Good news from Altus Group survey? CRE pros indicating that they are ready to buy and sell real estate again
By Dan Rafter, Editor
In good news for the commercial real estate market, 80% of U.S.-based CRE professionals said in a recent survey that they expect to buy or sell property within the next six months.
That would be a boon to the commercial real estate industry, which is still waiting for owners and investors to begin buying and selling industrial facilities, office buildings and retail centers in higher numbers once again.
The positive news came from Altus Group’s second quarter 2024 CRE Industry Conditions & Sentiment Survey released on June 12. The quarterly survey contains feedback from 560 commercial real estate professionals representing more than 97 firms in the United States and Canada. Altus Group surveyed these professionals from March 25 to April 29.
One of the bigger takeaways from this report is the willingness among respondents to make real estate deals. Commercial real estate sales have been slow since the Federal Reserve Board first began tweaking its benchmark interest rate. Now that the Fed has said it will no longer increase this rate, the hope is that investors and owners will begin selling and buying commercial real estate in larger numbers.
With 80% of U.S. survey respondents saying that they do plan to buy or sell in the next six months, it
does look like the Fed’s decision to no longer increase its benchmark rate will spur more sales activity in the commercial real estate sector.
The survey found, too, that 91% of the largest firms said that they intend to transact during the next six months. That is up from 83% in the first quarter of 2024.
And what asset classes will investors buy? Four the fourth consecutive quarter, respondents told Altus Group that industrial and multifamily properties are expected to be the best performers during the next 12 months. U.S. respondents also said that retail is expected to be attractive, too.
Not surprisingly, respondents cited office as the expected worst performer during the next 12 months.
This willingness to make deals doesn’t mean that U.S. commercial real estate professionals aren’t worried about the country’s economy. The number of U.S. respondents who told Altus Group that a recession is “very likely” or “somewhat likely” in the next six months increased by 7 percentage points from the previous quarter.
This means that the majority of respondents -- 70% -- say that a recession is either “somewhat likely” or “somewhat unlikely” in the next six months. This indicates plenty of uncertainty.
In other results from Altus’ study, 49% of respondents said that they expect interest rates to remain stable during the next 12 months. Surprisingly, 25% of respondents said that they expected interest rates to rise during the next 12 months. That is up 16 percentage points when compared to the first quarter of this year.
Altus Group reported that 26% of respondents expected interest rates to fall by 20 percentage points in the next year.
More than a third of respondents -- 37% -- said that they expected increased availability of capital in the next year, a jump of nine percentage points from the last quarter. However, 40% of respondents said that they expected the cost of capital to increase in the next 12 months. That figure is up 12 percentage points from the first quarter of 2024.
And when it comes to revenue growth? Respondents to Altus Group’s survey were generally optimistic.
A total of 62% of survey participants said that they expected revenue growth to be stable during the next 12 months, while 19% expect revenue growth to increase. That latest figure represents a modest increase of two percentage points from the first quarter of the year.
In addition, tenants are looking for more collaborative open spaces as well as privacy, seeking huddle rooms and phone booths. They’re trying to create a sense of community through shared social spaces and task-focused work environments. Fredrikson’s new office space is a good example of this trend. They incorporated a variety of welcoming meeting spaces that encourage camaraderie but also offer offices when employees need a quiet place to work.
Which submarkets are seeing the most leasing activity? How does the demand for office space downtown compare to the suburbs?
While leasing in the suburbs has not yet reached pre-pandemic levels, the activity is considerably higher than downtown. Bloomington continues to be an attractive submarket. It is well located with an abun-
dance of shopping, dining, hotel and entertainment options.
KBS’ Northland Center is an example of how the company supports leasing and retention by making capital improvements to its properties each year. We recently completed nearly $1 million in renovations at Northland Center, further enhancing its appeal to companies seeking top-tier space in the Bloomington area.
Ryan Pires (Photo courtesy of KBS.)
60 South Sixth in downtown Minneapolis underwent an extensive renovation project that has resulted in stronger occupancy levels. (Photo courtesy of KBS.)
These renovations included refreshing the lobbies of both buildings and the addition of 25,000 square feet of spec suite space.
As someone who understands the market, we know how much Minnesotans want to be outside whenever the weather is nice, so taking advantage of outside space is paramount. With this in mind, at Northland Center we made use of all the functional exterior space it has. We added outdoor seating areas with comfortable chairs and tables, giving employees both interior and exterior areas to work or relax. We try to tailor amenities to each property and one of the most popular amenities, the new pickleball court, is one of the most cost-effective features we added.
We strive to create a welcoming, hospitality-inspired environment at each property that will positively im-
pact occupancy, and the renovation helped us do that. In fact, we signed over 145,000 square feet in new and renewal leases at the 492,514-square-foot office park last year.
