MREJ June 2019 by REjournals

VOLUME 35, NUMBER 6

By Liz Wolf

he role of a property manager is different today than even just a few years ago, and it continues to evolve. Property managers overseeing commercial space and apartments have a lot more responsibility than merely collecting rents and handling requests for maintenance. Technology continues to advance the

role of property management as firms utilize new platforms, products and services to better manage and enhance the use of their buildings. Increasingly, technology is helping property management firms automate systems and processes to improve tenant experiences, while still recognizing the importance of providing a personal touchpoint for tenants. MREJ interviewed three Twin Cities experts to learn more about how the industry will continue to

June 2019

change, and what new skill sets property managers will need to manage properties successfully in the future.

Office market continues changing It’s about ‘experience,’ amenities and how property managers ‘activate’ those amenities The office market is highly competitive, regardless of the market, as many aspects about this product Property Management to page 14

Mid-Year 2019 Minneapolis/St. Paul CRE Markets Economic Overview

By Mitch Simonson

Like the mighty Mississippi River that flows through the north edge of downtown Minneapolis, the Minneapolis/St. Paul commercial real estate market continues to move forward at a healthy pace with a few areas worth paying attention to.

Here are the best insights I gathered from the panel of speakers at the June 14, 2019 Commercial Real Estate Forecast Summit, put together by Jeff Johnson and the MN Real Estate Journal. This half-day seminar focused on current real estate trends for retail, industrial, office and multi-family property types in the Minneapolis/St. Paul market.

Mike Roessle, Market Economist with CoStar provided a short overview of the United States and local economic overview. These are the pertinent items identified. • Lower skilled jobs are never coming back to US. • Minneapolis/St. Paul growth in the 65+ age group is expected to exceed the U.S. average and soon outMid-Year to page 12

June 2019

Minnesota Real Estate Journal

Featured Stories

JUNE 2019 • VOLUME 35, NUMBER 6

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Departments PEOPLE ON THE MOVE 4 BREAKING GROUND CLOSINGS

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Minnesota Real Estate Journal (ISSN 08932255) Copyright © 2019 by the Minnesota Real Estate Journal is published monthly except combined in March & April 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

WHAT WILL PROPERTY MANAGEMENT LOOK LIKE IN THE FUTURE? MID-YEAR 2019 MINNEAPOLIS/ST. PAUL CRE MARKETS

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Minnesota Real Estate Journal

7767 Elm Creek Boulevard, Suite 210 Maple Grove, MN 55369 For information call 952-885-0815

President | Publisher Jeff Johnson jeff.johnson@resummits.com Vice President | Publisher Jay Kodytek jay.kodytek@resummits.com Chief Financial Officer Todd Phillips todd.phillips@resummits.com Consulting Editor Dr. Tom Musil tamusil@stthomas.edu Conference Manager | Art Director | Graphic Designer | CE Specialist Alan Davis alan.davis@resummits.com

EDITORIAL ADVISORY BOARD JOHN ALLEN JEFF EATON MARK EVENSON PATRICIA GNETZ TOM GUMP CHAD JOHNSON BILL WARDWELL JEFFREY LAFAVRE WADE LAU JIM LOCKHART DUANE LUND CLINT MILLER DR. THOMAS MUSIL

45 NORTH GROUP WELCOMES LITTIA SWIFT AS ASSISTANT PROJECT MANAGER A leader in commercial real estate project management, development and renewable energy solutions, 45 North Group is growing and proud to welcome Littia Swift as an Assistant Project Manager. Littia has been in the real estate and construction industries for over 8 years. Having spent that time involved with a variety of administrative, operational, marketing, and client support activities, she is passionate about making connections between the functional areas of a business and working to generate efficiencies. She thinks strategically and works for continuous improvement both internally and with clients. She believes it is not only important to complete a project within budget and scope, but also to ensure that the business’ goals are met with the finished product. “Littia’s attention to detail and passion for delivering the very best experience to our clients is what makes her such a valuable addition to our firm. Additionally, she brings the same focus on community and philanthropy that is engrained in all that we do at 45 North Group which makes Littia a natural fit,” said Will Roozenboom, one of the firm’s four partners. “We couldn’t be happier to have Littia with us, and we’re excited for what her unique and dynamic skill set will bring to the team.” Littia is a Minnesota native and holds a B.A. English from the College of Saint Benedict. To occupy her time outside of work she enjoys reading, playing Ultimate Frisbee and Volleyball, traveling, camping, and spending time with her friends and family.

WHITNEY PEYTON MIKE SALMEN

7767 Elm Creek Boulevard, Suite 210 Maple Grove, MN 55369 For information call 952-885-0815

BADE PROMOTED TO COMMERCIAL MARKET LEADER, MINNEAPOLIS Westwood Professional Services, Inc., Westwood announced today the promotion of David Bade, PE, LEEP AP, to the position of commercial market leader, Minneapolis. Bade has served as Westwood’s director, Minneapolis commercial operations for the last five years. Bade has more than 24 years of proven success in development, design, and construction management

for industrial, office, and retail projects. He is a registered professional engineer in several states and a LEED Accredited Professional, as well as a Westwood associate. He recently completed Westwood’s Leadership Development program. “David has done a great job as commercial operations leader in Minneapolis,” says Jason McCarty, PE, vice president north region leader, Land Division. “He brings a wealth of knowledge and expertise as an engineer, project manager, and developer. His relationships with both our commercial clients and staff make him uniquely qualified for the position. I look forward to continuing to work with David in his expanded role.” About Westwood Professional Services, Inc. (Westwood) Westwood is a multi-disciplined national surveying and engineering services provider for private development, public infrastructure, wind energy, solar energy, energy storage, and electric transmission projects. Westwood was established in 1972 in Minneapolis, Minnesota and has grown to serve clients across the nation from multiple US offices. Westwood’s Corporate Fact Sheet. Awards In 2019, Westwood received Zweig Group’s Best Firms to Work For and ranked on its Hot Firms List. The firm is consistently ranked on industry top 25 lists and receives recognition for its involvement on awardwinning projects nationwide.

