MREJ Dec 2021 by REjournals

Not slowing down: Multifamily ready for a strong 2022 Pg. 4

The Redwell in the North Loop area of Minneapolis is an example of modern affordable multifamily housing

Pandemic? Even it couldn’t slow commercial development throughout Minnesota

ew commercial real estate professionals – few people at all, in fact – will look back fondly on 2021. That’s thanks to the COVID-19 pandemic, which continued to upend life throughout the country.

Add in the supply chain shortages that have come with the pandemic, and bringing commercial buildings to life in 2021 has not come without challenges.

By Dan Rafter, Editor

But not even the pandemic could bring commercial real estate development to a halt in the Twin Cities area. Despite the struggles brought on by COVID-19, developers throughout Minneapolis, St. Paul and their suburbs continued to bring multifamily towers, distribution centers, warehouses and mixed-use developments to the Twin Cities.

We recently spoke to three commercial real estate professionals about a busy, if challenging, 2021 and their hope for the new year, Anne Behrendt, chief executive officer and principal with Bloomington, Minnesota-based Doran Companies; Tony Kuechle, president of development with Doran Companies; and Paul Hyde, co-founder of Hyde Development in Minneapolis.

And 2022? It looks to be even busier as several new projects come online throughout the market.

Here’s some of what they had to say. DEVELOPMENT (continued on page 10)

Don’t expect demand for data center space to fall in the Twin Cities anytime soon By Dan Rafter, Editor

emand for new data center space has been on the rise in the Minneapolis-St. Paul market throughout 2021. And the signs point to this demand remaining strong throughout the first half of 2022, too. That’s the takeaway from the most recent North American Data Center Trends Report from CBRE.

According to CBRE’s report, Minneapolis saw the ninth-highest amount of data center leasing activity in North American in the first half of 2021. CBRE reported that Minneapolis saw 4.2 megawatts of net absorption of data center space in the first half of 2021. That’s a year-over-year increase of 600 percent, largely because of users moving their on-site data centers to third-party cloud providers.

CBRE also said that Minneapolis added 0.9 megawatts of data center inventory in the past year, bringing its total to 55.6 megawatts. The future looks busy in this sector, too, with CBRE reporting that the Twin Cities market had 13.5 megawatts of data center inventory under construction as of the midpoint of 2021.

DATA CENTERS (continued on page 14)

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DECEMBER 2021

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MINNESOTA REAL ESTATE JOURNAL

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A BIG YEAR FOR DEVELOPERS: Yes, the COVID-19 pandemic continued to upend life in the United States. And, yes, builders faced extreme supply shortages. But that didn’t stop developers from having a big year in 2021 in Minnesota.

DON’T EXPECT DEMAND FOR DATA CENTERS TO WANE IN 2022: Demand for new data center space has been on the rise in the Minneapolis-St. Paul market throughout 2021. And the signs point to this demand remaining strong throughout the first half of 2022, too.

DECEMBER 2021

APARTMENT MARKET STILL ON A HOT STREAK: The COVID-19 pandemic keeps dragging on. And as it does so, commercial real estate developers continue to adapt. But one commercial sector has remained resilient throughout the pandemic, multifamily. And as 2022 arrives, all signs point to demand and development activity remaining high for the apartment industry.

STILL TACKLING THE SHORTAGE OF AFFORDABLE HOUSING IN MINNESOTA: The AFLCIO Housing Investment Trust reached a key milestone in 2021, investing $1.6 billion in 100 multifamily housing projects in Minnesota. The projects include a mix of affordable, workforce, mixed-income and market-rate housing.

ONE RETAIL SECTOR THAT’S THRIVING TODAY? THE GHOST KITCHEN AND THE GHOST FRANCHISE: Ordering food from a delivery app? The odds are it might come from a ghost kitchen. And if you don’t know what these are, you will soon.

A BIG SURPRISE? RETAILERS ARE OPENING MORE STORES IN 2021 THAN THEY ARE CLOSING: Here’s a fact that might surprise many: Retailers have opened more stores in 2021 than they’ve closed. And this is a trend that isn’t slowing.

OVERCOMING THE MOST COMMON HURDLES OF AN OFFICE MOVE: As we enter a new year, many businesses are preparing to move into new spaces come 2022. The economic and social impact of the pandemic has made the margin for error around a move budget and timeline as narrow as ever.

HOW BAD IS THE LACK OF AFFORDABLE HOUSING IN THE UNITED STATES? SOME ARE CHOOSING RENT OVER FOOD: A lack of affordable housing remains a serious challenge for many adults in the United States. A new report from LendingTree shows just how serious.

Minnesota Real Estate Journal (ISSN 08932255) Copyright © 2021 by the Minnesota Real Estate Journal is published bi-monthly for $85 a year by Jeff Johnson, 7767 Elm Creek Boulevard, Suite 210, Maple Grove, MN 55369. Monthly Business and Editorial Offices: 7767 Elm Creek Boulevard, Suite 210, Maple Grove, MN 55369 Accounting and Circulation Offices: Jeff Johnson, 7767 Elm Creek Boulevard, Suite 210, Maple Grove, MN 55369. Call 952-885-0815 to subscribe. For more information call: 952-885-0815. Periodical postage paid at Maple Grove and additional mailing offices. POSTMASTER: Send address changes to Minnesota Real Estate Journal, 7767 Elm Creek Boulevard, Suite 210, Maple Grove, MN 55369 ©2021 Real Estate Publishing Corporation. No part of this publication may be reproduced without the written permission of the publisher.

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DECEMBER 2021

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Opus’ Vesi apartment project in the North Loop.