What are some of the unique opportunities and challenges impacting the Minneapolis office market?
Downtown Minneapolis was uniquely impacted by social unrest during the pandemic, which has kept some consumers and businesses away. We hope that by creating a safe and welcoming environment people will want to return the city back into the vibrant place it used to be. Spring is one of the best times of the year and we’re encouraged by the amount of people we’re seeing in the city and returning to the office. According to The Minneapolis Downtown Council, 65% of workers from the top-15 employers have some
weekly office presence in 2023 and we see this trend improving in 2024.
As tenants continue to seek new and recently renovated properties, vacancy will likely climb higher in older, outdated buildings, so it’s good to see that Minnesota ranks high for office conversions. About three out of every five future apartment units are former office units. This is positive for the overall community, as well as the owners of higher-quality or upgraded Class-A assets as it should take older office buildings out of the market. A further contraction of supply should be beneficial in the long term as tenants seek out smaller but nicer office space.
that smaller-scale property owners cannot purchase on their own. This kind of expense control allows owners to pass the savings on to their tenants or use the money to improve buildings. Shrewd expense control also leaves room for incremental rent increases for landlords.
Property taxes -- another rising cost -- have extended to industrial spaces in most cities due to office valuations declining and significant increases in industrial property valuations. While the increased value of industrial assets has been good for industrial property owners and sellers, tenants in industrial properties may receive serious sticker shock when reviewing year-over-year expenses with the increased property tax included. For tenants in office spaces, the reduced valuation of the property may not translate into lower property taxes for 12 months or more, unless the property managers and owners are diligently seeking reductions.
When will the next crisis strike? What are the possibilities?
A few crises are predictably looming. According to Bloomberg, more than $900 billion or 20% of the total US commercial and multifamily real estate debt will mature this year. The potential for lenders to require payback of outstanding debt on office properties with significant vacancy could be crippling to the regional banking and commercial real estate industries. The remaining debt on these properties is likely to exceed today’s appraised value, meaning the owners would need to find additional capital to pay or renew the
loan. If the owner doesn’t have that option, it’s possible to “give the keys” back to the lender.
That process, called Receivership, requires the court to appoint an impartial third party as Receiver, typically a property management team, to take control of a property and act as owners on behalf of both the lender and the property owner during the Receivership period. Receivership is a big step for both lenders and owners, and few in the industry take that step lightly. While widespread Receivership hasn’t started, property management teams are already thinking about what that might look like to get prepared. As the frontline for the tenants, lenders, and property owners, PMs are key to the success in that process.
Being appointed a Receiver is not for the faint of heart. The process can be hostile if both parties are not aligned in the decision to proceed. The relationships can be emotional if the defaulting party has long-standing ties to the property and is not ready to exit. It is also often that the defaulting party simply abandons the relationship and there is little information or transfer of knowledge for the Receiver to operate the property. Tenants can feel lost in the process if the Receiver is not knowledgeable enough or staffed well enough to effectively oversee things like lease renewals, approvals of tenant requests, or problem-solving on their behalf. Simple account receivable disputes can be difficult to resolve if the information is not available from the debtor. The rules for Receivers are clear in Minnesota but each lender and debtor bring a different set of operating challenges.
Inevitably, climate, workforce, and market changes will continue to challenge the operations of commercial properties. In some locations, the PM staff will need to plan for wildfires due to drought. In others, drought will cause reduced water available for operations, which may drive new environmental regulations. Hybrid workforce preferences will likely require new ways to heat/cool, clean, and operate buildings allowing for more flexible and sustainable systems. All change is interconnected, and we see building operating costs increasing in response.
Looking forward
One key duty of the property manager is to look forward – for operational or staffing needs, capital improvements, budgets for ongoing maintenance, technology trends, and tenant turnover. If the pandemic, recent environmental disasters, and the GFC taught us anything, it was to not be surprised when bad things happen. We’ve also learned yet again to plan for the worst and hope for the best during any challenge.
Amy Melchior is executive vice president of property management with Bloomington, Minnesota-based Forte Real Estate Partners.
SAINT PAUL
the most sought-after city for apartment rentals for the third consecutive month.
RentCafe’s demand report is based on the number of online views that apartment listings attract, the number of apartment units that site visitors save as favorites and the number of saved personalized searches for each of the 150 largest cities in the United States.
In February, Minneapolis once again earned the title of the most coveted city among renters browsing RentCafe.com in search of apartments.
Views for apartments in Minneapolis soared by 234% in February of this year compared to the same month one year earlier, according to RentCafe. This surge in online engagement is reflected in a 22% yearover-year decrease in available apartment listings on RentCafe.com compared to one year prior, which helped propel the city to the top of the company’s list.