Richard A. Carter, FAIA Appointed LHB Chief Executive Officer LHB, Inc.’s Board of Directors appointed Richard A. Carter as Chief Executive Officer, effective July 15, 2019. Carter previously held the position of Integrative Design Team Leader and was a Senior Vice President for the company. Carter succeeds William D. Bennett, PE, who has been LHB’s CEO and Chair of the Board since 2001. Bennett will continue to serve as the Chair of the Board and will work with LHB’s clients and community organizations until retirement from LHB on January 31, 2020. Carter is an accomplished architect and played a significant role in the evolution of LHB as an architecture, engineering, and planning firm. He helped

June 2019

establish and lead LHB’s Minneapolis office from 1989 to 2008. He also pioneered the company’s commitment to and leadership in regenerative and sustainable design, beginning in 1991. Carter’s passion for sustainability resulted in the design of the first American Lung Association Health House, and the state’s first LEED Pilot project, the Green Institute’s Phillips Eco Enterprise Center, along with many other pioneering sustainable demonstration projects. He led the team in the creation of the State of Minnesota’s sustainable B3 Guidelines, including the SB 2030 Energy Standard and launched the Regional Indicators Initiative MN, a statewide collection of energy and other critical data for Minnesota cities. Rick was inducted into the Fellowship of the American Institute of Architects (FAIA) in 2010 and in 2011 was granted fellowship into the United States Green Building Council’s (USGBC) Leadership in Energy and Environmental Design (LEED Fellow), becoming one of the first ever to receive both honors. Carter currently serves his community and profession on the boards of various associations, non-profits, and commissions. “Rick led some of our most important initiatives across the company and has shown his ability to help the firm be successful. He brings a vast knowledge of what clients expect of us, understands the firm’s culture, and believes our staff are critical to our success,” said Bennett. “The Board and I believe Rick will continue the company’s progress as a growing, quality-driven firm focused on the success of our clients and providing exciting opportunities for our employees.” Carter noted, “Our firm is unique, in that it has nearly equal numbers of architects and engineers, working in many different sectors from energy and transportation, to site and building design, as well as research. It will be a privilege to continue the legacy of leadership at LHB, advancing our strong focus on design excellence, innovation, and client service. Most importantly, our staff will also continue to grow, become more diverse, and take on new responsibilities in the future.”

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ACKERBERG & Partners Acquire and Break Ground on MN46 ACKERBERG and partners are pleased to announce that they have acquired and begun construction on MN46, a mixed-use, 54-unit, microapartment community with 1,835 square feet of first floor retail in the greater Longfellow/Hiawatha community of Minneapolis. The acquisition is a Joint Venture with Left Lane Corporation, Hayes Harlow, Twin Cities Home Rental, and Trew Capital. MN46 is located on the corner of 46th Street and Minnehaha Avenue. The pedestrian-friendly community is a short walk from the new urban format Cub Foods, the 46th Street Light Rail Station and Minnehaha Falls Park, Twin Cities bike trail system, Minnehaha Avenue shops, retail, dining

Minnesota Real Estate Journal

and the Mississippi River. The MN46’s apartment units will range from 390 - 410 square foot studios, 420 – 650 square foot one bedrooms, and 760 - 905 square foot twobedrooms. Apartment finishes will be top-of-market. Building amenities will include a fifth-floor community room with fireplace and patio, bike lobby, package room and covered parking. “Located near some of the best parks, lakes and riverside trails in the Twin Cities, as well as transit options just steps away, we feel this location is a fantastic blend of the built environment and the natural,” said Stuart Ackerberg, Chief Executive Officer of ACKERBERG. “We love urban real estate, and this project couldn’t be a better fit. We are excited to provide a community-oriented project that will benefit both the residents and the

neighborhood alike. Michael Pink of Left Lane Corporation, and Sean Sweeney of Hayes Harlow, had the perfect vision for this site, and we are excited to partner with them.” "We were attracted to this site for its fantastic proximity to both the 46th Street Blue Line light rail station and Minnehaha Falls,” said Sean Sweeney, Founder of Hayes Harlow. "We continue to remain very bullish on microunits as a niche and on the Longfellow neighborhood in general. The lack of new apartment product in the area was also a big factor in our decision to develop this site." "Ackerberg is one of the most prominent and well-respected developers in our market," said Michael Pink, Founder of Left Lane Corporation. "When the opportunity presented itself to partner with them on this project,

June 2019

Sean and I agreed they would be a great addition. We designed and entitled a great project and having the strength of the Ackerberg team as partners adds tremendous value to the construction and lease up of the project." Construction of MN46 is expected to be completed in May of 2020. The project was designed by Collage Architects and the general contractor is Yellow Tree Construction Services.