Not slowing down: Multifamily ready for a strong 2022 By Dan Rafter, Editor

he COVID-19 pandemic keeps dragging on. And as it does so, commercial real estate developers continue to adapt to the challenges this pandemic throws at them. But one commercial sector has remained resilient throughout the pandemic, multifamily. And as 2022 arrives, all signs point to demand and development activity remaining high for the apartment industry. What’s behind the strength of this sector? We recently spoke with Nick Murnane, senior director with the Minneapolis office of Opus Development Group, about the resilient nature of the multifamily sector both in the Twin Cities area and across the country. Here is what he had to say. Demand for multifamily space has remained high throughout the pandemic in the Twin Cities market. What is behind the strength of this sector?

“ You are seeing the young professionals who still want that live/work/play environment. They want to live in the active neighborhoods.” of demand for single-family homes and a low supply. Houses are selling fast with above-market offers and multiple offers. That is keeping some of the renters in apartments longer than they had planned.

Nick Murnane: Several factors play into why multifamily is so strong here. You are seeing the young professionals who still want that live/work/play environment. They want to live in the active neighborhoods. That’s why areas like the North Loop neighborhood in Minneapolis are thriving.

Specific to the pandemic, multifamily has seen a lot of the same challenges as any sector has in the Twin Cities. At the start of the pandemic, we saw an increase in vacancies, an increase in concessions and late rent payments. But the market has since rebounded well. These are communities that people live in for specific reasons. They want to stay in these communities, so they are paying their rents. The multifamily market has rebounded well since the start of the pandemic.

In addition, the housing market is incredibly competitive today. There is a ton

You mentioned rent payments. Are you surprised that renters have, for the most

part, continued paying their monthly rents throughout the pandemic? Murnane: We have worked with a handful of residents who were struggling. But overall, people have been paying their rents on time. The ability people have to work from home has helped with that. People have had to adapt and learn how to work from an at-home environment. But they have been able to continue working and make their rent payments. Have you seen any impact on the multifamily market from the Omicron variant?

MULTIFAMILY (continued on page 9)

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DECEMBER 2021

Taking on the challenge: AFL-CIO Housing Investment Trust still tackling the shortage of affordable housing in Minnesota By Dan Rafter, Editor

he AFL-CIO Housing Investment Trust (HIT) reached a key milestone in 2021, investing $1.6 billion in 100 multifamily housing projects in Minnesota. The projects include a mix of affordable, workforce, mixed-income and market-rate housing. According to HIT, these projects have provided about 22.8 million hours of union construction work, 13,142 units of housing that are 47 percent affordable and a total economic impact of $4.8 billion. These projects have been essential in Minnesota. It’s no secret that the supply of affordable multifamily housing remains far below the demand. There are too many people who can’t afford to live in apartment units located close to where they work. Any influx of new affordable apartment units, then, is an important benefit. “There was a big stretch, especially during the Great Recession, where it was difficult to find financing for construction projects,” said Kevin Filter, who has financed affordable housing in Minnesota for more than 40 years and is now a member of the HIT Board of Trustees. “But because the HIT partnered with us, we were able to spur revitalization and significant growth in the Twin Cities and statewide.” HIT, then, has been a key player in the development of new affordable and market-rate multifamily projects across the state. Its investment in 100 multifamily projects here is providing at least some relief for renters seeking apartment units they can afford. And in good news, HIT officials have no plans of slowing down. They are continually looking for more affordable and market-rate housing projects to fund. “Minnesota is only our second state in which we have been able to accomplish 100 deals,” said Paul Sommers, HIT’s regional director of marketing. “The other state is Illinois. We are very proud to celebrate our 100 deals in 34 cities across the state.” Of the 100 financing deals that HIT has closed in Minnesota, 71 are in the Twin Cities metropolitan area, Sommers said. Several of the projects that HIT has funded are under construction now. Those in Minnesota are: • Bassett Creek Apartments-Minneapolis

Left: Amber Union, a multifamily project in Falcon Heights, Minnesota, is one of many in which the AFL-CIO Housing Investment Trust has invested in Minnesota. Right: Elevate at Southwest Station in Eden Prairie, Minnesota, is an example of the multifamily projects in which the AFL-CIO Housing Investment Trust has invested.

• Parker Station Flats-- Robbinsdale • Sundance at Settler’s Ridge-Woodbury • Gateway Northeast-- Minneapolis • Zvago Cooperative at Stillwater-Stillwater • Morrow (University and Fairview)-- St. Paul • Wilder Square-- St. Paul • Amber Union-- Falcon Heights “In the last five years, there has been no busier market for us than Minnesota,” Sommers said. During this five-year stretch HIT has provided financing for 27 housing projects, with about 51 percent of the resulting units being affordable. And as far as recent history goes? HIT has provided financing for seven multifamily housing projects since the start of 2020. Of the units from these projects, 84 percent were affordable, Sommers said. It’s clear from the numbers, that not even the COVID-19 pandemic slowed HIT’s work. “We invested without a pause,” Sommers said about the pandemic. “We were able to keep our pipeline healthy. There was a little bit of a hiccup and work stoppage for about a week at the beginning of the pandemic. But the building trades are considered frontline workers and worked throughout the pandemic. Sometimes a construction loan might take a little longer. But we all recognized that affordable housing was a crisis before the pandemic. And as we were dealing with the pandemic, we understood that affordable housing was more important than ever.” Why has the Twin Cities area been so busy for HIT? Sommers pointed to the longterm relationships that HIT has built here with the mortgage-lending community. He also credits the building trades in the area. They, he said, have been committed

