MREJ Feb/march 2022 by REjournals

Refreshed and move-in ready at Butler Square: Pg. 6

Light industrial’s roll: Ryan Companies boosting its investments in light industrial properties By Dan Rafter, Editor

This building, in Edina, Minnesota, is an example of the type of light industrial facility in which Ryan is increasingly investing.

inneapolis-based Ryan Companies hasn’t been shy about investing in light industrial properties in the Twin Cities market.

This isn’t surprising. The demand for this asset class – which CBRE defines as industrial facilities smaller than 120,000 square feet – has been soaring before and during the COVID-19 pandemic.

Earlier during the pandemic, Ryan, as part of a joint venture, acquired a $16 million light industrial warehouse facility in Edina, Minnesota. Earlier this year, Ryan closed on its acquisition of the Minco industrial portfolio in Minnetonka, Minnesota. This $12.5 million portfolio includes three industrial buildings totaling 168,315 square feet. We recently spoke with Shawn Moore, vice president of acquisitions and assets management with the Minneap-

olis office of Ryan Companies, about why the company is so eager to invest in light industrial and why this asset class has generated such demand from investors. Let’s start with the obvious question: What do you consider to be a light industrial facility? Shawn Moore: Different people have slightly different definitions. But in general, light industrial facilities have lower ceiling heights than do bulk distribution facilities. INDUSTRIAL (continued on page 16)

The best city for renters in the Midwest? New study points to Minneapolis By Dan Rafter, Editor

hat’s the best city in the Midwest in which to rent an apartment? That’s pretty subjective, but a Feb. 10 report from Living Cozy puts Minneapolis at the top of the list.

Living Cozy looked at the average rent for a two-bedroom property in a city, the average wage there and the cost of

living. It also considered the amount of green space and parks in cities and looked at whether the city had any rent-control legislation that could protect tenants.

you’re looking for other Midwest cities on the top-10 list? Don’t bother. Minneapolis was the only one that made Cozy Living’s list.

When looking at those factors, Living Cozy ranked Minneapolis as the third-best city in which to rent in the United States and the best city in the Midwest. And if

What gave Minneapolis the edge? First, apartment rents here are fairly affordable compared to other cities in the RENTERS (continued on page 18)

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MINNESOTA REAL ESTATE JOURNAL

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LIGHT INDUSTRIAL STILL ON A ROLL IN THE TWIN CITIES: Minneapolis-based Ryan Companies hasn’t been shy about investing in light industrial properties in the Twin Cities market. This isn’t surprising. The demand for this asset class – which CBRE defines as industrial facilities smaller than 120,000 square feet – has been soaring before and during the COVID-19 pandemic.

THE BEST CITY FOR RENTERS IN THE MIDWEST? NEW STUDY POINTS TO MINNEAPOLIS: What’s the best city in the Midwest in which to rent an apartment? That’s pretty subjective, but a Feb. 10 report from Living Cozy puts Minneapolis at the top of the list.

WHEN IT COMES TO ATTRACTING INVESTORS, IT’S MORE THAN JUST THE TWIN CITIES: Multifamily investor Northland has entered the Rochester, Minnesota, market, acquiring a 186-unit apartment community there. It’s more proof that it’s not just the Twin Cities themselves attracting investors to the state.

REFRESHED AND MOVE-IN READY AT BUTLER SQUARE: Construction crews wrapped renovations in July of last year at the Butler Square building at 100 N. Sixth St. in downtown Minneapolis. Today, tenants are enjoying the results of that renovation project.

RENOVATIONS WRAP AT KEY MINNEAPOLIS OFFICE TOWER: 50 South Sixth, the 29-story Class-A office tower in the heart of the downtown Minneapolis Central Business District, has completed a multi-million-dollar lobby renovation.

STILL TOUGH OUT THERE FOR RETAILERS, BUT COSTAR SEES SIGNS OF HOPE: It’s no secret that retailers have taken their hits during the last two years of the COVID-19 pandemic. But in cheerier news? There are signs of hope in this sector today.

WHO CARES ABOUT HEADWINDS? CREXI PREDICTS ANOTHER BIG YEAR FOR CRE: It’s not like 2022 isn’t bringing challenges to the commercial real estate market. COVID-19 is still here. Inflation has become a serious issue. And the commercial construction industry is still dealing with a labor shortage and supply delays.

CRE ROUNDUP: A brief look at new CRE projects in Minnesota

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It’s not just the Twin Cities: Investors attracted to entire state’s commercial real estate market

By Dan Rafter, Editor

he Minnesota commercial real estate market remains an attractive destination for investors. And while much of this investment activity is centered in the Twin Cities itself, Minneapolis and St. Paul aren’t the only municipalities drawing investor dollars.

employment base and busy downtown area.

incorporating them into the existing apartment complex.

And there’s affordability. Northland prefers to invest in multifamily properties in which the rents are affordable to most nearby potential tenants.

No, investors are sinking their money into commercial real estate across the state, as one recent transaction proves.