180 East Fifth Transforms into The Great Northern Building – Renovations Coming Soon A comprehensive renovation plan, as part of a new rebranding initiative, has recently been announced for The Great Northern Building, a 670,000square-foot 14-story office building at Breaking Ground to page 8

Page 8 Breaking Ground from page 6

180 E. Fifth St., in St. Paul. Renovation and rebranding planning began in 2019 shortly after Gamma Real Estate purchased the property, known as the 180 E. Fifth building at the time. Gamma Real Estate’s vision of the property is to dramatically upgrade the Great Hall, currently a two-story, 500-person capacity banquet center, into the central component of the building as a tenant lounge, third workplace environment and community center.

Minnesota Real Estate Journal

The CBRE Minneapolis-based team of Mike Wilhelm and Chris Gliedman represent Gamma Real Estate in marketing and leasing of the property. “The scheduled renovations that are set to begin this year will greatly enhance The Great Northern Building’s already extensive best-in-class amenities,” said CBRE’s Wilhelm. “We have 390,000-square-feet of open vacancy, an amazing location in Lowertown, extensive upgrades to an already historic building and a revamped website hap-

pening with this rebranding initiative. With this work, Gamma Real Estate is creating a phenomenal workplace experience you won’t find anywhere else in the Twin Cities.” Constructed in 1910, The Great Northern Building was originally built by Great Northern Railway entrepreneur James J. Hill and designed by Charles S. Frost, the designer of the nearby Union Depot. Located in the Lowertown area, the building houses several deli and coffee shops, the 267-seat Jerome Hill The-

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ater and access to St. Paul’s Skyway system.

FLOURISH STAKES OUT “FORGOTTEN MIDDLE” IN MARKET WITH NEW ASSISTED LIVING STUDIOS AND 1-2 BEDROOM OFFERING MORE PRICING TRANSPARENCY The Schuett Companies, Inc. has been a longtime developer and property management company in the region, and is now opening its first market-rate assisted living community, Flourish, located in Golden Valley this fall. Flourish’s 102 units feature a new model of Assisted Living designed to deliver comfort, independence and peace of mind—all with that special feeling of “home.” According to Tom Schuett, President of the 40+ year-old company, Flourish will appeal to what industry sources call “the forgotten middle,” by offering more transparent and customized pricing through its Forever Home Policy* and menu of individualized CompassionCare services. “As senior living and the healthcare industry has grown, affordable marketrate apartments and studios have trended out of reach into the luxury end of the spectrum for many people,” Schuett notes. “Plus, many seniors and their families and caregivers can no longer understand exactly what they’re paying for. Greater transparency and the Forever Home Policy ensures that even as physical and financial needs change, their home won’t have to. This means seniors can continue to flourish within the stable, enriching lifestyle that they deserve.” Schuett’s position is reflected in a recent edition of The SeniorCare Investor, which estimates that “there may be more than 14 million boomers that will not be able to afford senior housing plus their healthcare needs. The largest unmet need in senior housing is the bulging middle income cohort, which some researchers have defined as between the 40th and 80th percentile in terms of financial resources. In other words, the largest cohort.”

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Minnesota Real Estate Journal

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Property Management From page 1

type are changing exponentially, says Steven Herron, principal with the Minneapolis office of Chicago-based Zeller Realty Group. “Tenants are deeply searching for a differentiated experience, something that helps them attract and retain top talent and one that allows better engagement of their own team members as a whole, and enhances their overall company performance,” Herron says. Herron says the traditional work space – or a single tenant’s office suite -- has morphed into a need for a “work place,” which extends well beyond the walls of the suite to encompass the building, its amenities and those amenities surrounding the property, which all create a comprehensive work environment. “Property owners, in virtually all markets, have spent significant sums of money adding amenities to their properties to include high-end conference centers, expansive common connectivity areas, outdoor rooftop spaces or patios, cutting-edge fitness centers, bike hubs, wellness centers, coffee bars, and at least locally, one property has added a golf simulator,” Herron says.

Steven Herron

Todd Balsiger

“The amenity arms race,” he notes, “is alive and well in all of the major markets and is quickly working its way to smaller markets.” However, determining the most appropriate amenities needed at a property to remain competitive and relevant within the marketplace is only half of the equation, Herron points out. “When the work is completed and checks for these amenities are cashed, the property has only accomplished part of the mission -- a physical improvement,” Herron notes. To most effectively capitalize, a property owner needs to activate the amenities, and this is where the property manager and their respective team

members come into play. “The property team must activate, program and operate these amenities in a manner that provides value to the tenant while also enhancing and differentiating an experience for that tenant,” Herron says.

Think hospitality and technology Herron says to effectively accomplish this overall activation and creation of a unique tenant experience, the property manager of the future should focus on two critical areas: hospitality and technology. Hospitality Property managers can take a page

Jack Sipes from the hospitality industry. “Think about the Ritz-Carlton or Four Seasons approach to managing your asset,” Herron explains. “This is not about having the budget of a RitzCarlton or Four Seasons.” Rather, he says it’s about the engagement of your team, connecting with customers, finding critical and routine touch points, and creating a differentiated experience to your tenant base. Additionally, Herron says property managers need to effectively leverage relationships with third parties to more actively engage and operate certain amenities like fitness centers, coffee bars, food service, etc. along with hirProperty Management to next page

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Minnesota Real Estate Journal