“That pent-up demand from investors looking for commercial real estate is starting to ease in Midwest markets, specifically the Twin Cities,” Talberg said. “Our market is attractive to investors. Some of these investors are looking at the Twin Cities market for the first time. They are ready to start making long-term bets again. They are looking for a stable region like the Twin Cities.”
More development on the way?
Will tenants seeking apartment units have more choices soon? Maybe. It largely depends on whether the challenges of building new construction today are outweighed by the rising demand among renters for multifamily space.
As Talberg says, the Minneapolis-St. Paul market does not have nearly enough apartment units to meet the demand for them. That would indicate that developers will be adding more supply to the mix.
At the same time, though, high interest rates and material costs make it difficult to pencil in new projects today, Talberg said.
The challenges of building new have resulted in a slowdown in permit activity in 2024, and Talberg says that he expects a similar slowdown in 2025. This is despite numbers showing that the Twin Cities market needs about 49,000 new apartment units to meet demand.
During the next 12 to 36 months, apartment construction that began before the current slowdown will be coming online in the local market. The real impact of the lack of new apartment development will be felt in 2025, 2026 and 2027, Talberg said.
One solution to bring new apartment units to the market despite the rising costs of new development? Talberg points to financial help from the state and municipal governments.
“If you find a project with a TIF, grants or favorable land pricing, that can help move that project from concept to actual construction,” Talberg said. “Without that help from the city or state, though, it remains very difficult to build anything new. The pipeline of new apartment construction will remain minimal for the next several months. That does set the stage for a very appealing growth story in the Twin Cities when it comes to rents.”
Where is demand for new apartment units highest? Talberg said that the local market saw a push to the suburbs during the early to middle stages of the pandemic. Now, though, the Minneapolis-St. Paul market is seeing a return to the urban core.
“As rents have been flatter in the urban core versus the costs of ownership and renting in the suburbs, we expect more people to return to the urban areas,” Talberg said. “As employees continue their back-tothe-office mandates, that, too, will bring more renters back to the urban core. There are specific pockets in the market that are more vibrant today than they were pre-COVID. They are a lot further along than people looking in from the outside would expect.
“There is absolutely a comeback story that is playing out in the urban core,” Talberg said. “We expect that will continue and only gain momentum.”
Talberg said that the suburban markets that are seeing the most demand for multifamily units are those that boast good school districts and walkable downtown areas. He pointed to communities such as Edina, Eden Prairie and parts of St. Louis Park.
With home values rising and mortgage interest rates high, that puts the cost of owning a home in the suburbs out of reach for more people, Talberg said. That has only amplified the demand for well-located apartment communities throughout the suburbs.
Urban areas that are seeing high demand for multifamily spaces include neighborhoods such as the North Loop, Mill District and anything located along the riverfront, Talberg said.
“There is growth and vibrancy throughout the downtown area,” he said. “Even St. Paul’s downtown has seen a nice rebound. Look at St. Paul: The pipeline for new apartment construction is practically zero right now. As we go forward, that is a set-up for the rent growth that will we see taking place there.”
Apartment rent growth has already been steady in the Twin Cities market. As Talberg says, with permit activity for new apartment construction down 55% from this time last year, the demand for multifamily units will only increase. And that should lead to monthly rents that keep rising.
“It is not a stretch of the imagination to see a rentgrowth story in the Twin Cities that is superior to even the Sunbelt states,” Talberg said. “That is a theme that could carry this market as the supply pipeline struggles to keep pace with demand.”
JLL Capital Markets earlier this year closed the sale of Elan West End, a 164-unit multifamily community in St. Louis Park, Minnesota. (Photo courtesy of JLL Capital Markets.)
JLL Capital Markets last year closed the sale of the 227-unit Millennium Edina in Edina, Minnesota. (Photo courtesy of JLL Capital Markets.)
were doing that on the side, though. I was working as a CPA before we started Roers Companies. Kent was working as a certified financial planner.
Kent Roers: Everyone asked us what we were doing with our money. We had some 20 houses around the University of Minnesota. Everyone gave us the same response when we told them that: ‘Next time you get a chance to invest in a rental house, let me know. I’d like to invest, too.’ After you keep hearing that, you start to think, maybe we should set up an investment company of our own.
What jumpstarted our decision to form our own company was in 2011 about two weeks before Christmas my company got shut down. I figured, now is the time to launch Roers Companies. We brought out a product that was we were always looking for, something that was institutionally sized. We pooled together a lot of investors. And it’s just grown steadily over the years.
