MREJ Mar 2017 by REjournals

VOLUME 33, NUMBER 3

March 2017

Downtown Minneapolis office market responds to shift in office dynamics, changing tenant needs By Liz Wolf

hen monitoring the health of the downtown Minneapolis office market, industry experts say you have to look beyond the vacancy and absorption numbers to get the whole story. Although Cushman & Wakefield/NorthMarq, for example, reports that the downtown vacancy rate increased to 19.4 percent – and 746,430 square feet of negative absorption was tracked in the second half of 2016-- these negative numbers were highly anticipated and primarily due to large build-to-suit corporate moves. Most recently, Wells Fargo moved out of the Baker Center and Northstar Center into its new corporate headquarters in Minneapolis’ “East Downtown” near U.S. Bank Stadium. The company and its 5,000 employees stayed downtown. Most research tracking the office market, however, doesn’t include such singletenant space. “This Wells Fargo thing has happened to us a number of times,” says Jim Montez, senior director of brokerage services for Cushman & Wakefield/NorthMarq. “It happened when Target built their buildings and Ameriprise built their buildings, and you have this huge negative absorption number that occurs and everyDowntown to page 12

Finance pros: Multifamily market still booming, overbuilding not yet a concern in Midwest by Dan Rafter

inneapolis’ Dougherty Mortgage has been busy, fielding plenty of financing requests from investors who want to acquire and developers who want to build apartment complexes in the markets this commercial lender serves. Dougherty Mortgage isn’t alone, either. The multifamily market continues to boom across the Midwest, with investors sinking their dollars into existing properties and developers rushing to build new apartment towers in urban downtowns. Tim Larkin, senior vice president in the Minneapolis office of Dougherty Mortgage, says that the apartment

market continues to keep him and his fellow lenders active. And he doesn’t see any slowdown in multifamily financing requests in the near future. “Rents have been rising and will continue to rise. The economy is in good shape. Payroll is up and unemployment is down,” Larkin said. “The country’s median income is up. All of those strong factors are still in place, so there doesn’t seem to be any reason for a slowdown in the multifamily market.” That is good news for the brokers, developers and investors who continue to flock to this busiest of commercial sectors. National factors fueling local multifamily markets Why has the multifamily market been so strong for

so long? Larkin points to larger trends within the residential market. As Larkin points out, the national homeownership rate has fallen in recent years, ever since the housing bust that started in 2007. More consumers chose to rent as housing prices fell. Many of these consumers have continued to choose rental housing over owning. There is also a lack of single-family homes available on the market. This lack of inventory is forcing some consumers who might have chosen to own into renting. “The Millennials are out there renting for longer periods of time,” Larkin said. “We didn’t anticipate that or expect that. But that has been the case, and it’s provided a boost to the multifamily market. At the Multifamily to page 18

March 2017

Minnesota Real Estate Journal

Contents

MARCH 2017 • VOLUME 33, NUMBER 3

DOWNTOWN MINNEAPOLIS OFFICE MARKET RESPONDS TO SHIFT IN OFFICE DYNAMICS, CHANGING TENANT NEEDS FINANCE PROS: MULTIFAMILY MARKET STILL BOOMING, OVERBUILDING NOT YET A CONCERN IN MIDWEST

CO-OPS COLLABORATING TO BRING BROADBAND TO RURAL COMMUNITIES

NEW LIFE: TRANSFORMING OUTDATED OFFICE BUILDINGS INTO APARTMENT TOWERS, HIGH-END RETAIL

Page 3

Departments PEOPLE

NEWS

Minnesota Real Estate Journal (ISSN 08932255) Copyright © 2017 by the Minnesota Real Estate Journal is published for $85 a year at 12 times per year by Jeff Johnson, 13700 83rd Way North, Suite 206, Maple Grove, MN 55369. Monthly Business and Editorial Offices: 13700 83rd Way North, Maple Grove, MN 55369 Accounting and Circulation Offices: Jeff Johnson, 13700 83rd Way North, Maple Grove, MN 55369 Call 952-885-0815 to subscribe. For more information call: 952-885-0815. Periodical postage paid at Maple Grove and additional mailing offices. POSTMASTER: Send address changes to Minnesota Real Estate Journal, 13700 83rd Way North, Suite 206, Maple Grove, MN 55369 ©2017 Real Estate Publishing Corporation. No part of this publication may be reproduced without the written permission of the publisher.

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Minnesota Real Estate Journal

March 2017

People

13700 83rd Way N, STE 206 Maple Grove, MN 55369 For information call 952-885-0815

President | Publisher Jeff Johnson jeff.johnson@resummits.com Associate Publisher Jay Kodytek jay.kodytek@resummits.com Consulting Editor Dr. Tom Musil tamusil@stthomas.edu Conference Manager | Art Director | Graphic Designer | CE Specialist Alan Davis alan@resummits.com

Dominium Hires Amber Dvorak as Accounts Payable Administrator

Dominium Hires Joel Otto as In-House Architect

Dominium, a leading apartment development and management company, today announced that it has hired Amber Dvorak as accounts payable administrator at its Plymouth, Minn. headquarters. In Dvorak’s new role, she is primarily responsible for invoice processing. In addition, she will counsel property management staff and work with them on accounts payable matters. Prior to joining Dominium, Dvorak was the cash office coordinator at HomeGoods where she balanced the registers and assisted with other daily functions.