June 2019

Property Management from previous page

ing client services managers and community managers to more directly and aggressively manage the tenant experience of the conference centers, open collaborative space, rooftop decks and others spaces. Just a few years ago, Herron points out that positions such as community manager and client services manager, along with the specific roles they have, didn’t exist within the industry. “Much like hospitality and the use of a concierge service, property managers will need to pivot in a manner to utilize different tools to more routinely connect with their tenant base,” Herron says. Technology Most millennials, and certainly all of Gen Z, have grown up with significant use and access to technology. As these individuals have entered or are entering the workforce, that demand will continue, Herron says. “Long gone are the days where one person in an office makes a call to the management office to request a light bulb change or temperature adjustment,” he says. “Now the expectation is that everything can be communicated electronically, managed and followed up on right through the use of

your personal mobile device. “You know the old saying, ‘We have an app for that,” the tech industry offers an app for completing nearly every task, and more importantly, offering a link to a broader base of individuals working in the building,” Her-

ron says. Occurring now and certainly more into the future, tenants will want the ability to manage temperature, lighting control, access control and building information all managed through their personal mobile devices.

“It’s all very exciting but also advancing at breakneck speed,” Herron says. That said, the successful property manager of the future will be the one Property Management to next page

June 2019

who can effectively hire a team built more from a hospitality perspective, and can implement the balanced technology platform to manage the needs of the tenants’ base collectively, resulting in a unique and differentiated tenant experience, Herron says.

Experience and differentiating your building Obviously, technology has taken on an expansive role in day-to-day management of real estate, says Todd Balsiger, senior vice president and group manager at the Minneapolis office of JLL. Balsiger oversees the Twin Cities property management portfolio operations. For example, it’s certainly becoming more prevalent for tenants to access services through a building’s tenant portals. Balsiger points to JLL’s new “Curae Approach” platform, which is a collection of products and programs focused on a better client, tenant and employee experience. This approach was created to help tenants increase their employees’ overall well-being, productivity and workplace efficiency. Amenities that landlords can offer tenants through the Curae Approach include wellness programs, yoga classes, concierge services and educational seminars. “We can implement it at a variety of buildings – typically, Class A down-

Minnesota Real Estate Journal

town buildings -- and it includes everything from scheduling tickets [for tenants] to concierge services for drycleaning to coupons at the building’s coffee shop,” Balsiger explains. “It’s sort of your one-stop shop for building tenants, and that’s becoming absolutely more prevalent in our market as a differentiator from one building to the next,” he says. Balsiger agrees with Herron about the importance of hospitality. “The landlord or property management company is extending hospitality to a whole new level,” he says. Not only are tenants’ employees working on their laptops in a building’s lobbies and coffee shops, but after hours, bars can be rolled out into the lobbies, so people can have a cocktail before they step on the train and head home. “It’s not enough any longer to have the ice cream social and pumpkin-carving contests,” Balsiger says. “Tenants want all of the amenities and that’s a differentiator. It used to be if you had a conference center and a tenant lounge - that was a ‘check the box.’ But if you’re competing in the downtown market today, you must have every one of those things and more,” including a bike room/bike repair and even golf simulators and sleep pods are offered in some buildings.

It comes down to employee retention and if we’re giving them the right environments, Balsiger says. And it’s not only millennials fueling the trend. “People like to point the finger at millennials, that they were the drivers behind a lot of it, and perhaps that’s a fair statement,” Balsiger notes. “But at the same time, it’s the CFOs and CEOs understanding that they’ve got to battle for talent. Whether that’s millennial talent tor Gen X talent or whatever it might be, they have to do something to differentiate themselves as an employer.”

Smarter office buildings Technology on the operating side of the building continues to evolve as well, and buildings are getting smarter. While there has always been BAS (building automation system) that allows either a tenant and/or the engineer/management team to control the building’s heating and cooling, today’s technology is taking it even further. For example, smart management systems are available for office restrooms that send real-time alerts via mobile devices when towels, tissue and soap run low. Technology will continue to advance to create more efficiencies—both operating efficiencies and tenant conven-

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iences. However, while technology is critical, Balsiger says buildings will still need property managers. “I don’t think you’ll ever do away with property managers and engineers,” Balsiger says. “It’s still a very customer service-driven business. But as technology grows, managers can manage more projects. “I still think there’s a very fine balance between how many assets a manager should oversee, because there’s always going to be a personal touch that needs to occur,” he continues. “You need to get out in front of your tenants and build rapport and relationships with them, and you can’t do that just with technology.”

What’s new in apartment property management? Apartment property managers are responsible for marketing a building, determining rent pricing, screening, processing tenant applications, collecting rent, and overseeing maintenance issues– and their tenants’ needs are 24/7. Technology can help cut costs and improve the quality of service at multifamily buildings, as many processes can be automated or streamlined. Technology includes 3D virtual tours, Property Management to page 18

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Minnesota Real Estate Journal

Mid-Year From page 1

pace under 18 age group. This will lead to a pear-shaped demographic chart. • International migration has helped to provide positive population growth in the Twin Cities. Most of the migrant population provides low or highly skilled labor talent. • U.S. economic growth is slowing, but not plunging. • It was mentioned the average length of time between surpassing full-employment and the next recession is three years. As the following chart shows, the U.S. economy appears to have surpassed full-time unemployment about three years ago. • In 2019, the U.S. 10-year yield has dipped below the 3-month yield. This results in an Inverted yield curve – meaning an interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality. This has historically preceded recessions.

Retail Update: Opportunities and Trends – State of the Market Moderator: Lisa L. Diehl, Principal, Diehl and Partners, LLC.

