential buyers who are looking for modern industrial space.

Joyce said that experienced investors are looking to add value to older industrial assets that have become less func-

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tional.

“They are looking at opportunities to enhance the loading areas or to add trailer parking,” Joyce said. “That will attract more coveted, more sophisticated users.”

The benefit to this approach? Higher leasing rates.

Joyce said that some investors have been able to charge rents that are 50 percent or 60 percent higher than what they would have been able to charge if they hadn’t made their improvements.

“A $4 net building without improvements turns into a $6 net building with improvements,” Joyce said.

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Rates From page 1

Minnesota Real Estate Journal: The presidential election is finally over.

Have the results brought any – or will they bring any – changes to the commercial lending market?

Sue Blumberg: The lending market has shifted a bit with the recent increase in interest rates. We are seeing a shift toward long-term planning versus shortterm planning from borrowers. Even for properties that are in transition – they are being leased, under construction or in the planning stages – the rise of interest rates could affect them going forward. The plans of the developers and investors could change a bit depending on what happens with rates. That being said, those borrowers, those developers and investors who are familiar with real estate and who are long-term players, have been through cycles of higher interest rates before. They tend to be prepared for these kind of changes.

There is no reason for concern on their part. There’s just more of a need for longer-term planning when rates go up.

John Petrovski: We’re moderately optimistic for 2017. We think that the U.S. economy will continue in the slowgrowth mode. That’s a positive for commercial real estate. There are a few clouds on the horizon. We don’t yet

Minnesota Real Estate Journal

know what the president-elect will mean for business and growth. That is unknown at this point.

MREJ: Were you surprised that interest rates after the election finally rose?

Blumberg: Not really. The way I see it, the rates didn’t rise solely because of the election. People expect there to be actual growth in the future. There has been actual growth in the economy.

There has been growth in employment, wages and GDP. It feels like the Fed finally signaling a rise in interest rates is a good thing for the country. It is actually stabilizing. I think rates would have risen even without what happened in the election. It was time for a rise, and that should be thought of as a good thing.

Petrovski: We’re waiting to see what happens with interest rates in the longterm. Does the Fed see more inflation so that rates will rise faster? That has added a bit of uncertainty to real estate projects. So there are some clouds because of the uncertainty. Now, those clouds could become soft, puffy white clouds if everything turns out to be good. Or they could turn out to be grey storm clouds.

We’re not sure yet.

MREJ: How much uncertainty do we face in the commercial real estate market today because of the election?

Petrovski: Every election is unique.

Eight years ago, the stock market hit its

nadir. Lehman had failed. Back then, we were in a dark time. Obama’s vision of hope and change resonated with people.

It was a much harder time to get a real estate loan than it is today. The capital markets had frozen, had shut down.

Today we are operating in a much different environment. Clinton was perceived more as the status quo, a way to continue down the same path. The Electoral College results, though, said that the country was ready for a different path.

Trump presents more unknowns. He says he’s pro-business, but what does that mean?

MREJ: It might be a tough adjustment, though. I think people have gotten spoiled by these low rates.

Blumberg: Spoiled is right. It will take a bit of a lag time for everyone to swallow the rate increases. But, really, a 4.5 percent interest rate is really good.

Deals should work at those rates.

MREJ: What do you look at today when borrowers are coming to you and asking for commercial financing?

Blumberg: Liquidity would be the first thing. Experience is number two.

Has that borrower or the key principals been through a cycle before? How did they perform? Were they able to stabilize their projects or make things right when a down cycle hit? Chances are that everyone who comes to us has had a hiccup in their past. It’s how they acted dur-

December 2016

ing the hiccup that matters. Most lenders agree that if you did everything you could, acted honestly and forthright, that’s a good sign.

Petrovski: I’m fond of telling our younger bankers that it all starts with the client, their experience, their reputation, the strength of their balance sheet. People who have done 50 real estate developments learn something on every one that they do. They bring all that experience to managing costs, to managing the construction schedule. People trying for the second time? The risks are higher.

There is a higher risk of the project going sideways. With us, it all starts with the clients and their experience.

MREJ: What kind of changes are you seeing today in the number and type of financing requests coming your way?

Blumberg: I think construction lending might be curtailed somewhat. It won’t be shut off, by any means. But there will need to be more equity going into the deals that we approve. We generally do business with borrowers who have liquidity and funds and can spot it in times of a trickle or a hiccup. We want to make sure our borrowers have enough skin in the game.

Petrovski: Banks in general have pulled back on their appetite for construction financing. It’s still there. You can still get a construction loan. But they are being offered on more conservative

December 2016

terms today. We are still getting requests for construction loans. We are still quoting acquisition loans. Our loan-to-cost ratio is down a notch from 18 months ago as we get more conservative.