Welsh and Colliers International|MinneapolisSt. Paul names new COO

EditoRial advisoRy BoaRd JOHN ALLEN Industrial Equities ROBERT ANGLESON Navigator Real Estate JEFF EATON Cushman & Wakefield/NorthMarq MARK EVENSON Evenson and Young PATRICIA GNETZ US Bank TOM GUMP TAG Consulting DAVID JELLISON Liberty Property Trust CHAD JOHNSON Hellmuth & Johnson BILL WARDWELL Colliers International JEFFREY LAFAVRE IAG Commercial WADE LAU Founders Properties MIKE LE JEUNE Fabcon

Mark Parten has been named chief operating officer and executive vice president of Minnetonka, Minnesotabased Welsh and Colliers International|Minneapolis-St. Paul. Parten formerly served as executive vice president of real estate management and facilities services at Welsh and Colliers. He will at these efforts while taking on new management responsibilities. “I am thrilled about the opportunity and look forward to continuing my work alongside the company’s established executive leadership team toward the common goal of creating great experiences for our customers and team members alike,” said Parten. in a written statement.

Newly created position enables company to better maintain design standards for new construction and rehab projects Dominium, a leading apartment development and management company, today announced that it has hired Joel Otto as the company’s new inhouse architect at its Plymouth, Minn. headquarters. In this newly created position, Otto will be responsible for managing the company’s outside design teams to ensure designs adhere to its standards. In addition, he will be in charge of quality control of all construction documents and for maintaining Dominium’s design standards. “As Dominium continues to grow and we do more new construction projects and renovations of existing properties, it became increasingly important to have in-house architectural experience,” said Mark Moorhouse, partner and senior vice president. “Having Joel on staff will enable us to have more control over the design process and ensure our construction and design standards are maintained.” Prior to joining Dominium, Otto most recently worked in a construction administration position at BKV Group where he was responsible for managing the construction processes. In addition, he was responsible for responding to contractor and end user coordination issues during construction, reviewing payment applications, conducting construction administration procedures and compiling project closeout materials

and punch list preparation. Previously, Otto also held positions at BCE Engineers, ICI Design Group, Inc., Walsh Bishop Associates, Vanman Companies, WAI Continuum and Close Associates. Otto received a Bachelor of Construction Management/Architecture degree from the University of Minnesota and an Associate of Architectural Technology degree from Minneapolis Technical College.

Dominium Promotes Jordan Richter to Development Associate Dominium, a leading apartment development and management company, announced that it has promoted Jordan Richter to development associate at its home office in Plymouth, Minn. In his new role, Richter will be responsible for overseeing design and construction, securing financing and placing equity for investments in new and existing apartment communities throughout the United States. Previously, Richter was a staff associate for Dominium, where he was responsible for assisting project partners with new project development and financing, financial underwriting and property research for new developments and acquisitions. Prior to that, Richter was a corporate banking associate for PNC Bank. Richter has a Bachelor of Business Administration in Finance from the University of Wisconsin-Madison. He currently resides in Minneapolis.

JIM LOCKHART WIPFLI DUANE LUND Exchange Realty CLINT MILLER Cushman & Wakefield/NorthMarq DR. THOMAS MUSIL WILLIAM M. OSTLUND CBC Griffin Companies WHITNEY PEYTON MIKE SALMEN Transwestern

13700 83rd Way N, STE 206 Maple Grove, MN 55369 For information call 952-885-0815

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Minnesota Real Estate Journal

News CBRE CAPITAL MARKETS ARRANGES $8.2 MILLION CROSSTOWN CORPORATE CENTER SALE IN EDEN PRAIRIE, MINNESOTA CBRE Capital Markets arranged the sale of Crosstown Corporate Center, a 59,487-square-foot two-story corporate office building in Eden Prairie, Minnesota, to Altus Property Investments, LLC for $8.175 million. Ryan Watts, Judd Welliver, Sonja Dusil and Tom Holtz of CBRE’s Minneapolis office arranged the sale on behalf of the seller, a commercial real estate private equity fund manager headquartered in Boston, Massachusetts specializing in strategic real estate acquisitions throughout the United States. The sale closed March 15, 2017. Crosstown Corporate Center is a 59,487-square-foot, Class A, multi-tenant office building located at 6385 Old Shady Oak Road in Eden Prairie, Minnesota. The property was built in 1999 and is conveniently surrounded by 63,500 square feet of retail amenities

and is less than three miles north of Eden Prairie Center. The Minneapolis-based team of Ryan Watts, Judd Welliver, Sonja Dusil and Tom Holtz focuses on the disposition of single-tenant and multi-tenant industrial and office properties. The team also advises real estate operating companies on the sourcing and structuring of joint venture equity. Mr. Watts and Mr. Holtz are part of the 100-member CBRE Institutional Properties group. In 2016, the Capital Markets enterprise of CBRE, including the Institutional Properties group, completed more than $128.4 billion in combined total U.S. capital activity.