“Affordability is huge for us,” Campbell said. “To know that residents in the market are comfortably able to afford the rents is important for us. That doesn’t always happen in some of the higher-cost markets in the country. The markets we look for are ones in which residents aren’t overburdened by rents.”

Each of the existing buildings of SoRoc on Maine offers studio, one-, two-and three-bedroom units. SoRoc on Maine also boasts a variety of indoor and outdoor amenities. This includes a central green and pond, a pool, hot tub deck and bocce ball court.

Multifamily investor Northland has made its entrance into one of these markets, Rochester, Minnesota, about 86 miles from Minneapolis, acquiring SoRoc on Maine, a 186-unit garden community spanning three three-story residential buildings. Mike Campbell, associate vice president of acquisitions with Newton, Massachusetts-based Northland, said that the company each year canvasses the country for secondary and tertiary markets that boast strong demographics and equally strong public/private partnerships. This search put the Minneapolis-St. Paul area, and any communities within an hour-and-a-half drive or so, on Northland’s radar. Campbell said that Rochester made sense because of its strong demographics, stable

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SoRoc on Maine itself was attractive to Northland, too, Campbell said. The property has undeveloped land adjacent to it, land that Northland plans to develop with 160 to 200 more apartment units, all of which will be part of an expanded SoRoc on Maine. The hope is to start this construction within a year of acquiring the property, Campbell said. This isn’t the first time that Northland will take such an approach. Campbell said that the company purchased a multifamily property in Santa Fe, New Mexico, that also had a small parcel of adjacent land. Northland built new units here, too, also

SoRoc on Maine also benefits from its strong location. The apartment complex is near downtown Rochester, home to the headquarters of the Mayo Clinic and 3 million square feet of office and data center space for IBM. Campbell said that Northland plans on investing in additional multifamily properties in Minnesota. “Our ultimate goal is to establish a foothold in an area,” Campbell said. “We like to build a portfolio of units within a close radius of the existing properties we hold.” Northland owns and operates a multifamily portfolio that includes more than 26,000 units across the United States. The Rochester acquisition adds to Northland’s portfolio of long-term markets within NORTHLAND (continued on page 10)

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Butler Square:

Refreshed and move-in ready

The Butler Square refresh accentuates the historic landmark’s award-winning architecture, including its massive timber structure, natural finishes and soaring atriums. (Photo credit: Butler Properties, LLC/Tom Wallace.)

Construction crews wrapped renovations in July of last year at the Butler Square building at 100 N. Sixth St. in downtown Minneapolis. Today, tenants are enjoying the results of that renovation project. Here’s a look at the steps the building’s owner took to rejuvenate this key Minnesota building. We hope this helps inspire other building owners to undertake their own revitalization projects. At first glance, Butler Square’s spectacular, bright and uplifting “refresh” might seem like it was completed in response to the global COVID-19 pandemic. While it’s true that the building’s new amenities are in especially high demand by organizations that are working to strike an ideal mix of in-person, hybrid and/or virtual work—and adapting their operations and facilities accordingly—the vision for this project began to take shape in mid-2019. Back then, the building’s owner, Jane Mauer, conducted walk-throughs with architects, and by January of 2020 construction had begun. Finishing touches were completed a little more than a year later. The new and refreshed amenities include: • Brand-new finishes and updated lighting. The white tile that replaces the existing brick floor boosts natural light levels and amplifies the impact of Butler Square’s

“Beauty matters. It’s natural to want to construct, renovate, operate and maintain a beautiful building in ways that sustain and enhance this characteristic.” soaring atriums. The design/project team also updated and improved lighting in the atrium and public areas by replacing high-pressure sodium and fluorescent sources with high-color-rendering, warmwhite LEDs, up-lighting wood ceilings above corridors and circulation routes, adding remote-controlled color options for the spotlights aimed at the “Speed Astir” glider in the East Atrium, and using specialized fixtures to accentuate gathering places, murals, sculptures and other art. • Spaces that foster community and connection. There is now a wonderful variety of seating areas in both atriums that provide inviting places where tenants can meet, collaborate, work alone or in groups,

or relax and enjoy a meal prepared at the on-site café. • A new, black carbon-steel spiral staircase. This staircase replaces the East Atrium’s escalator and provides a pedestrian circulation alternative for the adjacent elevators. Its lower landing serves as a small stage during special events. • Circular wood-floor insets with cleanlined, steel-edged planters. Low-lying, lush, grass-like greenery adds texture and vibrancy to the décor, providing a calming interior view of nature for occupants. The 2,500 plants installed throughout the public areas were chosen to optimize indoor air quality, reduce stress, drive productivity and spark innovation.