to providing affordable housing projects on time and of good quality. And in like most major markets across the country, demand is simply high for all types of multifamily buildings, including those falling into the affordable and market-rate range. “Every metropolitan area is in need of more rental housing,” Sommers said. “There are large demographics of young professionals that prefer a metropolitan area. The older population is downsizing, and they want to live in apartment units without worrying about maintenance. Many renters are increasingly interested in transit-oriented developments. The demand is there and is rising, here and across the country.” What’s interesting about the projects in which HIT is investing is that many of them are indistinguishable aesthetically from higher-end multifamily buildings. This means that they include higher-quality finishes and more of the amenities that all renters today want. This means a focus on common areas in which residents can gather. With more people working from home, it also means more common-area spaces in which renters can work during the day. Other HIT-financed properties include first-floor retail, including grocery stores. “It’s very rare that we do just an apartment building with nothing else,” Sommers said. “There is almost always retail. The projects that we finance have evolved. The quality of everything from the appliances and the interior spaces to the high ceilings have made these projects attractive and allowed people to have a quality affordable place to live.” Since the start of the pandemic, demand among renters has shifted a bit, from core urban buildings to those in the suburbs.

Some of this has to do with the ability more people have today to work from home. Other renters were seeking more space as the pandemic continued. Sommers, though, said that there will always be demand for apartment buildings in or near the Twin Cities core urban neighborhoods. HIT, for instance, is working on two financing deals for new apartment projects slated for the Minneapolis urban center and another in St. Paul. HIT hoped to close the financing for all three deals before the end of 2021. “In terms of entertainment and sports, a lot is located downtown,” Sommers said. “We will see what 2022 brings. There is plenty to bring people back downtown. It’s not only work and the return to the office. It’s also entertainment. It’s true that we have been financing more projects in the first-ring suburbs right now. But I do expect to see people returning to downtown, too.” While HIT remains busy, it – and the developers with which it works – still faces challenges in 2022. As the new year begins, there is little evidence that the supply shortages that the construction industry has faced are lessening. Sommers said that many of the projects done in Minnesota are stick-frame. That means that rising lumber prices were a challenge to the industry. At the same time, other supplies – such as steel and insulation – remain in short supply and are taking longer to reach construction sites. Despite this challenge, Sommers is predicting a busy year in 2022 for HIT. “We have a healthy pipeline,” Sommers said. “At HIT, we have an initiative in which we identified nine cities to do a billion dollars in financing. Minneapolis-St. Paul is part of that initiative. We are ready to put our best foot forward in 2022.”

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

DECEMBER 2021

One retail sector that’s thriving today? The ghost kitchen and the ghost franchise By Dan Rafter, Editor

rdering food from a delivery app? The odds are it might come from a ghost kitchen. And if you don’t know what these are, you will soon. Industry analysts say that these kitchens – which prepare foods either from online-only restaurants or from several traditional restaurants in an area – are becoming a big part of the U.S. restaurant business. Ghost kitchens, at their most basic, are commercial kitchens that don’t come with storefronts. They also don’t come with any physical dine-in or drive-through restaurant attached. Instead, they are spaces that restaurant owners might rent to prepare food off-site so that they can deliver it more quickly to their customers. A single ghost kitchen space, then, might prepare the food from several different restaurants in an area. Then there are those restaurants that don’t have any actual dining or carry-out spaces at all. They instead rely on an Internet presence and several ghost kitchens across the country. These so-called ghost chains run no physical restaurants. Customers instead order food online where it is then prepared in a ghost kitchen near them. This allows entrepreneurs to open online restaurants without worrying about operating actual dine-in or drive-through facilities. Most of the ghost kitchens that prepare the food offered at these ghost franchises are located in less expensive parts of town, often on the edge of industrial areas, where rents are cheaper. Matt Giffune, co-founder of Occupier, a provider of transaction and portfolio management software, told Minnesota Real Estate Journal that ghost kitchens are a smart business model in a world in which online ordering and food delivery has become so popular. “These were already an existing concept before the COVID-19 pandemic,” Giffune said. “The pandemic, though, just accelerated the demand for these operations. A lot of people were working from home. They had nothing in the fridge. If you ordered your salad on DoorDash, it was most likely made in a ghost kitchen than in the actual retail outlet you were ordering it from.” Consider MrBeast Burger. MrBeast, real name Jimmy Donaldson, is a YouTube star with more than 54 million subscribers to his channel. Late last year, Donaldson opened MrBeast Burger with locations across the country. The trick, though, is that diners can’t drive to any physical locations. The food from this ghost chain is created in other kitchens across the country and delivered to customers. Those hungry for

a MrBeast Burger can only order the food through delivery apps. Another YouTube star, Larray, a musician, launched his own ghost franchise in October of 2021, Larray’s Loaded Mac. On its website, Larray’s Loaded Mac advertises itself as a delivery only restaurant. Again, the food here is created in the kitchens of restaurants across the United States, depending on from where customers order it. These aren’t isolated examples. Ghost kitchens are growing, thanks in part to the COVID-19 pandemic. Throughout the pandemic, many customers have been hesitant to dine in-person at restaurants. That fueled an increase in online ordering. As more diners ordered their food for delivery, restaurants that offered delivery only didn’t seem unusual. CBRE, in a May report, said that it expects ghost kitchens to account for 21 percent of the U.S. restaurant industry by 2025. Before the pandemic, CBRE said, ghost kitchens were only expected to account for 10 to 15 percent of the restaurant industry market share. It’s not surprising that ghost kitchens have gained traction. CBRE in its report said that online food ordering rose 17 percent in 2020, largely because of the pandemic. And those habits -- even people who might not have ordered much food delivery in the past have now learned how convenient

“That solves a real need. It’s more convenient. I don’t see that

That is such a level of convenience that demand for it will only continue to increase.” Giffune, who works in the Boston area, said that street-level retail is just starting to come back around the office building in which he works. This can make it difficult to know which nearby restaurants are actually open for lunch. But Giffune can go online and have lunch delivered to the office, without having to worry about which restaurants are open and which are still closed.

trend going in the

“That solves a real need,” Giffune said. “It’s more convenient. I don’t see that trend going in the other direction.”

other direction.”