Ryan Companies Signs Real Estate Management Contract with Connexus Energy Will provide facility management services to 230,000 square foot Ramsey headquarters Ryan Companies, US Inc. announced today that they have been named real estate manager for the Connexus Energy headquarters located in Ramsey, Min-

March 2017

nesota. Ryan will provide facility management services to property which includes 150,000 square feet of office and an 80,000 square foot service vehicle garage. The property, located at 14601 Ramsey Boulevard, is 100% owned and occupied by Connexus Energy, an electric cooperative that serves members in Anoka, Chisago, Hennepin, Isanti, Ramsey, Sherburne and Washington counties. Connexus Energy is looking to Ryan for operational expense control and to provide 24 hour service call/data center coverage. “Managing the Connexus Energy Headquarters allows our team to provide services in improving operational efficiencies and meaningful expense savings,” said Jeff Steinke, Regional Director of Management at Ryan Companies. “Our enhanced 24 hours service call/data center coverage and the experience our team represents will provide a seamless transition and integration of existing staff’ With the addition of the Connexus Energy property Real Estate Management Services under the North Region is

7.8 million Square feet and nationally Ryan Companies has over 13 million square feet under management. Heide Schwarze will represent Ryan as the property manager for Connexus Energy.

CBRE Completes Sale of 290-Unit Bloomington Apartment Community CBRE Multifamily recently assisted Dominium in the sale of Bristol Village, a 290-unit apartment and townhome community in Bloomington, to an affiliate of TH Real Estate. Keith Collins, Abe Appert, and Laura Hanneman in CBRE’s Minneapolis office represented the seller. The sale closed March 15, 2017. The buyer is an affiliate of Nuveen, the investment management arm of TIAA. “Bristol Village represents an opportunity to acquire a well-located community, while offering the rental market a diverse unit mix, including a highly desirable allocation of townhomes,” said Brian Eby, Senior Director at TH Real Estate. “Coupled with attractive inplace tax-exempt financing and avenues to grow revenue through discretionary

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Page 8

value-add capital investment, the investment is positioned to provide favorable long-term performance.” Completed in 1988 and originally developed by Dominium’s founding partners David Brierton and Jack Safar, Bristol Village is a 290-unit property consisting of one, 119-unit apartment building and 11 townhome buildings containing 171 units with a shared clubhouse. The community was 98 percent occupied at the time of sale. The 18.27-acre community is situated in West Bloomington near Highway 169 at 7301 Bristol Village Drive. On-site amenities include the clubhouse, community room, fitness center, outdoor heated pool and indoor hot tub.

Added staff will work with local, county and state agencies to combat youth sex trafficking Hennepin County is adding two employees dedicated to aggressively investigating and prosecuting youth sex traffickers and purchasers. The interdisciplinary team working

Minnesota Real Estate Journal

on Hennepin County’s plan to end youth sex trafficking is currently at full capacity, and these new positions will help them respond to incidents. The number of sex trafficking cases submitted to the Hennepin County Attorney's Office has risen from 20 in 2014 to 51 in 2016. "We are pleased with the county board's vote today," Hennepin County Attorney Mike Freeman said. "This will allow us to dedicate a prosecutor to sex trafficking cases. With more investigations being done by police, we should be able to charge more cases against bigger traffickers, particularly those who traffic children." In addition to adding a specialized prosecutor to the Hennepin County Attorney's Office, an investigator will be added the Hennepin County Sheriff's Office. Both positions will work with Hennepin County's No Wrong Door coordinator and other local law enforcement agencies. “The Sheriff’s Office is going to pursue the individuals in the community who are trafficking our youth. No Wrong Door protects our kids and provides increased enforcement for sex

trafficking,” said Hennepin County Sheriff Rich Stanek. “Sex trafficking has been a top priority for every public safety agency in Hennepin County, and I am thankful for the county board’s support of this program.” Added staff will enable the Hennepin County Sheriff’s Office, Attorney’s Office and Human Services and Public Health Department to continue working with law enforcement agencies and other local partners on this issue. “County government response in support of victims has been tremendous. By adding a specialized crime analyst and a lawyer, we are taking our work to the next level by aggressively going after sellers and buyers who perpetrate these crimes against children,” Hennepin County Commissioner Marion Greene said. Hennepin County began its No Wrong Door Plan in 2014 in response to Minnesota’s Safe Harbor legislation, which stipulates that sexually exploited youth must not be treated as criminals, but rather as sexual abuse victims. The plan aligns with the state’s No Wrong Door plan.

March 2017

“This is an issue happening 365 days a year. It’s a complex issue and is not as street-based as one might think. People are soliciting youth via online networks. This intricate network speaks to the need for more resources,” Amanda Koonjbeharry, Hennepin County’s No Wrong Door coordinator, said. Hennepin County will evaluate the outcomes of the No Wrong Door initiative at the end of 2017 and 2018, including the number of cases investigated and prosecuted.

Making progress at Treasure Island Center Tenant buildouts awarded to RJM RJM Construction, a Minnesotabased general contractor, is busy at work converting the former Macy’s store in downtown St. Paul into the recently named Treasure Island Center. Plans for the 540,000-square-foot building at 363 Wabasha St. include a mix of new office and retail tenants, topped off by an 1,100-seat hockey practice facility. The rooftop NHL-sized ice rink,

Page 10

named The TRIA Rink, is the most distinctive feature of the building. Earlier this week, crews placed a 100,000pound crane atop the roof to hoist structural steel, mechanical equipment and other supplies. “This isn’t your typical construction project, but we’re up for the challenge and excited to be part of the team,” stated Joe Maddy, chief operating officer. In addition to the core and shell renovations, RJM will lead tenant buildouts as well. Those projects include space for the Minnesota Wild and Minnesota Housing Finance Agency. RJM will also build out a 6,000 square-foot orthopedic clinic for TRIA Orthopaedic Center on the street level of the building. “A project of this complexity requires a contractor with extensive experience. The scope includes 800 stalls of parking, a rooftop rink, office, medical and retail space along with a separate building component for a tobe-named national drug store,” stated Randy

Minnesota Real Estate Journal

McKay, developer with Hempel Cos. “We are very pleased with the progress RJM Construction has made thus far.”