• A new conference center. Leading-edge, wireless video conferencing technology and easy-to-clean, lightweight, mobile furniture make the presentation room easy-to-use and flexible. Ceiling-hung microphones and speakers detect and evenly distribute sound. A kitchen/arrival space with two new, universally accessible restrooms provides a place where hosts can greet guests and serve refreshments. • A private tenant lounge. This amenity can be used by all tenants with card-key access during the workday and reserved by them for gatherings after hours. The lounge features relaxing, living-room-style furnishings and a food preparation/dining area. • A new skylight atop the East Atrium. The Kalwall proprietary glazing used for this renovated feature improves ambient light management, increases natural light levels, and supports health and wellness by filtering out harmful UV light while providing soothing, evenly diffused, full-spectrum visible light and aiding plant photosynthesis. • New shower rooms adjacent to the existing bike-storage room. The refreshed interior spaces and features showcase and provide a clean, contemporary contrast to Butler Square’s award-win-

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The building’s new conference center features wireless PC- and Mac-compatible technology that is simple for tenants to use. (Photo credit: Butler Properties, LLC/Tom Wallace.)

ning, historic architecture. They also build on Butler Square’s existing amenities, which range from an on-site post office, café, and childcare center to a secure bike storage room and skyway connection, easy-in/ easy-out highway access, and reduced-rate parking for carpoolers in adjoining ramps.

early 2021, just in time for the post-pandemic surge of economic, recreational and cultural activity. “We are pleased to lead by example and to provide an inspiring place where an active, engaged, and growing pool of urban dwellers can work near their homes and enjoy all our city has to offer,” Mauer said.

“Beauty matters,” said Mauer, president of Butler Properties, LLC. “It’s natural to want to construct, renovate, operate and maintain a beautiful building in ways that sustain and enhance this characteristic.”

Tenants of the building have also praised the renovation work.

Harry Wild Jones, the original architect for Butler Square, was known for designing buildings that elevated the human spirit. And as Mauer says, such spaces are critical for creativity, bringing something new into being and ingenuity, which requires taking a leap of faith toward the future. Butler Square’s first owner, T.B. Walker, invested in high-quality architecture, materials and construction. When Charles Coyer took over ownership in 1972, his decision to transform The Butler Brothers Warehouse into a mixed-use commercial office and retail destination named Butler Square helped catalyze revitalization of the Minneapolis Warehouse District. In 1979, the third owner, Jim Binger, redeveloped the west half of the building, making sure this part of the renovation was compatible with the first phase. Binger enhanced Butler Square’s beauty and performance by adding the West Atrium, new office and retail tenant spaces, and high-efficiency building systems. He had

Refreshed atrium areas now provide a diverse range of seating arrangements. (Photo credit: Butler Properties, LLC/Tom Wallace.)

the “Speed Astir Glider,” the “Circus Fliers” sculpture by George Segal, and other art installed in public spaces to be enjoyed by the building’s occupants and visitors. “As the fourth owner of this landmark building, I have continued this legacy by investing in ongoing upgrades to the building systems and refreshing and adding amenities that are not only highly valued by our tenants, but that also resulted in Butler Square becoming the first 100-plusyear-old, multitenant commercial build-

ing in the world to win LEED EB O&M certification in 2009 and in our building receiving continued awards and accolades for its beauty, sustainability, connections with our community and focus on healthy, high-performance operations, maintenance and management,” Mauer said. The timing of the Butler Square Refresh has turned out to be ideal. Construction began shortly before Minnesota’s COVID-19-related stay-home order was announced, and the finishing touches were completed in

“The Butler Square Refresh turned out amazing,” said Melanie Yetter, office and marketing events manager of building tenant Nature’s Way Brands. “The color selection of the furniture, new carpet, flooring, plants and the upgraded lighting create such a delightful and calming ambience on the first floor and the other common areas of the building. I also love the new staircase which opened up the atrium. We look forward to using the new meeting space and seating areas.” Adrian Aguilar, accounting manager with tenant CGS Publishing Technologies International LLC, agreed that the work has transformed an already stunning building. “Give credit where credit is due,” Aguilar said. “The Butler Square ownership and management team has done a superb job with the renovation of this beautiful building. They honored the historical character that makes this building unique and made it contemporary yet classic without losing the iconic look and feel of a historical landmark.”

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Renovations wrap at Minneapolis’ 50 South Sixth

The renovated Lobby seating area at 50 South Sixth, with its steam fireplace and backlit stone.

50 South Sixth, the 29-story Class-A office tower in the heart of the downtown Minneapolis Central Business District, has completed a multi-million-dollar lobby renovation featuring leading-edge technology with a focus on safety, security and wellness. Owned by Singapore-based Mapletree, the 700,000-square-foot building is home to the iconic Oceanaire, Kinderberry Hill Child Development Center and major office tenants such as Dorsey & Whitney LLP, Stinson Leonard Street, Deloitte, BMO Harris Bank and Dunham Associates in its list of tenants. Ben Goodsir, Head of U.S. Commercial for Mapletree, said that the company is already seeing leasing results from the foresight to invest in hi-tech features that improve safety and security for guests, with an emphasis on health and wellness. “Employees returning to their downtown offices will find a refreshed 50 South Sixth building featuring new technology that will enable easier access to the building in a safe and secure fashion,” Goodsir said, in a statement. “It’s not just the building aesthetics that have undergone a transformation; we also have upgraded technology systems that track indoor air quality and occupancy throughout critical areas of the building, making 50 South Sixth a healthier place for everyone. In addition, the renovated lobby provides an appealing place for tenants and guests to meet.”