Deb Carlson, Director Brokerage Services, Cushman & Wakefield Margaret Linvill Smith, President, Linvill Properties Mark Robinson, Principal Investment Sales, Mid-America Real Estate J. Lindsay, President, The Lindsay Group

Retail • The new buzz word from ICSC in Las Vegas this year was “Retail Renaissance.” In my mind, that’s far more uplifting than the media derived “doom and gloom” drumbeat of Retail Apocalypse. There are still plenty of opportunities in retail. • Low unemployment rate is impacting retailers and making it difficult to fill jobs and hinders growth. On the positive side, companies are looking at ways to innovate and implement technology where possible to offset labor shortages. • On the national retail scene, many store closures in 2018 were bankruptcy related. Going forward, expect to see more frequent strategic store closures due to poor performance. • For the Twin Cities retail market, the number of national bankruptcies in 2018 impacted big box space across the metro. While location always impacts real estate decisions, the mantra of how the retail market is faring today is “It Depends.” Importance of location is very prevalent in backfilling the vacant

Riverside, Minneapolis

June 2019

spaces. Class A-type locations are faring well, and Class B-type locations are taking longer to lease-up and dealing with more competition. • Many Class B and C centers have flat to declining rental rates to attract tenants. • Internet resistant and e-commerce stores moving into bricks and mortar are growth areas. As the market continues to shift, the truth is no one truly knows what defines internet resistant. Ex. grocery stores have more competition from shipping and delivery options. • General outlook is to expect more of the same for now. • Local developers including Margaret Linvill Smith, Linvill Properties and J Lindsay, The Lindsay Group talked about really striving to create unique experiences at their neighborhood centers. It’s also important to spend time thinking about how the landlord can best help the tenants. • When backfilling vacant spaces, need to be creative and relational with tenants • Investment Sales Trends (from Mark Robinson, Mid-America Real Estate) - Single tenant and higher quality strip retail still seeing strong demand, but waning - Liquidity and debt availability is still strong, but need to shop more to find the right lender. - Estimated at least half of

investment sales are 1031 buyers. - Legacy retailers and restaurants are tougher to sell. - Buyer-seller expectation gap widening • One idea on how to repurpose B and C big box centers. Remodel/narrow the depth of buildings and sell outlots along street frontage if land value is high enough. • In MN, a real factor is operating expense costs have risen, what used to be $6.00/ are now $10.00/SF+. Other states, such as Florida, operating expenses are still slower. This has a real impact on ability of retailers to afford new locations and makes them pause and slow growth. • Technology – Artificial Intelligence is increasing in shopping centers with ability to track where shoppers have been. Based on the feedback from the panel, I’m not the only one who thinks this is CREEPY!

Industrial Real Estate Update – State of the Market Moderator: James DePietro, Senior Vice President, CBRE Tom Bennett, First Vice President, CBRE Peter Mork, Founding Partner, Capital Partners Mid-Year to next page

Uptown, Minneapolis

Lowertown, St. Paul Reuter Walton is proud to be developing and constructing these three in-ﬁll, ground-up, apartment projects located in Opportunity Zones in Minneapolis and St. Paul. They will deliver much needed housing to three unique urban neighborhoods

www.reuterwalton.com

June 2019

Paul Hyde, CEO, Hyde Development Steve Hoyt, CEO, Hoyt Properties

Industrial • While not prevalent int the Minneapolis/St. Paul market yet, vertical industrial logistics is coming -think multi-story. Especially, to help with onetwo hour deliveries and last-mile distribution. This makes infill sites very desirable, but its difficult to find good large tracts. • Average age of refrigerated spaces in US is 34 years – new space is coming. • There is a shortage of cold storage. The challenge is new construction costs are $125-$150/SF so difficult to build speculative space. This link provides good insight on cold storage trends and needs:https://www.cbre.us/researchand-reports/US-Food-in-DemandSeries-Cold-Storage-LogisticsUnpacked-May-2019 • According to one broker, the secret sauce to Amazon’s success is the advanced level of technology in their buildings and increased automation. • The Twin Cities industrial market continues to see strong demand and 35 quarters of positive absorption. • Additional new industrial speculative space will be needed with bulk warehouse the main drive because of investor demand. • Flex warehouse space is in high

Minnesota Real Estate Journal

demand but seeing limited new development. Flex office deals are attractive to tenants because of lower rents. Attractive to landlords because of lower TIs and easier to backfill after rollover. • Two things drive industrial development – jobs and capital. Lending has been very disciplined over the last 10 years which is good. • As with most real estate sectors, companies are having a hard time to vacant positions. • A few recent transactions point to high-water benchmarks for industrial. There was a recent $12.37/SF Roseville land sale and the Industrial Equities/John Allen 34 building, 2.5 million SF, $227 million all cash portfolio sale to Blackstone that traded at a 5.5% cap rate. It makes me ponder -is this a positive sign showing continued bullish strength of the market or is the market getting out of line? Strong investment demand including foreign capital looking to secondary markets after getting priced out of primary and coastal markets. • Cap Rate Compression - How low can they go? • Construction Costs – $70.00/SF is the new $40.00 • New construction rents – new norm is $11.75/$5.75/SF – replaces the $8.00/$4.00 • Seeing annual construction cost

increases of 8-12%. • Seeing more 7-to-10-year leases to help offset higher construction costs and lease rates. • 2.5% annual rent increases are typical right now. • Buildings are getting bigger and higher. 2019 Minneapolis Industrial Predictions (from CBRE slide deck) • Continued emergence of private capital investors for offerings under $20 Million • All-time high pricing continues • Infill locations will become more valuable regardless of functionality • Continued positive absorption • Value appreciations for light industrial and tech • E-Commerce emergence still in early innings