Why do you enjoy about working with commercial real estate?
Brian: We truly believe, and it has been proven again and again, that the best way to grow wealth with the most tax efficiency is by investing in real estate. That’s what’s at the heart of our business: We sell real estate profitably all while paying less taxes than we’d pay if we were making our money some other way.
How would you sum up what Roers Companies does?
Kent: We are building apartments and offering the opportunity for investors to invest directly in them. They are not investing in a multifamily fund. Instead, we can ask our investors if they want to directly invest in multifamily in Plymouth or Woodbury, Minnesota, or if they want to invest in South Carolina, Florida or Texas.
We bring out seven projects a year to our investors. We have a stable of about 800 investors with whom we work. They get good returns and refer friends and families to us. We also have seven projects a year
that we do as a tax credit. By doing this, we provide affordable housing, something that is much needed right now.
Brian: Affordable housing is a big part of our firm. We have 2,500 units of affordable housing under construction as we speak. If we weren’t providing this, that affordable housing wouldn’t get built and people wouldn’t get to live in a quality, affordable property. To get this affordable housing under construction, we ask for a tax credit from the government in exchange for rent discounts. We are keeping rents at our affordable properties at about 60% of normal rents for the area. We partner with others, too, to create the financing mechanism required to build these properties.
Kent: Building affordable multifamily housing isn’t easy. It takes two to three years to put one deal together.
What other states does Roers Companies work in?
Kent: We are in 15 states. Outside of Minnesota, our primary areas of growth are in Arizona, Texas, Florida, Utah and South and North Carolina. We also do a lot of work in Wisconsin and Montana.
We are always analyzing the best markets for us to expand into. At this point, though, we have no firm plans to expand into other states.
What do you enjoy about working in commercial real estate?
Kent: We get to work with very successful entrepreneurs. You need a minimum of $100,000 to invest with us. You have to be accredited, which means that you must have a net worth of more than $1 million. That steers you toward people who have done well in their careers. Most of the people we work with started their businesses in their own garages and houses, just like Brian and I did. We started in one of the bedrooms of our houses, and now we have more than 300 employees. We help people who might be closer to retirement and are looking for diversification in their investments. They want to invest in a tax-advantaged way. I think helping people meet this goal is the coolest part of what we do.
Brian: I enjoy the positive impact we have on people. It starts first with the homes that we provide. It is pretty incredible that in 12 years we have provided more than 12,400 homes for people. Those homes also provide construction jobs. The financial people, leasing people, contractors … So many jobs go into these housing projects.
We have also helped our team at Roers Companies. We have a program in which our team members can buy shares in our buildings and be partners in our company alongside us. It is gratifying to watch them growth their wealth, learn finan-
The clubhouse at Roers Companies’ the Espen in Oakdale, Minnesota. (Photo courtesy Roers Companies.)
Risor of Bloomington in Bloomington, Minnesota. (Photo courtesy of Roers Companies.)
cial lessons and become leaders. We have people working in positions that they never dreamed of having.
Then there are our investors. They have great expectations from us. They want to grow their legacy wealth that they can pass on to their family or donate.
Kent: The positive impact we’ve had on our employees is rewarding. The employee who leads our construction company is a good example. He started with us two-and-a-half years ago and had no idea he’d rise so steadily to that level. We have hired 80 people in the last two years. We provide opportunities for talented and hard-working people. We are willing to take the risk with our employees.
Why has Roers Companies been so successful?
Kent: It’s our company values. We also have a lot of passion for what we do. I know it is old-fashioned, but we believe in the power of work ethic. We believe that this is a place for people who are willing to work hard. We are willing to give those people an opportunity. We also have an ownership mindset. We want people to work their jobs like they are the owners of the company.
Brian: We also learn our lessons. We have had challenges in the past. The mere fact of overcoming them helped create who we are. We had a couple of buildings in a commodity market that basically tanked. We found innovative ways to make those buildings
successful. That is when our growth started, when we began finding ways to overcome challenges. If there is a challenge, we find ways through it. That mindset has helped create the growth velocity of this company. Why is multifamily such an attractive investment for investors?
Kent: Real estate is a natural diversifier for everyone. Everyone has their 401(k) and IRA. But the money in those is invested primarily in stocks and bonds. People who want to diversify their investments often look at real estate. Now, these investors can buy their own single-family homes and rent them out. But that might be more work than you want to take on. There is less scale with single-family homes. You don’t make as much money. But multifamily? That does provide more scale. It is possible to make more money. It is also an opportunity for investors to diversify.
Are investors returning to the multifamily market now that there is some interest-rate stability?