The building’s seating area overlooking Nicolette Avenue.

From high-tech to high-touch The renovations included adding several high-tech solutions to the building that elevate safety and wellness such as the en-

hanced visitor management system from provider Kastle Security Systems. The Kastle system includes turnstiles that feature Bluetooth technology, allowing employees and visitors seamless security

clearance to the building through QR code technology. In addition, the building now features Enertiv technology to monRENOVATIONS (continued on page 10)

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The turnstiles securing elevator lobbies at 50 South Sixth.

RENOVATIONS (continued from page 8)

itor the indoor air quality and occupancy throughout critical areas of the property. The platform also delivers real-time energy management and incorporates hightech devices and AI to maximize energy efficiency while ensuring best practices for indoor air quality. Lobby design and furnished office spec suites The highlight of the revamped lobby includes the Sisyphus tables developed by local artist Bruce Shapiro, who is known for developing museum-quality, computer-controlled kinetic art pieces that are

NORTHLAND (continued from page 4)

New England, Austin and the Southwestern and Southeastern United States. Campbell said that multifamily properties consisted of 99 percent of Northland’s portfolio before the pandemic. That focus has only accelerated since COVID-19 hit, he said.

“We are fielding more inquiries from companies looking for spaces that are furnished and ready to go. The spec suites allow tenants more flexibility.” featured in museum installations around the world. The first floor is now home to O’Sullivan’s convenience store, which also has an entrance on Nicollet Mall.

“Despite an influx of capital into the space and very aggressive and elevated competition, multifamily continues to be our bread and butter,” Campbell said. Why has multifamily remained such a favored asset class for investors? Campbell said that the supply of single-family homes remains low, something that is sending more people toward apartments. “We have almost four generations of Americans competing for the same

ment. “The spec suites allow tenants more flexibility and the design of the suites are conducive to a variety of uses while minimizing a tenant’s out-of-pocket costs for renovation.” After touring the renovated building, Israeli-based technology firm NextSilicon immediately signed a lease for a furnished spec suite for its second US office and occupied it in early January.

“We are fielding more inquiries from companies looking for spaces that are furnished and ready to go,” said Alexx Smith, general manager at Newmark, in a state-

housing now,” Campbell said. “The stock is very limited. Rentals continue to be an option for those who haven’t been able to buy. That seems to be pervasive regardless of market across the United States. For now, we don’t see that trend changing.” Then there are the number of new investors moving away from assets such as office and retail, product types that have been hit hard by the pandemic, and

putting their dollars instead into multifamily. “Multifamily is more inflation-proof,” Campbell said. “It offers better risk-adjusted returns. It provides some predictable cash flow in otherwise uncertain economic times.”

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Still tough out there for retailers, but CoStar sees signs of hope By Dan Rafter, Editor

t’s no secret that retailers have taken their hits during the last two years of the COVID-19 pandemic. But in cheerier news? There are signs of hope in this sector today.

the physical presence to drive ecommerce sales.” Before the pandemic, retailers that were selling experiences, such as high-end bowling alleys and movie theaters that delivered food to patrons’ seats, were performing well. That came to a halt during the earlier days of the pandemic when many consumers sought to avoid crowds in indoor settings.

Earlier this month, CoStar Group released its annual Global Predictions Webinar, predicting that some U.S. retail markets that were hit particularly hard by the pandemic will experience significant recoveries in 2022.

But what about today? Is experiential retail in recovery mode?

CoStar said that markets such as San Francisco, Boston, Washington D.C. and New York City should at least begin to recover throughout the rest of this year. CoStar also pointed to at least one Midwest market -- Nashville -- as being particularly well-positioned for a strong rebound in retail foot traffic and rent growth. And other Midwest markets? CoStar’s analysis said that two major cities here, Chicago and Minneapolis, are expected to see either slower-than-average or average growth in retail rents throughout 2022 and slightly above-normal growth in leasing activity during the year. Not great news, then, but also not terrible for both major Midwest markets. Kevin Cody, senior consultant with CoStar Advisory Services, said that the Global Predictions Webinar contained plenty of good news for the still-hurting retail sector.

Cody said that CoStar is predicting a continued rebound in this type of retail in 2022.

Many cities on the West Coast, though, have seen retail sales, foot traffic and rents all remain sluggish throughout the pandemic. In the Midwest, retail activity is a bit on the sluggish side, too, Cody said. This isn’t all pandemic related. Demographics and population loss in some Midwest cities are also hurting retail markets in the center of the country. Not all retail types are equal, either. Cody said that indoor shopping malls have been the hardest hit during the pandemic.

“We expect to see leasing activity increase in 2022 in this sector,” Cody said. “In-store retail sales are also rising. We are seeing several markets that are still performing well on rent growth and occupancy, despite how hard retail was hit by the pandemic.”

“That is largely due to enclosed malls being harder to shop at when restrictions and social distancing are in place,” Cody said. “But also, the tenant rosters at malls are typically more exposed to competition from ecommerce. Malls were facing challenges even before the pandemic.”