Sierra Trading Post coming to CityPlace development in Minnesota Elion Partners has added Sierra Trading Post to the list of retailers at its CityPlace retail development at Interstate-94 and Radio Drive in Woodbury, Minnesota. An official project grand-opening will take place in late spring to celebrate the completion of CityPlace’s retail and the overall development to date. Sierra Trading Post joins a 116-room Residence Inn by Marriott and anchor tenant Whole Foods Market, along with Nordstrom Rack, Verizon Wireless, Café Zupas, Pie Five Pizza, Naf Naf Grill, Spire Credit Union, Wedding Day Diamonds, Caribou Coffee, La-ZBoy Home Furnishings and Décor, Mattress Firm, Potbelly Sandwich Shoppe, Qdoba Mexican Grill and TU

Nails, Piada Italian Street food, Chuck & Don’s, Sur La Table, CycleBar and Bank of America. Sierra Trading Post, which also operates a store in Eagan, Minnesota, is a national retailer of outdoor gear, apparel, footwear and home accessories.

Kraus-Anderson wraps construction of $4.9 million market and shop in Minnesota The Bemidji office of Kraus-Anderson has completed construction of the $4.9 million Palubicki’s Family Market and Spirits on U.S. Highway 2 in Fosston, Minnesota. Designed by RSP Architects, the 43,342-square-foot grocery store includes a new bakery, deli and catering, meat, seafood and produce departments. It also includes a take-and-bake pizza shop. The shop includes a pharmacy, Caribou Coffee shop and a bistro with beer on tap. The store is open.

March 2017

The Lindsay Group Assumes Management of Edina’s One Corporate Center Financial Plaza; Adds Property Management Group The Lindsay Group, a Twin Citiesbased commercial real estate developer, builder and property manager, announced that it has assumed management of one of Edina’s premier office parks, One Corporate Center Financial Plaza V and VI.. The Lindsay Group will provide comprehensive property management services to the Edina office building complex, located just north of the intersection of Highway 100 and I-494. On a combined basis, the complex offers 148,000 sq. ft. of office space. The park consists of 14 separate one and two-story buildings, ranging in size from 7,000 to 18,000 sq. ft. According to Peter Lehner, head of property management for The Lindsay Group, “all of the buildings are fully News to page 20

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Minnesota Real Estate Journal

March 2017

Co-ops collaborating to bring broadband to rural communities E

lectric cooperatives turned the lights on for many rural residents who were left in the dark until the 1930s. Now they plan to connect members to the world through broadband deployment in those same communities. A federal court last year defined broadband as a utility – ranking it as essential as electricity and the phone – that should be made available to all. For its part, Great River Energy is looking to collaborate and combine resources with others to help Minnesota meet the state Legislature’s goal of all businesses and homes having access to high-speed broadband that provides minimum download speeds of 100 megabits per second and upload speeds of 20 megabits per second by 2026. “Our cooperatives have the attitude, expertise, customer base and financial strength necessary to be successful in meeting this challenge,” said Jeff Borling, economic development lead at Great River Energy. “With ready public sector partners and resources available, there is great opportunity.” There are a number of socioeco-

nomic benefits to internet connectivity, including people having access to more affordable education options, readily available medical care and information, and the opportunity to search and apply for job openings online. Broadband access also fosters economic growth, an area that co-ops play large role in for their communities. Great River Energy and its 28 member cooperatives are part of a network made up of more than 700 electric co-ops across the country that are in various stages of planning, installation or completion of deploying broadband across their respective regions. “Our electric cooperatives believe they have an obligation to economic development, so it was very natural for them to leverage the systems they have to also provide broadband,” said Martha A. Duggan, a senior principal for the National Rural Electric Cooperative Association. Great River Energy last year hosted and co-sponsored a meeting with the Blandin Foundation, Calix and Co-Bank for co-op managers, board

members and staff to learn more about broadband deployment strategies and existing successful partnerships. A number of Great River Energy’s member cooperatives have applied for or have received funding from the state of Minnesota’s Border to Border grant program. The grant’s focus is to provide state resources that help make the financial case for new and existing providers to invest in building infrastructure into underserved and underserved areas of the state. It can provide up to 50 percent of project development costs with $5 million as the maximum amount. Arrowhead Electric Cooperative, one of Great River Energy’s members, has already included broadband in the services it provides after the USDA awarded the co-op more than $16 million in grants and lowinterest loans to build a broadband network throughout Cook County. In addition, Cook County awarded the co-op a $4 million grant from its 1% sales tax fund. This project has connected local, rural communities to the rest of the globe. Mille Lacs Energy Cooperative,

another member, partnered with a telecommunications company to apply for a Border to Border grant in an effort to install approximately 128 miles of fiber optic cable and provide fiber to the home for approximately 740 Aitkin County residents. The state announced in January that the project would receive $1.76 million to make enhancing business, employment, health care and educational experiences in the region a reality. “We recognize the need for the rural areas that we and our cooperatives serve to stay connected to the rest of the world and will continue to aid them in receiving funding to bring these projects to those communities,” said Tom Lambrecht, manager, economic development services. For more information about the Border to Border grant, visit mn.gov/deed/programsservices/broadband/grant-program/.