Office Market Update – State of the Market Moderator: Julie Kimble, President, KimbleCo Steve Chirhart, Principal, TaTonka Real Estate Advisors Brent Erickson, Senior Managing Director, Newmark Knight Frank Jim Montez, Vice President, Transwestern Andrew Webb, Managing Principal, Redline Property Partners

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Office • Stabilized assets are selling in CBD -Class A trophy buildings represented the most investment sales in 2018; holding top of market rents and consistent occupancy attracting buyers from large investment groups • Parking in the CBD’s still an issue. • The push to urban has hurt every suburban market except the I-394 corridor • Creative office buildings saw high investment activity (national trend) in 2018 especially urban and NE Minneapolis • Mega projects help impact a small submarket. Ex. Allianz Field project in Midway St. Paul which Cushman and Wakefield is working on to market a mixed-use development.. The office component is normally a smaller piece of the larger mixed-use redevelopment. • A more mature example of this would be the significant North Loop development around Target Field since 2010. • Outward urbanization from downtowns. • Most prospects for Dayton Project have been from outside markets than MN. • Interesting that many of the mega projects are in East Metro. Mid-Year to next page

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• Construction costs continues to climb. Important to clarify with tenants upfront about construction bid expectations. • New TIs and Renewal TIs both continue to climb • Up to $70-$80 for new TIs. • If looking to shed excess office space, need to really discount. • Co-working space trend continues. Flexibility of floor plates and more space being allocated for common area spaces and amenities is happening. • According to one office building investor, 10%-20% feels like a good percentage of coworking space in a multitenant building. • About 5% used to be provided for common area, moving closer to 10%. Working to create more experiential office opportunities. Amenities are very important for employers to provide to employees and good enough they will actually be used. • Coworking makes it easier for companies to jump into a space with limited time spent on planning, etc. Working to create “communities” in the coworking space. • One panel member expects a bubble in coworking space in next 24 months, especially if a correction occurs in the

Minnesota Real Estate Journal

economy. • Flight to Quality, with Class A and top Class B buildings • Natural lighting in buildings has improved. • More layers of different space needs within a suite are important questions to answer in terms of what tenants want and need. • Institutional money is now more aware of Minneapolis market. Investors want cool buildings like tenants. Events like the Super Bowl, Final Four and PGA golf tournament have all helped put Minneapolis on world map.

Apartment Market Overview – State of the Market Moderator: Abe Appert, Executive Vice President, CBRE Ted Bickel, Senior Vice President, Colliers International Anne Olson, COO, IRET Matt Mullins, Vice President, Maxfield Research & Consulting, LLC

Apartments • As more supply enters the market which impacts apartment rent growth, operators are working on ways to implement Ratio Utility Billing System (RUBS) and increase other income.

• In the Twin Cities, capitalization rates for Class A apartments are 4.5% to 5%. Low to mid 5% range for Class B cap rates and Class C cap rates are around 6.0%. • Minneapolis/St. Paul metro area has 4x the historical sales volume in the current cycle. The amount of new construction in recent years has changed the historical buy and hold long-term strategy of local owners. There is more merchant capital and developers that build and sell. • According to data from CBRE, over the past few years, 41 of 54 transactions (76%) of 100+ units were out of market buyers. The Twin Cities are widely accepted as a good market to invest in for apartments. • I’ve heard of Airbnb, but this was the first time hearing about short term rental companies Stay Alfred and Pillow. At least one developer is looking to construct a new apartment building for Stay Alfred and sign a master lease to them. • While few data points exist so far, the panel opined a slight uptick in cap rates is anticipated on projects with a higher percentage of units rented to short term rental stay companies. • Micro units and co living spaces are present. Amenities are incredibly impor-

June 2019

tant for these space types. More about being able to offer an affordable monthly rent vs. $/SF. These projects require a very site specific, niche product. • Conference rooms and video conferencing are becoming more important in apartment buildings as more people work remotely. • With micro units, some have seen some operational challenges such as payroll. Also, expect to see more turnover with these units. • It’s becoming more difficult to justify new development due to construction costs. • Modular multi-family construction is being talked about but hasn’t really gained traction yet. While modular construction can offer lower costs, building codes in Minnesota result in higher costs. One challenge is how far the construction plant is from the development site. Greater distances increase transportation costs.

June 2019

Minnesota Real Estate Journal

CBRE: Cold Storage Industry Likely To See Demand For Another 100M Sq. Ft. From Online Grocery Sales Cold-Storage Expansion Most Likely In Gateway Markets and in Leading States for Food Production, Like California, Washington, Florida The growth of online grocery sales has the U.S. market for cold-storage warehouses poised for strong growth, potentially creating demand for up to 100 million sq. ft. of cold-storage space over the next five years, according to a new report from CBRE. That forecast stems from a projection by the Food Marketing Institute and Nielsen that groceries ordered online will account for 13% of total grocery sales by 2022, up from 3 percent in 2018. Such growth would amount to an additional $100 billion in