Kent: There is a housing shortage in the United States. That is the case no matter what interest rates do. Apartment buildings continue to rent out. Some submarkets aren’t doing as well as others. The urban cores of Minneapolis and St. Paul are slower. But our suburban multifamily markets have remained strong. There is strong demand for housing in the suburbs. We opened a property in Maple Grove. It opened
at 60% occupancy and grew to 95% within months. There is still strong demand for multifamily housing.
Considering the challenges of high interest rates and construction costs, how is Roers Companies continuing to build new multifamily properties?
Brian: The interest rates don’t make it easy on us. The banks aren’t making it easy for us. But we are looking forward to two years from now when we open these buildings. The demand for these new properties will be intense when we open them in the next two years. That’s what you must focus on.
Kent: We have to bite the bullet now. Yes, it is more expensive to build now. But the rewards will come. When our apartments open two years from now, there won’t be as much competition because construction starts are down so much now. That is when we will benefit.
Retail from page 1
The fortunes of the mall, then, are a good indicator of how strong the retail sector in general is in the Twin Cities region.
It’s good news, then, that Mall of America is as busy as ever, according to Carrie Charleston, vice president of leasing at the mega-mall.
“Our leasing activity has been incredibly strong over the last four years,” Charleston said. “We are seeing a lot of new brands entering our market. There is so much leasing activity, that we are looking at relocating tenants to make room for the new ones coming in.”
Charleston says that new tenants help drive even more traffic to the mall. That’s largely because Mall of America features more than 170 brands that were new to the Minneapolis-St. Paul market when they first opened in the mall.
“That is what sets us apart. We have so many unique brands,” Charleston said. “The only place to shop at some of these brands on a brick-and-mortar basis is in Mall of America.”
Why do these new-to-market brands choose Mall of America? Charleston points to the tens of millions of visitors who flock to the mall each year. Retailers want to get their brands in front of all these eyeballs.
Charleston said that many of the brands in Mall of America report that their mall locations rank as the top-selling spots in their chains.
Have a spot in Mall of America allows retailers to show off their wares to shoppers from across the globe, too. Charleston said that 60% of Mall of America’s traffic comes from local shoppers, while 40% comes from tourists, who travel to Bloomington from around the world.
Charleston said that a wide range of retail types are thriving today at the mall. This includes retailers who cater to children, those who offer beauty supplies, those specializing in athleisure and sporting goods and those offering jewelry.
Mall of America is known for its experiences, too. The mall holds an indoor amusement park, large aquarium, multiple miniature golf courses, arcades, ax-throwing, movie theater and a multi-story M&Ms store, among other examples of experiential real estate. These retailers are important: Consumers today are seeking experiences. Those retailers who offer them are positioned to thrive today.
“We have always been about experiences,” Charleston said. “We are seeing a continued increase in retailers who are bringing experiences into the mall. Our guests and customers are always looking for something new to do. Those experiences create brand loyalty.”
Charleston said that about 65% of the tenants in Mall of America are classified as retail while 35% would be better classified as entertainment and dining.
An experience doesn’t always mean a trip to an amusement park or aquarium. Many of the retailers inside Mall of America offer in-store demonstrations of their products. Others have salespeople who educate customers on all that they can do with their products.
Consumers might not buy the product while they’re at the brick-and-mortar location. But when they get home, they might order it online. The retailer still made a sale, thanks in part to the experience it offered. This
is what is known as the omnichannel approach, retailers focusing both on brick-and-mortar locations to showcase their products and online stores at which consumers make their actual purchase.
“We went through the pandemic when people weren’t able to shop as much in person,” Charleston said. “People were excited to get back and go to a store to see, feel and touch products. That’s more satisfying than just shopping online. It goes back to the
experience that is being provided inside the store. It creates brand loyalty.”
Charleston said that Mall of America continues to evolve, much like the retail sector. She said that seven new brands recently opened in the mall as Mall of America continues to offer new retail experiences to its visitors.
“Bringing in new retailers is what we love to do,” Charleston said. “And we do it well. We have such a great offering. There is something for everyone. There
Mall of America continues to offer both experiences and new retailers. (Photos courtesy of Mall of America.)
Mall of America continues to offer both experiences and new retailers. (Photos courtesy of Mall of America.)
is always something new in terms of stores, dining and attractions. We are boosting the percentage of our offerings that are more on the side of experiences and attractions. Our guests want it and desire it. They love the experience.”
A restaurant boom
Of course, Mall of America isn’t the only example of a retail space that is thriving today in the Twin Cities market. In both the urban heart of Minneapolis-St. Paul and in its suburban communities, retail spaces are filling fast today, say the brokers working this market.
Ben Kepple, director of commercial operations with Minneapolis-based Sherman Associates, said that the demand from tenants for retail space throughout the Twin Cities market remains high. This is especially true of restaurant space, Kepple said.