And while ghost kitchens are mostly thought of as an urban trend, Giffune said that they are actually opening everywhere, including suburban areas. This trend will only gain strength as more companies move to a hybrid work schedule in which their employees work some days in the office and others at home.

it is -- are expected to stick, something that will keep demand high for ghost kitchens. “These ghost kitchens are 100 percent here to stay,” Giffune said. “The pandemic not only accelerated the demand for online food ordering, it created a new normal of expecting on-time delivery for pretty much anything. Ghost kitchens are just one example of this trend. If you need a gallon of milk or some toothpaste, you can order it online and someone on a scooter will deliver it to your house within 10 minutes.

“People in the suburbs desire the same level of convenience that people living in the city do,” Giffune said. “The ability of people to work from anywhere will drive that expectation of convenience to more areas. Ghost kitchens will spread out from the urban areas and into the suburbs.”

DECEMBER 2021

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

MULTIFAMILY (continued from page 4)

We are adding amenity spaces in our new buildings that are also work-from-home areas. There are tables and breakout areas and booths that people can work in. We are adding small conference rooms. If they need to make a call, they can jump into one of those small conference rooms.

Opus recently started construction on a 250-unit multifamily development in St. Louis Park, Minnesota.

Murnane: Not yet. But we do monitor any variant of COVID and act accordingly. If we need to close amenity spaces, we will do that. But we have great community managers. They are doing a great job of making people feel safe in our buildings. These are communities. The amenities are part of the reason why people choose to live there. Keeping everyone safe is our top priority, but we also want to keep those amenities available if we can. Are vacancies low now in your company’s apartment developments? Murnane: We have seen a nice rebound. It is submarket-specific. The North Loop of Minneapolis is seeing a lot of traffic and enjoying a solid rebound. We have a project in the North Loop, the Vesi, that is seeing a tremendous amount of activity and a strong lease-up. On the other hand, in the Twin Cities’ CBD and urban core, activity continues to be slower. There are more concessions in those buildings. The lack of workers in downtown Minneapolis and St. Paul is contributing to that. There is a need to get the workforce back downtown. That is taking longer than anyone expected. Because of that, we continue to see a little slowdown in the urban areas as opposed to the activity we are seeing in the first-ring suburbs.

Are there any new multifamily projects that Opus is working on that you’d want to mention?

Is downtown Minneapolis still quieter than normal? Murnane: We still have a lot of the larger employers in downtown opting for a workfrom-home option. There has not yet been a full return of the workforce in downtown. Some employees have come back, but not to the levels we need to see for the commercial businesses and multifamily projects in the urban core. How high is multifamily demand in the first-ring suburbs? Murnane: For the first time in a while, suburban projects have a little bit of an edge over urban ones. A lot of projects are being delivered to the first-ring suburbs, but we are seeing solid absorption of those units.

A large portion of people are able to work from home. They want to be close to the urban core, but they don’t need to be in the CBD downtown. They want to work from home but still have quick access to entertainment areas. When renters are looking at new apartment projects, what amenities do they want? Murnane: The number-one thing is again related to working from home. They want spaces that can be used for entertaining as well as working from home. Does this space work at 2 on a Tuesday afternoon but also on a Friday at 9 p.m.? Spaces have to function as a workspace during the week and an entertainment area during the weekends.

Murnane: We have a new project in St. Louis Park that we just broke ground on last week. It’s a 250-unit, market-rate apartment near the light rail line. It’s a quick train ride to downtown Minneapolis. We are excited about that one. We are excited to deliver that project. It is a transit-oriented development in a great community close to Minneapolis. We also have the Vesi in the North Loop neighborhood that just got stabilized. That opened a year ago and we are working steadily through the lease-up period. Do you think demand will remain strong for multifamily developments throughout 2022? Murnane: Well-executed, well-located projects will continue to do well. There is a ton of investor demand for multifamily. Over the next 12 months, that demand will continue to increase.

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

DECEMBER 2021

redevelop and build new buildings on the property once the leases expire.

DEVELOPMENT (continued from page 1)

Throughout the pandemic, multifamily has remained one of the strongest commercial sectors. What do you think is behind this strength?

We are fortunate to have a great team and a great community to work with in Fridley. We are at 100 percent occupancy with our Northern Stacks project. We are eager for more opportunities to expand the park. Buying this building was our way of doing that. We will either reposition the 430,000-square-foot building or build one to three new buildings. We have some homework to do in the first part of 2022.

Anne Behrendt: I think that many of the renters who are choosing to live at the projects we are developing are choosing a lifestyle. They want quality and they want walkability. That desire didn’t change during the pandemic. People still want a connection to the community and the ability to live in a way that provides a lot of freedom. Those wants were driving renters by choice before the pandemic and they remained strong throughout it. We are continuing to see those choices being made by the populations that have driven the rentby-choice trend during the last decade. Tony Kuechle: Renters by choice are exactly who are driving the demand for multifamily. We are seeing more empty nesters who have sold their larger homes and are moving to a maintenance-free lifestyle community closer to their children and grandchildren. That is part of the reason why we are seeing multifamily flourishing in the suburbs. What are some of the new projects Doran Companies is working on? Kuechle: We broke ground a couple months ago on a project in Minnetonka on Shady Oaks Drive that will be 375 units. It will be the largest market-rate multifamily development in Minnetonka. We also have a multifamily development in Tonka Bay on Lake Minnetonka that will be 86 units. That will be added to a community of 1,050 people. The population could increase by 10 percent with that project. It’s not a massive development, but it will be a change for that community. Before the pandemic hit, we had written a lot about how strong multifamily demand was in the center of cities. That seems to have changed now. Are you seeing increased demand for multifamily projects in suburban areas now? Behrendt: We are, and we think that demand will continue. There are a number of renters by choice who are looking to change their lifestyles but not their networks and circles. They want to go to the same grocery store, the same place of worship and the same walking trail, but they want to sell their larger homes. They are choosing suburban projects that provide a bit more of an urban lifestyle but in an area that they call home. Do you think demand for urban multifamily properties will return as the pandemic fades? Kuechle: I sure hope so. I think it will, but there are other concerns that renters have in addition to the pandemic. People have safety and security concerns in downtown Minneapolis, too. Those do have to be addressed.