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Downtown From page 1

body gets a little excited about it. But what we don’t do --and it’s just the way the industry standards of tracking space goes -- is put those singletenant buildings into the universe. Wells Fargo didn’t leave Minneapolis but they added to the universe. If we counted that space, we would have a bigger universe and the same amount of vacant square footage, so our vacancy rate would be lower than that 19 percent.” Shrinking footprint trend continues Another factor impacting the multitenant office market is the shift in office dynamics and tenant needs, including a growing trend of openplan office space and more co-working, which typically requires less space per employee. “We’ve seen the workplace environment change more in the last five years than we have in the last 40 years,” Montez says. “The big aspiration was the corner office. Nobody wants the corner office anymore. We have gone away from ‘me’ space to ‘we’ space. You have companies going away from 250 to 300 square feet to trying to get under 150 square

Minnesota Real Estate Journal

March 2017

feet per person for personal space. Companies are typically reducing their square footage by 10 to 30 percent.” However, companies aren’t downsizing their staff, and in fact, many continue to hire. “I would describe the downtown office market as healthy,” says Bob Pfefferle, director of Hines. “Yes. There’s an increase in vacancy in the multitenant market, but that’s largely due to the Wells Fargo move to owned/single-user buildings, which is overall additive to the downtown employee base and vitality. There’s significant employment growth for many companies from small start-ups to corporate users, so there’s overall net growth and in-migration to downtown.” Renovations underway; positive impact on downtown Vacancies left by Wells Fargo and TCF Bank -- which built a new campus in Plymouth -- kicked off a slew of building renovations to help older, tired properties attract tenants. Owners are updating and creating amenities like fitness centers and conference spaces. CBRE reports that 16 buildings are either scheduled for renovation or under renovation in downtown Min-

March 2017

Minnesota Real Estate Journal

office and retail space. 601W selected United Properties as its local development partner. Suburban-to-urban migration: a ‘war for talent’ More companies -- pursuing young talent that wants to both live and work downtown -- are moving downtown. For example, Plymouth-based Select Comfort announced plans to

neapolis and primarily in Class B buildings, which saw their vacancy rate skyrocket to 32.4 percent. Buildings are adding tenant lounges, conference facilities, fitness centers and rooftop green spaces,

renovations will reinvigorate and bring life, energy and activity back to those buildings and the retailers, hotels and areas that surround them. “This is a huge plus for downtown that these buildings are being

CBRE reports. These renovations address the “live-work-play environments” that tenants expect. Examples include the TCF Bank Building, Baker Center, Northstar Center and Fifth Street Towers. “An important sign of health and confidence in the Minneapolis market can be seen in the millions of dollars being invested to renovate a significant percentage of the downtown Class B market and some of the additional new development projects -mostly in the North Loop,” Pfefferle says. “Many of these B buildings are in the core of downtown and these

refreshed and not just stagnating,” Pfefferle adds. “The appeal of these renovations will bring more non-traditional CBD users in from the suburbs where they can have cool, affordable space, be fully connected to the downtown transit infrastructure, entertainment and night life, and attract the coveted knowledge workers that want to have a more authentic urban experience.” Perhaps the largest renovation will be that of Macy’s on Nicollet Mall, which closed in March. 601W Cos. purchased the property and is planning to renovate it into mixed-use

Page 15

move its 900 employees downtown. “We’re averaging 400,000 to 500,000 square feet of new tenants to the marketplace every year,” Montez says. “There’s a lot of great stuff happening and it’s driven by a new lifestyle and work style… Corporations are saying, ‘How do I attract and retain the best talent?’ This is a Downtown to page 19

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Minnesota Real Estate Journal

March 2017

New life: Transforming outdated office buildings into apartment towers, high-end retail by Sara Freund

flurry of new development is hitting the Chicago office market, with much of it focused on turning outdated Class-C buildings into apartments, hotels, retail and student housing. Developers are on pace to complete nearly 3 million square feet of office space in the Chicago market, the majority of which is slated for the city. This will top last year’s high of 2.9 million square feet, according to a report from Marcus &amp; Millichap. The area west of the river is particularly active with a 54-story office tower at 444 W. Lake St. that totals 1.2 million square feet. Employment rates are also up 1.5 percent, with roughly 27,000 of those jobs based in office spaces. The new, top-shelf office space available is pushing along a flight to quality, said Avison Young tenant rep Mark Robbins. Tenants who can afford it and whose images depend on it, move into trophy office towers, leaving space for others to upgrade. As an

Revival Food Hall at 125 S. Clark St. in Chicago and A furnished apartment at Arc at Old Colony at 37 W. Van Buren in Chicago

example of this, Robbins noted DLA Piper’s move to River Point at 444 W. Lake St. from an office at 203 N. LaSalle which they had been at for about 30 years. “All the new product creates shadow space. All of a sudden, owners of build-

ings that are 12 years old are motivated to find tenants,” Robbins said. Inevitably, that puts some vintage office spaces at the bottom of the food chain. While they might not be attractive office spaces anymore, they are ideal for retail or apartment conver-

sions. Now developers have a captive audience and are able to push redevelopment of these spaces. An example of this can be seen at The National building at 125 S. Clark New Life to next page