Cody said that these positive signs aren’t surprising. Yes, in-store retail sales plummeted during the earliest days of the pandemic, back when many cities enacted stay-at-home orders. But retail sales rebounded quickly as the pandemic progressed, Cody said.

Strip centers, though, have fared better during the pandemic. Part of that is because consumers can spend more time outside, still considered safer by many consumers, when shopping at individual strip centers. Many of these retail centers also are home to retailers who are not competing as directly with ecommerce. Beauty salons, for instance, offer a service that consumers can’t get online.

Sales have continued to improve throughout most of 2021 and the earliest months of this year. Cody said that CoStar analysts expected retail foot traffic to continue improving, too. The rise of the Omicron variant, though, has slowed this metric for 2022 so far, he said. It remains to be seen if retail foot traffic will rebound now that COVID-19 cases are again falling throughout much of the country. Not all parts of the country are equal when it comes to retail performance. Cody said that markets in the south, including several cities in Florida, Arizona and Texas, have all seen stronger retail performances.

ing goods online turned to the Internet at the beginning of the pandemic. Fueled largely by the ease of online shopping, certain retailers not only survived but thrived during COVID-19. Cody pointed to those selling sporting goods, books, music and home-improvement supplies as doing especially well. Warehouse clubs and super stores, the Walmarts, Costcos and Targets of the world, also performed well during the pandemic, he said. These shoppers have now seen how convenient online buying is. It’s likely, then, that these consumers will continue doing at least some of their shopping online even after the pandemic fades away. Savvy retailers are relying both on their physical locations and their online presence to boost sales. Cody used department store chain Macy’s as an example. Macy’s recently released studies showing that its ecommerce sales fell in the surrounding area whenever the chain closed a physical store. That report, Cody said, shows how important physical space remains to a retailer.

“One of the biggest headwinds that retail has faced is the growth of ecommerce,” Cody said. “There has been a shift in consumer spending preferences that will remain for quite some time. The threat of ecommerce has been here long before the pandemic and will continue after it.”

The most successful retailers today take advantage of physical and online space, Cody said. A customer might walk into a nearby Macy’s – or might even simply drive by one – and then make purchases online from that retailer’s website when returning home. The physical space acts as an enticement or reminder for customers, inspiring them to later log onto the retailer’s online home to buy what they need.

Of course, online shopping only grew in popularity during the pandemic. Many consumers who were reluctant to buy clothing, food, electronics, toys and sport-

“Some retailers are right-sizing their physical footprints and focusing on their more profitable locations,” Cody said. “But they are also realizing that they need

“There is some revenge shopping going on here. People have a desire to return to those experiences that they enjoyed before the pandemic,” Cody said. “Those retailers that can provide experiences that consumers can’t get online will see their business return as cases fall and people feel more comfortable.” There’s also the suburban vs. urban divide in retail today. Before the pandemic hit, retail activity in urban centers was on the rise. Again, COVID-19 changed that, as workers moved to work-from-home mode. This left quiet office buildings in most downtowns, something that negatively hit the retailers in the urban centers of major cities. At the same time, retail activity in the suburbs rose during the pandemic. With more people at home during the day, retailers in the suburbs saw their sales and foot traffic increase. “There has definitely been a shift in spending from urban to suburban,” Cody said. “We have seen a recovery in urban retail to an extent. But it is still underperforming when compared to suburban retail. We do expect rent growth and traffic to come back to urban retail, but we also expect it to continue to underperform when compared to suburban retail for a while.” The key will be the return of office workers and tourism, two factors that urban retail largely relies on. Cody said that tourism is steadily gaining strength. Office workers, though, still aren’t returning in big numbers to downtowns. “Right now, office is the biggest key to urban retail performance,” Cody said. “But it’s uncertain what will happen. Even after cases fall, there will be some sustained increase in remote working. People want to work remotely now.”

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Headwinds? Who cares? Crexi predicts another big year for commercial real estate By Dan Rafter, Editor

t’s not like 2022 isn’t bringing challenges to the commercial real estate market. COVID-19 is still here. Inflation has become a serious issue. And the commercial construction industry is still dealing with a labor shortage and supply delays. But investors are still eager to sink their dollars into commercial real estate, largely because CRE remains a relatively safe harbor, especially during uncertain economic times. Commercial real estate marketplace and research company Crexi points this out in its recently released National Trends Report. As the report says, investors continue to embrace commercial real estate, and are especially interested in the strongest commercial sectors of multifamily and industrial. We spoke with Eli Randel, chief strategy officer at Crexi, about the state of the commercial real estate industry today. He, too, said that 2022 should be another strong year for the business. Why makes commercial real estate such a safe harbor for investors?