The Dakota Commerce Center, being developed by Hyde Development in Fargo, North Dakota, will be located near an Amazon fulfillment center.

Behrendt: There are a number of high-profile large multifamily projects that will be delivered in the urban areas in 2022. I think that how those projects perform will be telling. I am hopeful that these new projects will spur continued growth in the commercial market in downtown. When it comes to new apartment buildings, what type of amenities are renters looking for today? Kuechle: The number-one desired amenity that we have seen hasn’t changed much lately: It’s the ability to work from home, and not necessarily in the apartment unit itself. People want to pick up and move throughout different portions of the building as they work. They want to change their environment as they work during the day. When people were required to stay home, they didn’t necessarily work from their apartment units. Instead, they worked in the community areas. That is still the case. Many people are looking for the social interaction that they have missed from the office. In addition to that, we are still seeing renters interested in pools, workout facilities, entertainment suites and outdoor amenities. Behrendt: Renters want different options in their buildings for working from home. We will continue to design that in our projects. That is what our tenants want. The work-from-home spaces add to the overall flow and community feel of the buildings. Kuechle: It’s important to remember, too, that as we talk about empty nesters, the amenities in the buildings aren’t necessarily for them. They are for the grandkids who want to go swimming or play in a game room. It’s fun to see grandma and grandpa and experience all those amenities. It’s not easy to predict the future, but do you think 2022 will be another strong year for multifamily development in the Twin Cities area?

Behrendt: I think that we will continue to wrestle with supply chain issues and significant price fluctuations with construction materials and labor. That is a challenge during this stage of the pandemic. But in real estate development, there are always some headwinds. The market fundamentals are strong. There is demand still not being met. The pace and strength that we have seen in the last year or so will continue in 2022. Kuechle: I think the other factor to watch is interest rates. Demand for apartment units will be there. The ability to perform and deliver developments, though, will be challenged by supply chain issues. Behrendt: The challenge with supply chain issues is that it feels a bit like whack-amole. When one thing improves, another becomes constrained. The uncertainty is going to be a challenge for everyone in real estate development and construction. While multifamily has remained strong throughout the pandemic, demand for industrial space has boomed. How busy has 2021 been for Hyde Development when it comes to industrial? Paul Hyde: This year has been very active. We have even been active during the holiday week. This has been the busiest week of Christmas that I’ve seen in 24 years. Instead of attending Christmas parties and lunches, we are at our computers working. You ended 2021 with an industrial acquisition, right? Hyde: We purchased a 430,000-square-foot industrial building in Fridley, Minnesota, three weeks ago to the east of our Northern Stacks project. We are calling this Northern Stacks Nine. It is occupied now with a number of tenants that have some lease term left. We will be studying over the next nine months whether to reposition the building like we did with our Stacks 8, adding new utilities, a new roof, new paint and a new sprinkler system or if we should

What factors do you consider when making that choice to reposition a building or rebuild?

Hyde: The simple answer? It comes down to money. The more descriptive answer is that we look at the value of the land and property. We paid a good amount for the building and we are in a very good spot to reposition it. We can spend money on a roof, paint, parking lot, utilities and the sprinkler system and still be in a good cost basis to charge market rent. If you tear the building down, you have torn down a part of what you paid for. Then that purchase price has to get converted into your land basis. The question then is whether the land basis is competitive enough to support new construction and current market rents. That is what we are going to study. I think the answer will be ‘yes.’ Rental rates for industrial properties are rising. We have seen that from our first to our eighth buildings at the Stacks. The demand for infill construction is stronger than ever. What are some of the reasons for industrial’s strong performance throughout the pandemic? Hyde: The simple answer is that COVID accelerated a trend that we used to see only at holiday shopping time: people preferring to buy their goods online and delivered to their home. When COVID kept us in our homes, the goods that we wanted to buy and have delivered became much broader. It’s not just Gatorade and Minute Maid juice. It’s grills, snowblowers, lawnmowers, furniture, you name it. People expect to be able to buy it and have it sent to their homes rather than having to go into a store. There is not as much need for a large retail store, at least at the scale that we have been used to. There has been a dramatic increase in distribution centers to get these goods to consumers’ homes. That was always going to grow as consumers’ preference for online shopping continued to increase. But COVID changed DEVELOPMENT (continued on page 12)

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DECEMBER 2021

is the big companies coming back. When they decide to start sending people back to the office, that will change the whole feel of the downtown office market.

DEVELOPMENT (continued from page 10)

this to an everyday thing and not a season thing.

How busy do you think 2022 will be for your company?

Then there are the supply chain shortages. These shortages highlight why just-in-time delivery doesn’t serve us well when there are disruptions. Companies need to store more stuff so that it is ready to be delivered quickly. This means that they need more warehouses here and not in China. On the capital side, investors want to invest in industrial today. Industrial never used to be cool. Everyone wanted to invest in high-rise office buildings and fancy retail centers. Those have suffered, losing investment value during COVID. Investors want more of industrial.