“We are high on restaurants today,” Kepple said. “We are receiving a lot of inquiries from different users. It’s the post-COVID effect: People want to get out.”
Kepple points to the new restaurant leases that Sherman Associates has signed as proof of the demand for restaurant space here.
Sherman Associates recently closed a lease for casual French restaurant Chloe by Vincent in the Canopy by Hilton hotel in Minneapolis’ Mill District. Sherman also closed a lease for La Madre, a Mexican restaurant at 2025 Park Avenue, also in the Mill District.
Then there’s Pearl & the Thief, the restaurant of famed chef Justin Sutherland. This spot, specializing in seafood and southern cuisine is opening at Sherman Associates’ O2 Luxury Tower at 250 Portland Ave. in Minneapolis.
“We’ve found that certain areas of Minneapolis, including the Mill District, are hungry for restaurants,” Keppler said. “The demand is there, and deals will be done.”
Why are so many new restaurants moving into the Twin Cities market? Keppler again cites the impact of COVID. People today want to spend time outside their homes. Sitting down for a nice meal or enjoying an experience? That satisfies this desire.
The Mill District is particularly appealing to restaurateurs, Keppler said. The average income is high in this slice of the Twin Cities market. Several older residents live here, too, and they are more likely to spend their dollars on a meal out. The Mill District also has fewer safety issues than does the heart of downtown Minneapolis.
It helps, too, that a growing number of companies have brought their employees back to the office at least on a hybrid basis, Keppler said. When employees are back at the office three or four days a week, that provides a boon to restaurants and other retailers.
Keppler said that Sherman Associates has about seven residential buildings and 1,200 total units in the Mill District area. When new residents move into these spaces, Sherman Associates often provides them with a $100 gift card to a restaurant in the building or near it. That’s another help to restaurants in the area.
“That can be a big thing for the restaurants,” Keppler said. “It’s free marketing for them. It also helps us at Sherman Associates get deals done. Our clients know that we’ll do whatever we can to take care of them. We know that the restaurant industry is a tough one. Anything we can do to help them? We’ll do it.”
Mall of America continues to offer both experiences and new retailers.
(Photos courtesy of Mall of America.)
Keppler agrees with Charleston that experiential retail is a draw in the Twin Cities market, too. An example? The Puttery on Hennepin Avenue is an immersive miniature golf course and bar. This concept is attracting a steady stream of customers.
“It all goes back to people wanting to be around people,” Keppler said. “We are seeing less of the retail that is just retail and more of the retailers that are offering experiences. People want those experiences today when they go out. And they want to have them with other people.”
Patricia Weller, an attorney and chair of the Commercial Real Estate Department at Minneapolis law firm Monroe Moxness Berg, agreed that consumers today are in out-and-about mode. They grew tired of online shopping during COVID and are now eager to shop in person again.
That drive has powered the retail sector, both locally and across the nation, Weller said. And as others have said, experiential retail is leading the way today. Weller points to Can Can Wonderland in St. Paul as an example.
This former can factory now houses an entertainment venue of more than 300,000 square feet that features indoor miniature golf, vintage arcade games, a bar and restaurant.
“Just look at what you get with Dick’s Sporting Goods locations,” Weller said. “The location in Minnetonka has a batting cage. It has an ice rink for hockey. Kids and families can engage in a lot of activities there. This concept of creating experiences has been very successful for Dick’s. REI has been around for a long time, but it has experiences, too, such as climbing walls. It’s about encouraging people to come in and enjoy their time in your store. It’s not just hoping they run in and buy something. It’s a family experience.”
Weller has also seen steady growth in the number of new restaurants opening in the Twin Cities market. Suburban areas are especially seeing a strong influx of new restaurant concepts, Weller said.
This makes sense. Rents are typically less expensive for suburban restaurant locations. At the same time, with the office sector continuing to struggle, there might not be as many customers in downtown Minneapolis. This trend, too, is encouraging restaurateurs to look for space in suburban locations.
This isn’t to say, though, that restaurant concepts are completely avoiding downtown areas. The glamor of opening in the center of the city can still be a lure.
“You are always going to have destination restaurants in downtown,” Weller said. “That’s true even in nearby neighborhoods such as the North Loop. That’s where many of the cutting-edge restaurants go. These are walkable, vibrant neighborhoods.”
Hot spots for new restaurants? Weller points to the east side of Minneapolis near U.S. Bank Stadium as an area that is seeing new restaurants open. Edina is one of the more affluent areas in the Twin Cities and is also home to several new restaurants. Apple Valley and Eagan, too, are attracting young professionals, with restaurants following them.