March 2017

St., Robbins said. Revival Food Hall opened last August in the building, which previously served as headquarters for Chicago Public Schools. The old office was revamped into a 24,000square-foot space that now boasts 15 fast-casual food stalls plus a coffee and cocktail bar. The conversions are partly fueled by large corporations making moves from the suburbs into the city, according to John Slivka, who works in the investment properties group at CBRE. “Much of it is related to the younger workforce. They want to be in the city. That’s driving demand for these vintage buildings. People want to live where they work,” Slivka said. Several transactions that Slivka brokered were turned from outdated office building into apartments, retail and hotels. Slivka was involved with the former Brock &amp; Rankin building at 619 S. LaSalle that was transformed into Library Lofts, a 106-unit apartment building, by Marc Realty Residential. The South Loop building offers tenants a modern fitness center, an outdoor deck with lounge chairs and grills, a club room for entertaining and a bike room. Another notable property Slivka worked on was the redevelopment of the Oriental Theater building at 32

Minnesota Real Estate Journal

Page 17

Chicago is shifting into an environment that also reflects the wants of younger employees and students. The 17-story Arc at Old Colony developed by CA Student Living was a 124-yearold office tower at 37 W. Van Buren that is now 137 furnished apartments. College students get access to a 24hour fitness center, a communal and individual study rooms with free printing, a rooftop lounge with a fire pit and gas grills, coffee vending machines and a dry-cleaning service. Some units even come with a 50-inch flat screen TV, in-unit washer and dryer and modern furniture. The Gibbons and Stegar buildings, some of the oldest in the Loop, at 20 and 28 E. Jackson Blvd., were also developed by CA Student Living. In 2014 the company opened Infinite Chicago with 124 apartments with luxury, student-focused amenities similar to those at Arc at Old Colony. The office market is vibrant and looking to the future, Slivka predicts strong fundamentals As the culture of live-work-play grows, so will the activity.

West Randolph by the Murphy Development Group. The 237,200-squarefoot office space above the theater was

converted into a 199-room Cambria suites hotel and is expected to open later this year.

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Minnesota Real Estate Journal

Multifamily

“I think underwriting standards, unlike the last time we got into trouble in this business, remain reasonable,” Lutz said. “I don’t want to say they are conservative. But they are reasonable. The long-term demand outlook for rental housing in America looks very good.”

From page 1

same time, Baby Boomers are downsizing. Their kids are out of the house. Many of them are turning to renting, too. They can be a little more mobile when they’re renting instead of owning. So on the demand side, the fundaments are strong for renting.” Frank Lutz, senior vice president with Berkadia, said that apartments play an important role in the United States housing market. Lutz says that the country needs a greater amount of affordable places for its residents to live. Rental housing often fills that need. It’s true that much of the new apartment product being built today qualifies as luxury housing, rentals that are too costly for median-income renters to afford. But Lutz said that much of the existing apartment stock throughout the country, the Class-B and Class-C buildings, are far less expensive, and offer consumers a more affordable alternative to owning a home. “The less expensive apartments really are the bulk of the product out there today,” Lutz said. “There is a tremendous need for affordable housing in America. I think that is why the multifamily market has remained as strong

March 2017

as it has.” These strong fundamentals are why neither Larkin nor Lutz are overly wor-

ried that developers are building too many apartment buildings, especially in Midwest markets. Larkin said that there might be some overbuilding in markets such as Boston, Los Angeles, New York City or Washington, D.C. But in the Midwest, even in such hot apartment markets as Chicago and Minneapolis, supply has kept pace with demand, Larkin said. Larkin points to his home market of Minneapolis-St. Paul. He said that the apartment vacancy rates here average about 3 percent to 3.5 percent. Those are low rates, and an indication that the supply is not outpacing demand in the Twin Cities. “I’m not worried about the Midwest at this time,” he said. “You do have to be careful and keep a close watch on some of the hotter markets across the country. In the Midwest, I’m not concerned yet. There’d have to be something really big to throw a monkey wrench or cause problems, in my opinion. And I don’t see anything that big on the horizon.” Lutz said that apartment overbuilding so far has not materialized. “There are some pockets around the country where there might be a little bit of softness,” Lutz said. “But to be honest, I don’t feel that it is of any particularly strong threat to the business. Demand for rental housing remains very strong. The long-term fundamentals for multifamily housing and the demand for multifamily housing remains strong.” Lenders are cautious today, too, before loaning investors and developers acquisition or construction financing, Lutz said. That is preventing developers from oversaturating markets with apartment units, he said.

Loan approval What do investors and developers have to show companies such as Berkadia and Dougherty to gain approval of their financing requests? Larkin said that Dougherty lenders take a long look at the previous experience of a loan request’s sponsor or key principal. “What is their track record in developing, owning or managing the product type that they are looking to get financing for?” Larkin asked. “We will ask more questions if it’s something they’ve never done before.” Dougherty also studies the financial capacity of sponsors. If a problem pops up, will the sponsor have the financial ability to resolve the issue? For a new-construction project, Dougherty lenders study the members of the project team. Who is the architect? Who is the general contractor? The people working on a project matter, Larkin said. “It’s all about putting the pieces together,” he said. “We put a lot of work, time and effort into the credit side of things. Lenders do that. They have to.” Dougherty lenders look carefully, too, at the project itself. If an investor seeks funds to acquire an existing building, Dougherty will consider how well the property is doing and where its vacancy rate stands. “Is there a positive or negative trend in terms of operations?” Dougherty said. “If it’s a negative one, we will ask more questions. You have to be able to answer them, to get back to us with an appropriate response. Otherwise, we might pass on the deal. Our staff and underwriters do that work. They look at the feasibility of the entire project.” Lutz said that it’s important for lenders to consider the particular market that a developer or investor is targeting, Lutz said. That’s because a sponsor who has thrived with apartments in St. Louis might falter when moving to a new market such as Indianapolis or Chicago. “You might have a guy who is a terrific owner of multifamily products, a star in, say, Philadelphia,” Lutz said. “But if he shows up with plans for an 800-unit complex in Indianapolis, we might be hesitant. We might like him for an 80-unit deal in Philadelphia. But we might not like him as much with an 800-unit deal in Indianapolis.”