annual grocery sales conducted online. This outlook portends significant changes for the industrial cold-storage industry, which at 3.6 billion cubic feet (an estimated 214 million sq. ft.) currently accounts for a tiny portion of U.S. industrial-and-logistics real estate overall. Much of the cold-storage sector’s growth is likely to occur in gateway markets like Los Angeles and the New York area as well as leading foodproduction states, such as California, Washington state, Florida, Texas and Wisconsin. “Demand for cold-storage space, particularly freezer, has been on a seemingly constant rise in Minnesota, Wisconsin and Iowa over the last several years,” said CBRE’s Andy Lubinski. “Nearly all existing cold-storage facilities that become available, even those with poor configurations and/or deferred maintenance, have been

acquired or leased in a matter of months in primary, secondary and tertiary markets alike. This is being driven by food processors looking to optimize their distribution network as well as the growing popularity of ordering food and groceries online directly by the consumer.” The challenges of constructing and modernizing cold-storage facilities to keep up with the strong growth of online grocery sales has driven consolidation in the industry as firms seek to gain economies of scale, according to CBRE. Four companies control 73.4 percent of the refrigerated warehouse space in North America. “Few sectors of commercial real estate will undergo as much transformation in the coming years as the coldstorage industry due to e-commerce’s impact on this previously underpenetrated market,” said Matthew

Page 15

Walaszek, CBRE Associate Director of Industrial & Logistics Research, Americas. “We will see robust demand, further innovation in delivery and automation, and possibly more consolidation among major players.”

Dougherty Mortgage LLC closes $42 million Fannie Mae loan for Loden SV Dougherty Mortgage recently closed a $42 million Fannie Mae loan for the refinancing of Loden SV, a 206-unit four-story market rate multifamily apartment property located in Shoreview, Minnesota. The pet-friendly property was constructed in 2018 and features an onsite leasing/management office, community room with full kitchen, shared conference room, pet grooming area, billiards area, theater room, outdoor green space, fitness cenClosings to next page

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Page 16 Closings from page 17

ter, yoga/fitness room, and luxury outdoor pool with grilling areas, cabanas and sundeck. Unit amenities include floor to ceiling windows, quartz countertops, stainless steel appliances, inunit laundry and central air. Many units also feature private balconies or patios. The Fannie Mae loan has a 10year term and 30-year amortization.

MARCUS & MILLICHAP ARRANGES THE SALE OF A 85-ROOM HOSPITALITY PROPERTY Marcus & Millichap (NYSE: MMI), a leading commercial real estate investment services firm with offices throughout the United States and Canada, has announced the sale of Best Western Plus Eau Claire, an 85-room hospitality property located in Eau Claire, Wisconsin, according to Jon Ruzicka, Regional Manager of the firm’s Minneapolis office. Jake Erickson and Jared Plamann, investment specialists in Marcus & Millichap’s Minneapolis office and members within the firm’s exclusive

Minnesota Real Estate Journal

National Hospitality Group, had the exclusive listing to market the property on behalf of the seller. The buyer was procured by Erickson and Plamann as well. Regional Manager of the firm’s Milwaukee office, Todd Lindblom, assisted in closing this transaction. This transaction marks the industry leading 14th Upper-Midwest hotel transaction Erickson, Plamann, and the rest of the hospitality team out of the firm’s Minneapolis office have closed since 2017. Best Western Plus Eau Claire is located at 3340 Mondovi Rd in Eau Claire, WI. The property is a threestory, interior corridor hotel equipped with a heated indoor pool, on-site pub, and banquet space that can hold up to 300 people. The property’s most recent renovation and property improvement plan (PIP) was completed in November of 2018. Built in 1988, this hotel sits on 7.66 acres conveniently located off of highways 94 and 37.

ACKERBERG Acquires Multiple Twin Cities Office Properties ACKERBERG

pleased

announce that they have acquired three office properties totaling over 170,000 square feet. • Edina Business Plaza, a three-story 84,380 square foot office building located at 7550 France Avenue in Edina, Minnesota. • 811 Glenwood is a three-story, 46,510 square foot building located in the West Loop sub-market of the Harrison neighborhood in Minneapolis. • 1400 Van Buren is a two-story, 39,845 square foot office building in the Broadway & Central submarket of the Logan Park neighborhood in Northeast Minneapolis. Edina Business Center is located on the northwest corner of France Avenue and 76th Street West and is surrounded by an abundance of walkable retail. “Edina Business Plaza is a highquality, well-maintained office building with a very strong location on the France Avenue corridor. The largest tenant in the building is Coldwell Banker Burnet and we are excited to be their landlord at another property in

June 2019

Minneapolis,” said Stuart Ackerberg, Chief Executive Officer of ACKERBERG. “This location has served us well for 25 years. We have enjoyed the central location for our support team and corporate offices and are proud of the national success of our sales office which chares this location and services in this important southwest community,” said Matthew Baker, President of Coldwell Banker Burnet. The Edina Business Plaza seller was represented by Peter Tanis with Newmark Night Frank. “The 811 Glenwood Building’s West Loop neighrborhood location is an emerging market that will only continue to get stronger over time as more development occurs in the neighborhood and believe it is a very attractive option relative to the North Loop,” said Ackerberg. “The Van Buren Building is a classic brick and timber building. We’re excited to add another excellent co-working operator in Fueled Collective to our portfolio to complement WeWork, a tenant in our MoZaic East property,” Ackerberg added.