Hyde: It will be busier than this year. I think the constraining factors to watch for are interest rates and the supply chain issues. We have seen all-time-high pricing for industrial buildings this year. Because interest rates are still so low, there is more money that wants to own industrial buildings than there are buildings for sale.

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Do you think those online shopping habits will continue even after the pandemic fades?

You also work in the office space. Do you see any positive signs for the office market today?

Hyde: That seems to be the indication. We are seeing our tenants planning for it. Companies are trying to get out in front and making sure they have their network of distribution centers ready to serve their customers. Companies sure seem to be planning on online shopping only become stronger.

Hyde: We play in the smaller, more creative office space, brick-and-timber. While we saw the need for rent relief for some of our tenants in early 2020, a lot of that has been recovered. In the last three months, our office building in the Northeast submarket of Minneapolis that was at 50 percent occupancy reached 90 percent with three deals that got done in the last eight to 10 weeks. I think the strength of the office market is

neighborhood-specific today. In the North Loop and Northeast submarkets, we are seeing more success than perhaps the office market is seeing in the downtown core. We just need people to come back to work in the office for that to start to recover. Are you seeing more people returning to the office throughout the Minneapolis-St. Paul market?

The supply chain issues are a challenge, too. We are building a project in Fargo. Normally, we would get the materials for our roof delivered in one day, the membrane and the insulation. That is now being delivered in four weeks in spots. That slows your work down. The roofing people are having a hard time committing to any date. The supply chain problems we are now facing are unprecedented. More industrial buildings are being built. Companies like Amazon bought all the bar joists to make sure their buildings will be built. The rest of us are asking, where is mine?

Hyde: It is slow, but yes, every week we see more people in the Skyway. The parking lots and garages are getting fuller. The next step

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across the country, too, something highlighted in CBRE’s most recent data center statistics.

DATA CENTERS (continued from page 1)

Dan Peterson, vice president of data center solutions in the Minneapolis-St. Paul office of CBRE, said that the Twin Cities are not unusual: Demand for data center space is rising across the country. “It is indicative of what we are seeing in a number of markets,” Peterson said. “There is a set of conditions historically that are making it favorable for data center development. We are in another cycle where technology needs are pushing the demand for new data center space. It is going on everywhere.” Peterson said that enterprise users are more frequently moving to a hybrid strategy today, relying on a combination of cloud services, colocation services and their on-premises data centers. As this happens, companies need more data center space. This is keeping developers busy across the country. “It’s been interesting during the pandemic. At first, everyone was working remotely. That showed just how important cloud services are,” Peterson said. “We saw a real spike in demand for the services that those cloud companies can provide.” At the same time, a number of larger IT projects were put on hold at the start of the pandemic, Peterson said. That led to a drop in the demand for wholesale data center use from some customers.

But as the country moves into the next phase of the pandemic – with the hope that the omicron variant will be less severe than other forms of COVID – demand is again on the rise for data center space, with cloud service companies continuing to drive the market in both primary and secondary cities. Peterson says that the demand for data center space, both in the Twin Cities market and across the country, will only continue to rise. “Operators continue to build more inventory,” Peterson said. “And that inventory continues to be mostly pre-leased. Demand for data center space will only rise in both primary and secondary markets. I see an upward trajectory for data center demand for the foreseeable future.” As Peterson said, data center demand is rising not just in Minneapolis and St. Paul but

CBRE reported.

Providers brought 214.3 megawatts of new wholesale colocation supply online in the seven primary U.S. data center markets in the first half of 2021, an increase of 7 percent from the year-earlier period,

Despite this new supply, vacancy remained low across those markets – as low as 1.6 percent in Silicon Valley - amid persistent demand. Relief from tight vacancies likely will come from the 527.6 MW of capacity currently under construction in primary markets. That figure marks a 42 percent increase from a year earlier, CBRE reported. “We’ve seen no indication that the amount of data used is leveling out, so demand for data centers will increase across both primary and secondary markets,” said Pat Lynch, senior managing director of data center solutions for CBRE. “Hyperscale users are beginning to position themselves closer to end users to support technologies including 5G, artificial intelligence and blockchain technology,” Lynch

DECEMBER 2021

said in a written statement. “As this interest in edge computing and edge data centers continues, we expect to see a heavier appetite for data centers from investors who are starting to view data centers in the same category as more traditional real estate sectors.” Northern Virginia remained the most active data center market with net absorption of 70.6 MW in the first half of 2021, more than triple that of Phoenix, the next highest market. Net absorption totaled 142.7 MW across the seven primary markets in the first half, an increase of 3.4 percent from the first half of 2020. Data center users leased more space in the first half of 2021 than in the second half of 2020 despite fewer deals being signed during this period. Phoenix saw more leasing activity in the second quarter of 2021 than during any other quarter in the previous five years. However, several markets, including Northern Virginia and Dallas, saw a drop in absorption year-over-year as some users consolidated their operations, CBRE reported. Of the construction underway at the end of the second quarter, 317 MW (60 percent) has been pre-leased. Markets with notable pre-leasing activity include Silicon Valley, where 70 MW (82 percent) of the total MW under construction was spoken for, as well as Dallas (17.5 MW), Chicago (17.1 MW), New York Tri-State (13.1 MW), Phoenix (6 MW) and Atlanta (3.5 MW).

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DECEMBER 2021

A big surprise? Retailers are opening more stores in 2021 than they are closing

By Dan Rafter, Editor

ere’s a fact that might surprise many: Retailers have opened more stores in 2021 than they’ve closed.

might not have been able to get into before the pandemic. I think mid-tier cities might see their urban cores bounce back more quickly. In some of the larger cities, it might take more time. When you look at some of the expansion plans for retailers, those that are looking at opening smaller-footprint spaces are looking at the urban cores of mid-tier cities for some of that expansion. There was a time when these spaces might not have been considered exciting opportunities for these national retailers. Now it has become a new avenue for them to pursue.