March 2017 Downtown from page 15

war for talent. They need to be in an environment that offers the most, and that will be the area amenities, the building amenities.”

Mark McCary, senior vice president at CBRE, says suburban migration is having a major impact. “Downtown Minneapolis is just as vibrant as it’s ever been, maybe even stronger with the boom and popularity of the North Loop,” he says. “That has really contributed mightily to a migration from the suburbs to the city, and that’s really a trend I haven’t seen in the last 30 years… I think there’s a relationship between the North Loop and what it represents in terms of new work standards and interests among younger knowledge workers, and employers trying to understand that better and position themselves better in the way they use their real estate to attract and keep those young knowledge workers.” Activity spurring development Driven by suburban firms moving downtown and strong demand for space, especially in the hot North Loop, developers are seeking opportunities to build. Downtown is seeing its first new multitenant construction in more than a decade. North Loop office boom Hines completed its seven-story, 224,000-square-foot T3 building at 323 Washington Ave. N. The developer calls it the “first modern wooden office building of its size.” It offers common spaces, a Bar Method fitness studio, a fitness center and 100 indoor bike parking spots. Reports are that Hines has signed a lease with Amazon to take roughly 100,000 square feet.

Minnesota Real Estate Journal

United Properties has plans to develop the Nordic House, a 10story office/residential tower at 729 Washington Ave. N. It will include an outdoor plaza and rooftop patios. “We’re breaking ground in June,” Montez says. “We’re finishing up one lease and we have letters of intent for a couple of others, so we will have preleasing commitments before we break ground for twothirds of the building.” Other projects include CPM Cos. and Swervo Development teaming up to propose a 10-story office building at 419 Washington Ave. N.

‘East Downtown’ sees activity There’s also development occurring in “East Downtown” where Ryan Co. US Inc.’s new Millwright Building will open in April. Ryan will occupy 65,000 square feet of the 172,000-square-foot building for its headquarters. Amenities include a rooftop terrace, a commons area and bike-friendly features. The remaining 110,000 square feet is being marketed. “We have a handful of groups that have been looking pretty intensely,” says Tony Barranco, vice president of development at Ryan. “We feel

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it’s the next great neighborhood in downtown.” Ryan is also working on “Block One,” a 17-story, 440,000-squarefoot office tower near U.S. Bank Stadium. “It’s a prime office location, but we really need an anchor to get the project off the ground,” Barranco says. In addition, United Properties is planning a 10-story office building near the Target Field Station lightrail stop.

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Minnesota Real Estate Journal News from page 10

occupied and in excellent shape, and are located in a highly desirable and convenient Edina business neighborhood.” Simultaneously with the announcement, The Lindsay Group said it is establishing a third-party property management service, Falcon Management Group, to provide comprehensive commercial property management services for its own portfolio of investment properties as well as properties of

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PCL Construction Honored with Spot on Fortune’s “100 Best Companies to Work For” List for 12th Year Fortune magazine has named PCL Construction to its “100 Best Companies to Work For” list for the 12th consecutive year. PCL, one of North America’s top 10 general contractors, ranked number 98 on the list this year. “To be named on Fortune’s list for twelve years in a row is truly a testament to our dedicated employees, unique employee-ownership model, and connection to our communities,” said Michael Headrick, Vice President and Minneapolis District Manager. “This is what makes PCL so strong and sets it apart as a top construction company.” PCL has consistently made Fortune’s “100 Best Companies to Work For” list since 2005 because of the dynamic culture, wellness initiatives, and philanthropic endeavors. Beyond offering a comprehensive benefits package and professional development

March 2017

programs, PCL encourages employees to achieve work-life balance by offering a flexible working schedule, gym reimbursement, and employee health and wellness programs, along with the opportunity to celebrate accomplishments throughout the year, whether to mark a successful project, completion of a project, or milestone anniversary. “Having PCL recognized as one of the best companies to work across the United States is a significant honor that we take tremendous pride in,” said Shaun Yancey, President and COO of US Operations. “It’s because of our employee’s hard work, passion, and devotion to our company that we’re on this list.” Two-thirds of a company’s survey score is based on the results of an employee survey, which is sent to a random sample of employees from each company. This survey asks questions related to employees’ attitudes about management’s credibility, overall job satisfaction, and camaraderie. The other third is based on responses to the Culture Audit, which includes

March 2017

detailed questions about pay and benefit programs and a series of open-ended questions about hiring practices, methods of internal communication, training, recognition programs, and diversity efforts.