Given the largely positive news surrounding the retail sector today, is there anything that is concerning retailers? Weller says that many of her clients are concerned about expanding insurance requirements and the rising cost of insuring their spaces.
Other retailers worry about the neighborhoods and properties that surround them, Weller said. “They are very interested in what is around them,” Weller said. “They want to make sure that it is a synergistic fit. I am getting more inquiries from clients going into multi-site developments asking me, ‘Who will be my partners?’ Customers like that mix of restaurants and retailers. But the retailers want to make sure that the other businesses near them are a good fit for what they are offering.”
from page 1
they already have, lowering their buildings’ vacancy rates.
We spoke with two property management professionals in the Minneapolis-St. Paul market about how this business has evolved since the start of the COVID pandemic and what it might look like in the future. Here is some of what they had to say.
Jen Nergard Vice president
Commercial property management and leasing Schafer Richardson Minneapolis
Do clients expect more from their property management companies today?
Jen Nergard: Absolutely. We are a privately held company. With that, we have assets that we manage in our REIT and outside our REIT. The majority of our decisions are made by those in our office who work with Schafer Richardson. This means that we can be nimble and adjust to what we are seeing in the market today. We understand that it is a tenant’s market, so we have adjusted to that.
What does that mean? You have to respond in a way that allows the tenants to call the shots. If you want that tenant to remain in your building, you have to make sure that they understand that you are working for them, working to meet their needs.
Are tenants taking more ownership over their spaces?
Nergard: Yes. Especially in our office portfolio, we see tenants who want to draft their office-improvement plans without a lot of oversight from their landlords. They are open to feedback and oversight, but a greater number are self-performing. They want to tell landlords what they want to see, and they want their landlords and property management teams to deliver. It comes down to how badly landlords want the work. What are you as a landlord willing to do to get
that deal done? Tenants might have specific requests relating to HVAC or lighting. They might be focused on the adaptability of document storage or of using storage space in a different way. Landlords and property managers need to work with tenants to meet these needs.
Want are tenants looking for today from their property management teams and landlords?
Nergard: Because it is a tenants’ market, they can largely call the shots. The property manager has to ensure that everyone knows what an individual tenant wants from the building. Whether we are managing an A, B or C building, that is key. Some tenants want to pay extra for all the amenities and services, including fitness centers, outdoor spaces and conference rooms. They expect a certain level of service from their building’s landlord and property management team. Others just want to be in a building that offers free parking. They don’t care as much about those other amenities.
For a property manager, it’s important to understand the driving factors that motivate tenants to stay in a space. That is the focus I see from the best property management teams. They understand what tenants want and work to deliver that. It’s the specificity of managing the available dollars down to the penny so that tenants get the best bang for their buck. They want tenants to be happy with what the cost is at the end of the year.
I know that a strong property management team is an important amenity for any building. What makes a property management team a strong one?
Nergard: It’s about understanding the goal of the ownership group of a particular building. What is the goal to attract and retain tenants? Once a team understands that its members can focus on delivering. The efficiency and quality of the management team can develop from there.
Is it more difficult for building owns to retain tenants today?
Nergard: It boils down to what the tenants need out of the building. Can they grow in that building? A tenant might need a certain amount of square footage today but might want to grow into more space in a year or two. Are we able to write the lease with that kind of looseness in mind? Or maybe we aren’t heavily marketing space next door so that one day that tenant can move into it. That might keep that tenant in place. It really is about understanding what tenants need and desire. If we see a small business that is in growth mode in one of our buildings, we will do whatever we can to retain them. That includes trying to help them plan for their future.
How
closely do strong property management teams work with landlords?
Nergard: Very closely. For instance, some tenants went dark during COVID. They didn’t have policies in place saying that workers needed to be in the office at least two or three days a week. We are aware that those spaces might be available soon. We are watching those leases. We are planning from a landlord’s perspective: What if those tenants are not going to renew their leases? What will be a good fit for that space?
We are having conversations with our landlord like this sometimes on a weekly basis. It’s about being proactive.
How has evolving technology changed the job of property management teams?
Nergard: It is so important. But it can also be tempting to invest in technology just to say that you’ve invested in it, even if your building doesn’t need it. If you buy into every platform out there, it gets to the point where you are being inefficient with your dollars. We do buy into certain platforms, though, that we know help us manage our properties more efficiently.
For instance, platforms that allow tenants to easily pay their rent each month boost efficiency. Those are
Jen Nergard (Photo courtesy of Schafer Richardson.)
Schafer Richardson manages the Viridium apartment building in Minneapolis. (Photo courtesy of Schafer Richardson.)
more of a standard today. Technology that improves a building’s security is important today.