And this is a trend that isn’t slowing. Even with the COVID-19 pandemic, national and regional retailers will have opened more new locations in 2021 than they will have closed. Dominating the list of retailers that are expanding? Grocers, convenience stores and fast-casual restaurants. This is the good news from Lehi, Utah-based Retailsphere, which earlier in 2021 released a report on the expansion plans of national and regional retailers. According to the report, 52 percent of grocery-based retailers are expanding today, while 52.5 percent of fast-casual restaurants are doing the same. Retailsphere found, too, that 58 percent of value retailers -- such as dollar stores -- are also expanding this year. What’s behind the surprisingly strong year for retailers? We spoke to Barton Strawn, director of marketing with Retailsphere, and Tim Benzinger, vice president of product for the company to find out. What are some of the strategies retailers have taken to not only survive but grow during the pandemic? Barton Strawn: Our research team has spoken with a lot of retailers. One of the biggest moves retailers have made during the pandemic is to make it easier for consumers to buy online to pick up in the store or for curbside pickup. That was already happening before the pandemic, but the pandemic provided a shot in the arm to this trend. With more people staying home, retailers found that they could rely on their online presence and the convenience of having localized pick-up opportunities. If you look at the clothing sector, big boxes and places like Target, they all revamped their online platforms pretty aggressively. Restaurants were already doing curbside pickup, too, before the pandemic. But that has become even more important today. Even the smaller retailers are offering curbside pickup. We’ve even seen that when restaurants are looking to open new locations, they are more explicit about saying that they need extra parking that they can dedicate to curbside pickup. Tim Benzinger: These retailers know that the more convenient they are, the more they’ll stay top-of-mind with consumers. The more convenience they offer, the more often people will shop with them. That’s a trend that will stick around after the pandemic ends.

Do you think curbside pickup and online ordering will remain an important revenue stream for retailers even after the pandemic ends? Strawn: These options do add a more robust revenue stream for retailers. In-store shopping and in-restaurant dining will begin to recover again and hopefully return close to normal numbers. But I think you will see curbside pickup and increased delivery options stay in place even after that happens. For me personally, I’ve gotten used to it. It is nice to pull up to Target and they run a bag out to your car. I don’t have to go into the store. It saves a lot of time. What are some of the more important trends you’re seeing in the expansion plans that retailers do have? Strawn: A lot of retailers are opening smaller locations. Look at Target. They had already been experimenting with stores with smaller footprints. The pandemic increased the need for that. I don’t know if the pandemic increased retailers’ plans for focusing on smaller-footprint locations, but it did make those stores more important. A lot of national brands are looking to open stores with smaller footprints. Benzinger: It’s about creating a more curated experience for customers. Target is doing this with its smaller stores in urban areas. They are trying to create a niche for their brand that is exclusive to that neighborhood. We have seen articles about Ikea considering the same thing. It’s more like shop-and-go instead of navigating the maze of a larger store. We are seeing some retailers experimenting with these options. It’s all pointing toward a trend of more curated and considered space for consumers. Strawn: We’re also seeing some larger brands partnering with smaller brands. Target, for instance, might sublease some of the space in one of its larger stores to someone else, like Starbucks or a CVS pharmacy. That ends up as a good partnership and both brands ben-

efit from it. The stores with larger footprints are looking for partnerships to improve their space and curate it. They are finding ways to get creative with their larger square-footage buildings.

“ In-store shopping and in-restaurant dining will begin to recover again and hopefully return close to normal numbers. ” How about downtown areas? Some of the retailers in the downtowns we cover are struggling because of the pandemic and the lack of office workers. Do you see that improving anytime soon? Benzinger: A lot of that depends on the businesses and offices. The sooner the big companies get their employees back to work, the more relevant retailers in downtowns will be from a convenience standpoint. Strawn: Our researchers have found that some of the urban areas are starting to bounce back when it comes to retail. There are some interesting opportunities for retailers in urban core areas. Some places have closed and the landlords are looking to fill that space as quickly as they can. If retailers are in a position to expand or open something new, they will find a lot of interesting opportunities in those urban cores that they

How about retailers selling experiences? Before the pandemic, experiential retail was considered a strong bet. Is experiential retail coming back now? Strawn: At least from our research, it looks like experiential retail has come back. Topgolf is a good example. Topgolf is doing very well right now. As people get vaccinated and cities are pushing for that return to normalcy, we will see more of the experiential retail come back. Benzinger: People have picked up many hobbies during COVID. Experiential retail is a complement to that. Then there is the rise of social media. People want to share their experiences at interesting retail venues. They want to share with their friends and family members what they are doing, be it rock climbing or some other new hobby. Experiential retail is here to stay. How about the suburbs? They are seeing a lot of retail expansion, right? Benzinger: A lot of retailers in urban areas are moving out into more suburban areas, too. They want to reach and expand their brands further. At the same time, consumers might go into urban areas and find places that are still closed because of the pandemic. In more suburban areas, that is usually not the case. Where we are, in the suburban areas all the restaurants are open. In downtown areas, that is sometimes a question mark. Retailers want to position themselves where they know the people are, and that includes the suburbs. Strawn: We also see that there is a shift in population from large urban centers to the urban areas of mid-tier cities and their surrounding areas. Some of the retailers see that many of their consumers have moved to cities like Indianapolis. This inspires them to consider expansion plans in those areas. They want to move to these mid-tier cities and capture an even larger market. For brands that are poised to grow, this is an exciting opportunity to reach into new markets. There has been the unfortunate demise of some retail concepts, but plenty of retailers are also looking to grow.