June 2019

Minnesota Real Estate Journal

First & First, the seller for 811 Glenwood and 1400 Van Buren, was represented by Steve Buss with Jones Lang LaSalle. Grocery Stores Of Near Future Will Include Smaller Formats, Automated Checkout, Inventory-Tracking Robots, More

CBRE Report Shows Trends In Grocery Industry Converging on Convenience for Customers, Expanding Stores’ Offerings CBRE’s analysis of factors influencing the U.S. grocery industry points to a near-term future with a fully automated checkout process, a greater emphasis on prepared meals, a proliferation of smaller, convenience-store grocery outlets, and more collaboration between grocers and nontraditional partners such as fitness operators and restaurants. A new report from CBRE, the second in its Food In Demand series this

year, delivers 11 predictions for the U.S. grocery industry over the next decade. Grocery-anchored centers are favored by real estate investors due to the industry’s steady if slow sales growth and minimal e-commerce penetration relative to other categories. Still, US grocers face significant pressure to adapt to changing consumer preferences, new store formats, automation and delivery demand. “The store will remain central to the grocery industry, but its format and function will be reshaped by multiple factors over the coming years,” said Melina Cordero, CBRE Global Head of Retail Research. “Grocery operators must diversify their offering to best compete, which will lead to varied store formats for different markets, nontraditional merchandise assortments and an even greater focus on customer convenience.” Among CBRE’s predictions: The grocery checkout line will disappear within 10 years A slew of technological advance-

Page 17

ments is converging to replace the traditional checkout line, including carts with built-in barcode scanners and credit-card swipers; mobile-payment apps; weight sensors and cameras; and merchandise-scanning robots. Technology also will allow shelves to keep track of inventory. The elimination of checkout lines will allow grocery operators to free up real estate for revenuegenerating functions such as click-andcollect services. Major grocery operators will expand further into convenience-store formats The industry’s largest players are finding a strong growth opportunity in opening and operating smaller-format stores in dense, mostly urban markets. Many of these stores focus on convenience fare such as prepared meals. Already, big names have moved into the space, including Kroger Co. with its Express Mart format and Hy-Vee with Fast & Fresh.

Grocers will seek to add higher-margin merchandise and services in their stores to counter the steep costs of lastmile delivery. That will include more prepared meals and in-store restaurants. It also will entail collaborations, such as grocer Hy-Vee’s arrangement to cross-promote Orangetheory Fitness’ exercise classes with Hy-Vee’s healthy food offerings. Intensifying competition spurs reinvestment in stores Various large grocery operators have announced sweeping remodeling and redesign plans for portions of their U.S. store base as competition increases from supercenters, wholesale clubs and small-format rivals. Some of this expenditure also is going to improving in-store technology and omnichannel services such as curbside pickup.

Collaborations will expand grocers’ offerings

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Property Management from page 11

online application and background checks, and online lease signing and payment collection. Also, mobile apps are used for maintenance work orders. Apartments are finding new ways to engage with tenants on their preferred medium -- mobile devices. “We continue toward less human interactions, which is good and bad,” says Jack Sipes, partner and senior vice president of property management at Plymouth-based Dominium. Dominium is a large developer and manager of affordable housing, with just over 34,000 units in 22 states. A potential resident can look at a property and apartment unit online. They can apply and pay rent online, and in some cases, even receive a key code on their personal mobile device to get into their apartment without ever seeing anyone. The first time they physically see the apartment is the day they move in. “We’re not quite there, but we’re getting pretty close,” Sipes says. “The electronic revolution continues,” he explains. “It’s technology-driven but also societally driven as our renters become more and more used to doing things through their handheld mobile device, and they apply that to their apartment, too.” This has all “certainly revolutionized things, and it’s hard to see it not continuing to go in that direction,” Sipes says.

Minnesota Real Estate Journal

A pitfall of this process is it leaves potential for fraud and for people to get taken, Sipes points out. It could be “sort of bait and switch,” he says. “[The unit] sure looked good online, but when I got there in real life, it looked nowhere near what it looked like online.”

Online reviews are critical Online reviews play a big role in residential property management, especially if your customer is using those reviews to make decisions about renting. “That’s important and that’s a change,” Sipes says. “That electronic signature that you make really matters.” Meanwhile, maintenance orders at apartments are often done electronically. Tenants can go into the residential portal and submit work orders. Since millennial tenants have become more of the tenant market, they require high-tech solutions. “By in large, millennials are the prime renter group right now,” Sipes points out. The high end of millennials are ages 35 to 38, while for the 23- to 25-yearold, generally everything is done online rather than by voice or face to face. “The online presence and how social media has changed – in regard to how people interact with each other -- affects us in residential property management,” Sipes says. And he says it will likely only become more prevalent in the future.

June 2019

Technology changes rapidly When Sipes implements new technology, he looks at implementing it across many rental properties, and recognizes how fast technology changes. “One of the questions we’ve got to ask is this [technology]company going to be around in 24 months or is the need that they’re filling now something that someone else is going to fill with something better in 24 months?” he says. That affects how Dominium decides what they’re going to invest in and who they’re going to partner with.

Upscale apartment boom also underway A luxury apartment boom continues in the Twin Cities fueled by people renting by choice – including empty-nesters and double-income millennial households. The luxury sector boasts flashy amenities like elaborate fitness centers, concierge services, pet amenities like pet spas, rooftop pools, virtual golf simulators, co-working spaces and trash valet services. Property owners and managers of upscale complexes are delivering a customized experience for the luxury apartment resident, and working to position their properties as those that boast amenities and services of the future.