The more tenants we get who pay their bills automatically online, the more efficient we can be. We are not investing our managers’ time in collecting rents. I’d say we have 60% to 70% of our tenants on online payment systems. We would like to see it even higher. Some businesses just prefer to physically write that check each month. They might never change. We, though, want to make it easier for tenants should they want to skip that step.
How about green issues? Are more tenants and building owners interested in more energyefficient properties?
Nergard: It depends on the tenant and their business. We do, though, focus on how we can lower the utility costs in a building. We encourage tenants to take the steps necessary to lower a building’s utility bills. It’s the same with recycling. We encourage tenants to increase their recycling efforts naturally. It’s about educating the tenants. It’s important that we provide the education and communication necessary so that tenants now how they can boost the efficiency of the buildings.
Mel Schultz Manager Clarity Commercial
St. Louis Park, Minnesota
How has property management evolved during your time in the business?
Mel Schultz: Communication has become more and more important. It’s so important to be in regular communication with building owners and tenants about their concerns and needs. For instance, tenants today are very concerned about their rental costs going up. Building owners are worried about insurance costs. Insurance premiums are going up in Minnesota and across the country.
You need to be in contact with tenants and building owners about the issues they are facing. Coming out
of COVID, there is a really strong sense of needing to be more communicative and in touch with your tenants. By doing this, we can help building owners build their relationships with their tenants. We can help owners and tenants understand what is going on, let them know that we are taking care of the issues that matter to them. We can communicate with them about the steps we are taking to help the buildings they own or occupy.
I like this. It’s how we have always run our business. That strong communication helps build a relationship. Ultimately, when that happens, tenants stay longer in a building.
Does a strong property management team make a building seem more attractive to tenants?
Schultz: It does. Remember, we also work with our tenants and owners on security issues. That is an important topic in Minneapolis today. There is a bigger push from tenants for cameras and access systems. They are concerned about the safety of their workers. When a new tenant moves in, it’s important for us to quickly let everyone in the building know who they are. If we know that a vehicle is going to be left overnight in the parking lot, we need to communicate that information to tenants. It’s about making sure that everyone in a building knows what is going on in that property.
How have the expectations of tenants changed over the years?
Schultz: Tenants are more involved today. It’s great. There is not so much of a gap between tenants and property managers. I think that the global pandemic created such a need for everybody to communicate better with each other. During COVID, everyone wanted to know what property managers and building owners were doing to keep things clean, to keep people six feet away from each other, to keep everyone safe. That expectation of increased communication hasn’t gone away. COVID was a bit like a global reset for everyone. There is good and bad that comes with that. One of the good things? We all communicate with each other on a more consistent basis now.
How does Clarity set itself apart from other property management firms?
Schultz: We are a lot more hands-on. We try to keep our portfolio size as manageable as we can. If we don’t
overextend ourselves, it is easier for us to have those touchpoints with our tenants. We want to make sure that our tenants and building owners can get in touch with a live person. There is always a live person oncall who answers calls. People won’t get a recording. People like that. People want to talk to people. We are blessed with our clients. We have awesome clients. They appreciate the communication and education that we provide them. They feel good that someone is taking care of their investment.
How do you communicate with your clients?
Schultz: We don’t do a lot of surveys. But we are often on site and talking to tenants. We’ll talk about projects and lease renewals. We’ll talk about community events. We’re often there during fire drills. If you have enough of these activities at a property, and you do it right, you can have those touchpoints without sending everyone a newsletter. I always find that in-person contact is so much stronger than sending newsletters or emails. It helps build rapport and relationships.
How important has evolving technology been to property management?
Schultz: It’s been so important. You have building automation systems and security systems that so many tenants want today. You have technology to help monitor buildings’ energy usage. You can remotely check to make sure the trash was picked up on time. You can put security systems in place that make your tenants feel safer.
Energy efficiency is an important issue, too. There are some new efficiency requirements coming down the line concerning benchmarking where your building is when it comes to its carbon footprint.
Systems that monitor the temperature and energy use in a building can be important to us when we receive calls from tenants. A tenant might call saying that a worker feels hot or cold. If we have the temperature set at 68 to 72 degrees in a building, we can go that tenant with facts, instant facts, and say that the temperature is OK, that is outside of any reasonable expectation to tweak it further. The person who is uncomfortable either has to wear a jacket or shorts. That comes back to communication. The more sophisticated systems with online controls that allow you to remotely monitor and access them? It’s a huge improvement over what we had to do in the past.
Mel Schultz (Photo courtesy of Clarity Commercial.)
Parkway Plaza, a property managed by Schafer Richardson. (Photo courtesy of Schafer Richardson.)