“ I think commercial real estate will continue to perform well this year. I think property revenues will increase. Holding commercial real estate debt, assuming it is responsible and reasonable debt, is a good hedge against inflation.” Eli Randel: There are big challenges such as inflation and rising interest rates. But commercial real estate is somewhat insulated from some of these forces. That’s why it’s such an attractive investment right now. It’s one of the reasons why I’m so bullish on commercial real estate. There is still an abundance of debt equity capital available, which is important. It’s also such an attractive investment vehicle. Investors need to put their money somewhere. Real estate is safer. It is tangible.

It is less volatile. It’s a great hedge against inflation. Do you think investors will continue to favor commercial real estate throughout 2022? Randel: I do. I think commercial real estate will continue to perform well this year. I think property revenues will increase. Holding commercial real estate debt, assuming it is responsible and reasonable debt, is a good hedge against inflation. Your debt erodes with inflation. The

amount you owe becomes less impactful. For many reasons, commercial real estate is a safe harbor during inflationary times, which will help make real estate an attractive investment during this year. Are you surprised at how well commercial real estate has held up during the pandemic?

HEADWINDS (continued on page 18)

MINNEAPOLIS • DENVER • FARGO

INDUSTRIAL (continued from page 1)

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They have less intensive truck traffic. They are, in general, less intensive from a traffic perspective. They also might have a bit more office space than other industrial facilities. A building’s square footage might be 25 percent office and 75 percent warehouse. What is really interesting to us is that light industrial buildings tend to be more infill. You tend to find them a little closer to population centers. The bigger bulk distribution buildings tend to be on the fringes of urban areas and very close to highways. Why are these buildings so attractive to Ryan? Moore: Ryan has been and continues to be very active with our development and construction arms in the bulk distribution space. We have done a lot of work with clients like Target, Amazon and Kroger. The light industrial acquisitions we see as a great complement to that construction and development activity. It is a slightly different part of the industrial category that still benefits from many of the same characteristics in terms of tenant demand and investor demand. We look at the light industrial acquisitions as a great complement to the rest of our business. We also like the idea that light industrial facilities tend to attract smaller tenants. There are times when those tenants end up growing. They might then need a new building. We can build or develop something for them. We see synergies there. We can work with these tenants when they are in light industrial buildings and when they are ready to move to a bigger space. And because we also have expertise in property management, we can also provide these tenants that service, too.

“ It’s mostly about location and functionality. Given our construction expertise, we like projects where maybe a little bit of renovation needs to be done. Some of the facilities we recently acquired are in good shape but could use some minor improvements.”

Is it difficult finding light industrial buildings in which to invest? Moore: There are a lot of buildings in this space. That being said, they are in demand, both from tenants and also from other investors. There is a deep pool of buildings but quite a lot of competition to acquire them. The buildings we choose to pursue are those in locations that are close to population centers. We think that is where the tenant demand is the greatest. The tenants look to these buildings because they want that proximity to their customers. We also look for buildings that are in close proximity to a strong labor pool. Tenants want to locate in buildings that are close to a large number of workers, too. With the three light industrial buildings that we recently purchased in Minnetonka, half of the owners of the businesses in those facilities live within five minutes of those properties. At the same time, these buildings are close to their customers. Much of their client base is in the western suburbs of Minneapolis. From the Minnetonka facilities, they can service all their clients within a 10- or 15-minute drive.

Those type of locations are in the greatest demand from tenants. How about amenities? Are there any amenities that you look for when acquiring light industrial buildings? Moore: It’s mostly about location and functionality. Given our construction expertise, we like projects where maybe a little bit of renovation needs to be done. Some of the facilities we recently acquired are in good shape but could use some minor improvements. Given our construction expertise, we do not shy away from projects that have a greater need for renovations. Is the office component important when looking at these facilities? Moore: That’s really not the major concern of tenants looking for space in these buildings. The tenants in these buildings have an industrial warehouse need. If they are more concerned with office space, they’re

usually looking at a pure office building or more of a single-story office-flex type project. It is the warehouse functionality that is driving tenants to these light industrial spaces. Some tenants might have a sales team that they sit in the office space. But most of the tenants that we work with are focused almost entirely on the warehouse space. Do you think we’ll see an increase in the supply of these light industrial facilities? Moore: One of the reasons we like these buildings is because many of them are in infill locations close to population centers. It is challenging, though, to build new projects in these locations. Many of these infill locations are fully built out already. There is not a lot of vacant land in these locations. To build new, you often must redevelop an existing site, which can be more costly. That is another reason we like this segment and these locations: The new construction supply is relatively muted.

That makes it easier for us to attract tenants to these spaces. There isn’t as much new construction for them to choose from. Do you think demand will continue to rise in the coming months for these light industrial spaces? Moore: My crystal ball is always somewhat murky, but we are making these acquisitions and looking to acquire more properties this year. We expect to see consistent demand for light industrial in the future, at least for the foreseeable future.