CONSTRUCTION EMPLOYMENT JUMPS BY 58,000 IN FEBRUARY TO HIGHEST LEVEL SINCE 2008 Association Urges Educators, Public Officials at All Levels to Spread the Word about Industry’s High Pay and Opportunities While Enhancing Career and Technical Education Funding and Programs Construction employment increased by 58,000 jobs in February to the highest level since November 2008 with gains in both residential and nonresidential segments, according to an analysis of new government data by the Associated General Contractors of America. The association urged public officials to strengthen training and edu-

Minnesota Real Estate Journal

cation programs to help students and current workers better prepare for careers in the high-paying construction field. “These numbers match what many contractors have been telling the association—that demand remains strong for a variety of construction projects and that firms are still hiring, when they can find qualified workers,” said Ken Simonson, the association's chief economist. “The increase from January to February was the largest one-month gain since 2007, which probably reflected the exceptionally mild weather conditions in much of the nation in February. However, the year-over-year growth was similar to the industry’s employment growth rates since last spring, showing that the job gains in February were not solely weather-related.” Construction employment totaled 6,881,000 in February, an increase of 58,000 from the upwardly revised January total and an increase of 219,000 or 3.3 percent from a year ago. The yearover-year growth rate was almost dou-

ble the 1.8 percent rise in total nonfarm payroll employment, Simonson noted. Furthermore, average hourly earnings in construction amounted to $28.48 or 9.2 percent more than the average for the overall private sector, he said. Residential construction—comprising residential building and specialty trade contractors—added 18,900 jobs in February and 136,200, or 5.3 percent, compared to a year ago. Nonresidential construction (building, specialty trades, and heavy and civil engineering construction) employment increased by 38,500 employees in February and 82,600 employees, or 2.0 percent, over 12 months. Association officials noted that continuing growth in construction depends on having an adequate supply of new workers to replace those who retire or leave the industry for other reasons. The association urged lawmakers and government officials to expand and fund employment and training programs to equip students and workers with the skills needed to become productive construction employees.

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“Average pay in construction is 9 percent higher than in the private sector as a whole, and opportunities for advancement are plentiful,” said Stephen E. Sandherr, the association’s chief executive officer. “But we need educators and government officials at all levels to revitalize and better fund programs to prepare the next generation of construction craft workers and make students aware of the career opportunities.”

Schafer Richardson Signs 21,000 SF of New Leases at Recently Renovated Fisk Building Schafer Richardson, Inc. is excited to announce the successful leasing of 21,000 square feet of office space to six tenants in the newly renovated Fisk Building located at 1621 E. Hennepin Avenue in Minneapolis. Two featured new leases are Midwest Musical Imports occupying 7,000 square feet, and ideapark, occupying 6,200 square News to page 22

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Minnesota Real Estate Journal News from page 21

feet. Mike Olson, represented Schafer Richardson, in the transactions. Recent renovations include: new windows throughout, HVAC and electrical systems, and new common areas, restrooms and building entrances. “I am confident the renovations to the building helped us attract and sign these tenants to the Fisk Building. It’s a vibrant, central location, and now the building is on par with the caliber of the tenants who want to be here,” said Olson. “Working with Synergy Builders has been a great experience, and the owners and tenants are really happy with the work they’ve done.”

CBRE ARRANGES NEW FREDDIE MAC SMALL BALANCE LOAN FINANCING FOR 20 UNIT APARTMENT BUILDING IN SOUTH MINNEAPOLIS CBRE Capital Markets’ Debt & Structured Finance arranged $1.34 million in long-term financing for a 20-

unit multifamily complex located in the Ventura Village neighborhood just south of Downtown Minneapolis. Ben Bastian and Mark Roos of CBRE’s Minneapolis office represented the borrower, Lotus Acres, LLC. The borrower is affiliated with EIG Property Management, a local multifamily owner/operator with approximately 500 units under management within the Twin Cities Metro area. Financing took less than 60 days from signed loan application to closing. “I was very pleased with the professionalism of the CBRE team,” said Alex Eaton, chief manager of the borrower. “CBRE delivered an end product that was just like what their original underwriting suggested. I look forward to working with them in the future.” The financing was obtained through Freddie Mac’s Small Balance Loan Program and offers several attractive features: 10-year fixed interest rate of 4.24 percent and converts to floating years 11-20, first three years’ interest only, 80 percent loan-to-value, a 30year amortization, non-recourse, low

closing costs, and is fully assumable. “The Freddie Mac SBL financing offered an excellent solution for the borrower to attain a non-recourse loan and harvest equity from a long-term asset that has benefitted from increased rental rates and market value in recent years” said Bastian, vice president. The 20-unit building is located at 1828 Park Ave, less than one mile south of the downtown Minneapolis. The area apartment market and the local submarket are exhibiting strong occupancy levels and upward trending rental rates, while maintaining favorable absorption in recent years. Per CoStar 1Q 2017, the Ventura Village submarket reports an average vacancy of 2.9 percent. The two-story building was built in 1916 and offers one-, two- and threebedroom units. The property has reported high occupancy levels over the past five years and was fully occupied at the time of closing. Freddie Mac’s Small Balance Loan (SBL) program was established to specifically cater to loan sizes of $1

March 2017

million to $5 million for properties with at least five apartment units. The Freddie Mac SBL Program offers a more borrower-friendly “bank-like” approach to underwriting and quoting deals. The process for borrowers is considerably shorter than the traditional Freddie Mac program. CBRE is one of eleven nationally-approved Freddie Mac seller/servicer lenders and the largest company with a local Minneapolis office. The firm is also the largest Freddie Mac seller/servicer since 2009 with total volume of more than $10 billion in 2016.