MREJ: When looking at the projects themselves, what do you consider before approving a financing request?

Blumberg: The quality of the leases in a project really matter. When you’re looking at office projects, say, you look at whether the tenants in that office building have expanded, contracted or been there for a long time. For industrial, location is everything. Absolutely, location is key. For retail, we look at a bit of everything. Amazon has certainly changed that world. We are looking at retail centers today that are offering more of a lifestyle customer experience in the store. That has been an exciting change. We like to work with retail clients who are attracting a lot of customers who want to come to their shops for an experience. That’s how they are competing with online sales.

When it comes to a start-up or an entrepreneurial spinoff of large firms, we’ll look closely and carefully at the people behind it. What was their role in their former employ? Who is backing their new venture? What is their commitment to staying in business? The first-time deal for anyone is the hardest deal. We are still seeing a terrific flow and advancement of the entrepreneurial spirit today.

Petrovski: When it comes to the actual deal, it’s all about whether it’s a quality development that looks like it’s built to resonate with the current market. For apartments, are the units welldesigned? How many closets does it have? What is the layout of the kitchens, the ceiling heights? The experienced developers know what resonates in their markets. We look for something we think will sell well in that market.

MREJ: What about the multifamily market? It still generates plenty of headlines for how strong it is.

What do you look at when considering financing associated with multifamily properties?

Blumberg: Right now, it is all about looking at the historical operations of a building over the last several years. On an existing property with a good track record, it’s much easier to get financing. A solid asset can be trended and researched. Those properties that are in lease-up, it goes back to feasibility and absorption.

MREJ: I know it’s difficult to predict the future, but what do you see in the next several months when it comes to the strength of the commercial real estate market?

Petrovski: Let me tell you, every developer predicts the future. They are always doing the best they can to predict what is going to happen in their

Minnesota Real Estate Journal

markets. We look at what they’re predicting. Do we agree? Some developments have a lot of profit cushions built into them. Others are priced to perfection. They have aggressive rents and they have to hit them. They can’t afford any cost overruns. In some respects, the deal talks to you. If the deal is too tight, maybe that deal shouldn’t be done.

Overall, though, the level of com-

mercial activity has been robust. I don’t see it increasing. If anything, the level of activity will remain at a constant level or we’ll see it dialed back a notch.

Fewer projects might start. There is some concern with the overbuilding of Class-A apartments with higher rents.

Some developers might take on fewer projects as they grow worried about there being too much supply out there.

That is the debate that is taking place

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not only in Minneapolis but in every urban market. What is the pace of job growth? What is the pace of new supply? Are they in sync?

Page 22

Minnesota Real Estate Journal News from page 10

Dynamic Dining Trend and “Foodie Culture” The Minneapolis-St. Paul market is home to two “Food Halls” – one existing already in Minneapolis, the other under development in St. Paul – joining a growing dining trend built on the dynamic dining trend and foodie culture.

Global commercial real estate brokerage Cushman & Wakefield has released its Food Halls of America report and video. The report tracks the explosive growth of food-centered retail since the recession and ranks the top 10 food hall concepts in New York City and the top 20 nationally, including the Midtown Global Market in Minneapolis. The first video in a threepart series showcases New York City food halls and discusses the trend with industry experts like celebrity chef and restaurateur Todd English.

“No other retail category has generated as much aggressive expansion over the past few years as food-related retail – and arguably, there is no hotter

trend within that category than food halls,” said Garrick Brown, Vice President of Retail Research for the Americas at Cushman & Wakefield.

In the first nine months of 2016, food hall growth increased by 37.1 percent year over year with 18 more projects slated for delivery before the end of the year, according to Cushman & Wakefield data. The firm says restaurants accounted for 25 percent of planned unit growth across all retail concepts it tracked in 2007, the first year it began sourcing that data. By 2010, that number had increased to 35 percent, and for the last three years, restaurants have consistently accounted for 50 percent of all planned unit growth.

As recently as a decade ago, foodrelated retail concepts were more about convenience than quality, the report notes. But fueled by the rise of a “foodie” movement led by celebrity chefs and ushered in by millennials, food-centered social media platforms, and culinary-focused cable channels, food halls slowly began to enjoy previ-

ously unprecedented cache, Brown said.

Minneapolis is home to one of the more established and successful examples of a Food Hall, the Midtown Global Market. The 58,000 sf project opened in May 2006 and features 30 bars, restaurants and other vendors, including several award winners.

In 2017, St. Paul will join the trend with Keg and Case, a 32,000 sf devel-

December 2016

opment planned for the former Schmidt Brewery site. Plans include a 40-stall food market, a 200-seat restaurant and a coffee shop, with committed tenants including Hola Arepa and Five Watt Coffee.

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