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HEADWINDS (continued from page 14)

Randel: There was a knee-jerk reaction initially that with work-from-home and stay-at-home that retail and office would get crushed. But that didn’t really happen. Those sectors have been challenged, but they haven’t been crushed. And then there are the other sectors. With all the ecommerce activity, industrial has done exceptionally well. Multifamily had a bit of a pause at the beginning of the pandemic but has done very well throughout COVID-19, too. As inflation looms, multifamily rents have increased significantly. Owners, then, are seeing increases in their property revenues. Investor demand for commercial real estate never waned. There is still an abundance of capital out there for commercial real estate. Speaking of industrial, what do you expect from this sector in 2022? Randel: Occupancy rates will continue to be tight. Pricing did run up a little over the last couple of years. That might start to taper somewhat this year. All in all, though, I expect industrial to remain very healthy during 2022. Multifamily rents have been soaring. Has this surprised you? Randel: Most people in the multifamily space anticipated this. They anticipated that there would be a greater demand for rental housing as it gets more difficult to buy single-family homes. Single-family homes are very expensive now. There is also a low inventory of these homes. These factors have led to a surge in demand for multifamily product. I think what might have surprised people is not that apartment rents rose, but how much they rose. Many saw rents rising, but not to this extreme.

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“I don’t see companies giving up their corporate office space. There might be some dents around the edges of the office market, but this sector is slowly coming back already. It is not disappearing as a viable and attractive product type. ” Are there other commercial real estate sectors that are capturing the dollars of investors? Randel: I’m pretty bullish on retail. A lot of retailers are optimizing what I call their click-and-mortar strategies. They are repositioning what their storefronts mean to them. Storefronts might be a branding vehicle rather than profit centers. They are places where people can see a product before they go home and buy it online. Retailers are embracing pick-up at their storefront locations, too. Customers can order a product online and then pick it up at a physical location. This click-andmortar approach seems to be the sweet spot for retailers. These retail trends have become the norm now. Customers expect them. They expect you to have curbside pick-up and enhanced delivery options. I think that will become part of our everyday lives. What about experiential retail? Do you think this commercial sector will continue to rebound as people get more

RENTERS (continued from page 1)

top 10, with Cozy Living reporting that the average monthly two-bedroom rent here stood at $2,091, far less than what renters pay in other top-10 cities such as San Francisco ($5,209 a month on average); Washington, D.C. ($3,658); and San Jose, California ($3,204). Minneapolis also fared well when it came to green space. According to Cozy Living, 98 percent of Minneapolis residents live within a 10-minute walk from a park. And the city’s average monthly salary after taxes of $4,566.79 means that those two-bedroom apartment rents are on the more affordable side. The jobs market in Minneapolis is solid, too, with Living Cozy reporting that there are an average of 53.46 job postings per 1,000 people.

comfortable with being out and about again?

already. It is not disappearing as a viable and attractive product type.

Randel: I think so. It might have some catching up to do. People did learn to avoid public or crowded spaces. But the underlying themes that made experiential retail so strong before the pandemic haven’t left. As people’s comfort levels return, experiential retail will continue to improve.

Are there any differences in the office market when it comes to larger and then more mid-sized markets?

Do you see any signs of hope for the office sector? Randel: I think a lot of the narrative surrounding the increase in working from home has perhaps been isolated to certain markets. Some markets have seen their office spaces open for quite some time. Most corporations see that productivity is optimized with the in-office dynamic. There is room here, too, to find hybrid solutions that will satisfy employees. I don’t see companies giving up their corporate office space. There might be some dents around the edges of the office market, but this sector is slowly coming back

The top two cities in which to rent, according to Living Cozy? Washington, D.C. and San Francisco. And if you’re looking for cheaper rent? The average two-bedroom monthly rent in Tulsa, Oklahoma, came in at $895, lowest in the country, according to Living Cozy. Several Midwest cities made the lowest monthly rent list, including Memphis, with an average two-bedroom monthly rent of $1,042; Omaha, Nebraska, with an average monthly rent of $1,166 for a two-bedroom apartment; and Louisville, Kentucky, where two-bedroom rents average $1,197.

Randel: There have been some. I live in Raleigh, North Carolina. I’ve seen a great amount of growth in our office market as people and companies have moved away from bigger markets. A lot of people and companies have moved here during the last couple of years. Some corporations, mostly smaller ones, have decided to pull up their space in New York City and plant a flag in smaller markets. To sum up, what do you see for the commercial real estate sector, and investor demand, throughout the rest of 2022? Randel: This year, in my mind, will remain an attractive year for commercial real estate. There is still a lot of capital that needs to get placed. Commercial real estate feels safer and outperforms many other asset vehicles.

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CRE Round Up- News Briefs JLL Capital Markets sells two-building corporate office campus in Minneapolis market

T5@Minneapolis data center.

The J. I. Case Building.

JLL Capital Markets closed the $23.46 million sale of 11000 Viking Drive, a two-building corporate office campus totaling 258,850 square feet in Eden Prairie, Minnesota. JLL represented the seller, Shutterfly, LLC, and procured the buyer, Tempus Real Estate Partners. 11000 Viking Dr. has visibility from and immediate access to Interstate 494 in the southwest suburbs of Minneapolis. The area surrounding the office campus is home to a highly skilled and educated workforce.

A new elevator for handicap accessibility will be installed and run from the basement level to the rooftop level. The current elevator at the building’s main entrance will be upgraded. Existing underground parking will remain as is.