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DECEMBER 2021

Overcoming the most common hurdles of an office move By Peter Kontos and J.T. Garofalo

s we enter a new year, many businesses are preparing to move into new spaces come 2022. The economic and social impact of the pandemic has made the margin for error around a move budget and timeline as narrow as ever. To help businesses mitigate--if not sidestep--any challenges around their next office move, we’ve outlined some of the top hurdles to keep an eye out for based on our experience as project managers, and how to address them. 1. Identifying key decisionmakers, needs and approval processes. It is important to understand the flow of decision-making during the process of a move. Identifying who has the last say is key. Understanding departmental budget constraints and key decisionmakers from those departments upfront will help when it comes time to making critical time-sensitive decisions. Hiring experienced and objective outside consultants helps navigate this process and advances the most efficient and unprejudiced tactics of a move. 2. Maintaining productivity and change management. Taking workers out of their current office environment and putting them into a new space can disrupt productivity if not handled delicately. Often employees may encounter new workstations with different levels of privacy. If you plan to create alternative work environments, businesses must address this with the workers prior to arriving in the space.

This is a process that usually starts even before construction. Businesses need to bring employees along with management through the journey of an office move and keep them informed step by step of what changes will be taking place. For example, if hot desking or flexible office space is utilized and people no longer have assigned offices/desks, it is crucial to work with the employees to downsize their needs months prior to a move. This often starts with digitizing files and identifying spaces in the new office such as lockers or files in which they can keep office materials that they don’t want to lug home at the end of the day but can access when at the office. Often engaging employees in some decisions (with limited options) is a great way to make them feel part of the process. 3. Integrating new employee work-fromhome expectations. Transitioning to more work-from-home flexibility was a tough challenge for companies and employees prior to the pandemic, only to be accelerated during the last 18 months. Companies might not have invested in the needed technology (laptops vs. desktops) and investment infrastructure pre-pandemic. Now, companies must offer this alternative way of working and those that fought this prior to the pandemic had to quickly pivot and make the change. Many companies were already creating flexible work environments pre-pandemic, which put them at an advantage. When coordinating a move to a new office, decision-makers must lean on the operational flexibility work-from-home can offer while

planning new office design and needs in recognition that work-from-home is here to stay. 4. Connectivity! At the onset of any move, effective project managers and other decision makers make sure the IT department sets up their vendor for internet and connectivity to the new office. The lead time for this can be months out and the team needs to work with the building to make sure the desired vendors are in the building. If not, the client and the building need to work together to make sure a new vendor can get into the space. No matter how quick you can build a space, if the clients don’t have connectivity, they cannot run their business from the new space. 5. Identifying and budgeting for a variety of IT needs. Integrating remote and virtual collaboration technologies in the office space upfront makes a move and productivity upon arrival much easier. Business must get team members involved upfront in identifying IT needs so that the infrastructure makes it into the drawings (for pricing) and doesn’t become an afterthought and unexpected cost. Also, it’s important to remember that technology changes very quickly these days. Investing in furniture with heavy AV and technology can often be a waste and requires updates while furniture becomes antiquated quickly. When strategizing a new office move, businesses should make sure they are not committing

significant investments to technology that may become quickly obsolete. 6. Delays in confirming external vendors. Identifying all the external service providers needed for a new space is critical to prevent delays for set up on day one of business in a new space. This includes anything from copier equipment vendors to coffee vendors. It’s important that the specifications for their products are designed as part of the construction documentation phase to save on change orders down the road. 7. Furniture procurement. Laying out the procurement process for furniture and integrating it into the schedule is key to making sure lead times are accounted for. Often clients handle this process on their own rather than engaging the design firm, but a good project manager helps layout the process and timing so all parties know what to expect. A good move project manager hopes for the best outcomes but is always prepared to handle the worst challenges. An office move is an important step for every business, and decisionmakers should approach and plan for the event in a manner that is reflective of where the trajectory of their business is headed. Peter Kontos and J.T. Garofalo lead project management for Alvarez & Marsal Property Solutions

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DECEMBER 2021

How bad is the lack of affordable housing in the United States? Some are choosing rent over food

By Dan Rafter, Editor

lack of affordable housing remains a serious challenge for many adults in the United States. A new report from LendingTree shows just how serious.

housing costs. Other adults -- 29 percent -- said they borrowed from loved ones, while 27 percent said they took money from savings. That same percentage of respondents also said they sold something of value to help cover their rent or mortgage payments.

According to the report, released in December, 69 percent of U.S. adults with monthly rents or mortgage payments say they have made a sacrifice to pay for housing. And one in five say they’ve chosen to pay their rent or mortgage rather than have enough to eat.

A total of 37 percent of respondents said they skipped a vacation to be able to pay their housing costs, while 22 percent said they have stayed in a bad job and 20 percent said they skimped on having enough to eat.

LendingTree surveyed nearly 1,400 U.S. adults with monthly rent or mortgage payments for the survey. How much of a struggle are housing costs to Americans? The LendingTree survey found that 48 percent of U.S. adults with a monthly rent or mortgage payment said they were worried about making that payment during the past month. Those most worried included Gen Zers, with 67 percent reporting that they were worried

about making their payments, and Millennials, with 59 percent reporting the same.

about making their monthly rent or mortgage payments.

LendingTree said that 59 percent of parents with children under the age of 18 worried

The report found, too, that 30 percent of U.S. adults said they had taken on a side hustle or other job to afford their monthly

LendingTree reported, too, that 45 percent of surveyed adults said they are considering moving to a less-expensive living situation. Gen Zers, at 62 percent, are the group most likely to consider such a move.

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