1100 Viking Drive.

The office campus currently consists of a four-story “West Building” that was built in 1997 and a five-story “East Building” that was built in 2004, connected via a two-story “link” building. The City of Eden Prairie approved the plan to tear down the vacant “West Building,” and this space will be used to establish native grasses and wildflowers. The current “link” building will be renovated into a main entrance and will include patio seating overlooking the newly established native planting area. In addition, through a partnership with the City of Eden Prairie, an eight-foot paved trail along Viking Drive will be constructed by the developer as part of the overall site alterations. The “East Building” will continue to be occupied by Shutterfly with on-site amenities, including a fitness center and conference facilities. In addition to the indoor amenities, the 16.22-acre lakefront site features an outdoor seating area and direct access to a 1.6-mile walking trail. The JLL team was led by Senior Managing Directors Colin Ryan and David Berglund with the Capital Markets group and Pat Williams from the Tenant Rep group. Cushman & Wakefield closes data center lease in Minneapolis Cushman & Wakefield represented Legacy Investing, a Northern Virginia-based commercial real estate investment firm, in the signing of a new data center lease with BomberJacket Networks in Legacy’s newly expanded T5@Minneapolis data center at 1001 Third Ave. South in downtown Minneapolis. Cushman & Wakefield’s Justin Baratz, Sean Brady and Randy Borron, part of Cushman & Wakefield’s Global Data Center Advisory Group, have played an integral role in representing Legacy Investing in lease transactions and interconnection solutions since Legacy acquired the property in 2019.

Sherman has received an allocation of federal and state historic tax credits to finance the project that is expected to be completed in the first half of 2023. Blumentals Architecture is the architect and Gardner Builders is the general contractor. During the redevelopment, Sherman’s corporate employees are working from the nearby co-working space, Fueled Collective. The building is managed and operated by T5 Data Centers, a national data center operating company. Newly expanded, the data center offers 3.9MW of immediately available, turn-key capacity with the ability to offer private suites, and includes amenities such as technical office space, conference area and tenant lounge. Legacy strategically developed its partnership with T5 based on its track record of data center operations, compliance and colocation services. T5 currently houses and manages data centers for a variety of robust and marquee hyperscale and Fortune 500 clients. Sherman Associates begins $30 million redevelopment on Minneapolis headquarters building Sherman Associates has begun a $30 million historic redevelopment of the building that has been home to its corporate headquarters since 1999, located at 233 Park Ave. in Minneapolis. The building has been named the J. I. Case Building and was recently listed on the National Register of Historic Places. The J. I. Case Threshing Machine Company built and occupied the building for more than 50 years as a branch house, distributing and marketing its farming equipment across the Midwest. Its 63,000-squarefoot renovation is the latest of Sherman’s historic redevelopment projects.

The first floor is 15,000 square feet of restaurant space that will attract a large user or could be subdivided among multiple small users (formerly the location of the Old Spaghetti Factory that operated there for 25 years). The historic allure will be maintained with features like prominent floor-to-ceiling windows overlooking South Washington Avenue with 16-foot high ceilings that are present on the first floor. Sherman will relocate its office of more than 90 employees from the second floor and basement to the third floor, which boasts 14,500 square feet. The second floor will be an 11,000-square-foot co-working space utilized by Sherman, with 3,700 square feet space available for sublease. A new feature staircase will connect the second and third floors. Sherman’s amenities will include a fitness center, bike storage and a new rooftop patio. The most significant alteration of the building will be the addition of a 7,500-square-foot rooftop patio. The patio will be divided into three spaces: 4,500 square feet for a tenant-operated rooftop bar/restaurant, 1,100 square feet for Sherman headquarters and 2,000 square feet for a spa pool, sauna, and guest lounge subleased by Canopy by Hilton Minneapolis Mill District located next door. The basement level will be completely renovated and include a 4,000-squarefoot speakeasy concept operated by a local restauranteur.

The J. I. Case Building renovation is the final piece of Sherman’s redevelopment of the “Sherman block” made up of three buildings that are bordered by South Washington Avenue, Park Avenue, South 3rd Street and Chicago Avenue and includes the following, owned and operated by Sherman: East End Apartments, Starbucks, Canopy by Hilton hotel, and Umbra restaurant as well as commercial tenants, Trader Joe’s and Jimmy John’s. Sherman has other developments under construction in the area. Moment, to be completed in late 2022, is located at 500 South 7th Street and is a 10-story mixeduse tower with 222 market-rate apartments, 15,000 square feet for the Firefighters For Healing Transitional Healing Center, 17,000-square-foot commercial space, 90 underground parking spaces for residential and 13 ground level parking spaces. A new Fire Station 1 for the City of Minneapolis is under construction at 275 5th Avenue South. The facility will be 20,300 square feet and completed in mid2022. The Downtown Minneapolis Neighborhood Association has installed two plaques on the J. I. Case Building’s exterior to highlight its historical relevance as part of its Historic Sign Project to enhance a sense of community in the neighborhood.

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