Minnesota Real Estate Journal Feb 21

A risky time to start a new development company? ©2021 Real Estate Publishing Corporation February 2021 • VOL. 37 NO. 1

Endeavor Development’s Budish says ‘no’ page 4

Looking ahead: Challenges? Sure.

But there’s hope for CRE in 2021, too

By Dan Rafter, Editor

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hese remain challenging times for the Minneapolis-St. Paul commercial real estate market. The Twin Cities, like the rest of the country, continue to suffer through the COVID-19 pandemic, with the market’s office, retail and hospitality sectors hit especially hard. The cities are also dealing with the

aftermath of the murder of George Floyd and the unrest that followed it.

There are signs of hope here, though, in these early days of 2021. The industrial market in the Twin Cities enjoyed a boom year in 2020, and this sector looks to

be even stronger this year. And the multifamily market has remained stable throughout the pandemic and also looks poised for a solid year in 2021.

OUTLOOK (continued on page 16)

Setting records during a pandemic: JLL report showcases the hot industrial market the Twin Cities enjoyed last year

By Dan Rafter, Editor

T

he industrial sector boomed throughout the United States last year as the COVID-19 pandemic fueled even more demand for online shopping among consumers wary about taking their dollars to brick-and-mortar locations. And as demand for online product grew, the industrial market responded, opening new distribution and fulfillment centers across the country.

This helps explain why the Minneapolis-St. Paul industrial market broke a record in 2020 despite the pandemic, seeing more portfolio trades than in any other year.

According to the latest research from JLL, the Minneapolis-St. Paul industrial market ended 2020 on a strong note, with 766,074 square feet of positive absorption for the year and a market vacancy rate of just 6 percent in the fourth quarter.

That’s just some of the good news from JLL’s fourth quarter Minneapolis-St. Paul Industrial Insight report. The report also provides evidence that 2021 will be a busy year for industrial in the Twin Cities, too. According to JLL, 642,000 square feet of new industrial space was already under construction as of the close of the fourth quarter of last year.

INDUSTRIAL (continued on page 14)

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CBRE: DRIVE-THRUS, ESSENTIAL BUSINESSES AND GROCERY STORES THE RETAIL STARS IN 2021: Is there hope for the retail sector in 2021? The

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SPRAWLING CHURCHES, INDOOR SKI RANGES AND WATER PARKS: THIS IS THE WHAT THE FUTURE HOLDS FOR DYING MALLS: What

retail capital markets team in CBRE’s Minneapolis office thinks so. And part of this optimism stems from a big fourth quarter in 2020.

will happen to all the dying shopping malls across the country? They might become megachurches, their parking lots filled with worshippers. Or maybe construction crews will raze them and build multifamily developments on the land they once filled.

REPORT: 2021 TO BE A BIG YEAR FOR THE MIDWEST INDUSTRIAL 10 JLL SECTOR:

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CHALLENGES ABOUND. BUT THERE’S HOPE FOR CRE IN 2021, TOO:

These remain challenging times for the Minneapolis-St. Paul commercial real estate market. The Twin Cities, like the rest of the country, continue to suffer through the COVID-19 pandemic, with the market’s office, retail and hospitality sectors hit especially hard. There are signs of hope here, though, in these early days of 2021

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SETTING RECORDS DURING A PANDEMIC: IT HAPPENED IN THE TWIN CITIES INDUSTRIAL MARKET: The industrial sector boomed throughout the

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A RISKY TIME TO START A NEW DEVELOPMENT COMPANY? ENDEAVOR DEVELOPMENT’S BUDISH SAYS ‘NO’: This might not seem like the best

United States last year as the COVID-19 pandemic fueled even more demand for online shopping among consumers wary about shopping at brick-andmortar locations. And as demand for online product grew, the industrial market responded, opening new distribution and fulfillment centers across the country.

time to launch a new business, what with COVID-19 still dominating headlines, the U.S. economy mired in a deep slump and many consumers still secluding themselves in their homes to keep themselves safe. But these challenging times haven’t stopped commercial real estate industry veteran Josh Budish.

Expect this year to be a strong one for the industrial sector in the Midwest, with the region needing an additional 275 million square feet of modern bulk warehouse product by 2025 to meet the demand from ecommerce sales.

MATRIX: MIDWEST MULTIFAMILY PROPERTY SALES TOOK A 12 YARDI BIG FALL IN 2020:

Remember those record-setting apartment sales in 2019?

COVID-19 made sure that there’d be no repeat performance this year.

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A risky time to start a new development company? Endeavor Development’s Budish says ‘no’

By Dan Rafter, Editor

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How did COVID-19 impact your plans?

his might not seem like the best time to launch a new business, what with COVID-19 still dominating headlines, the U.S. economy mired in a deep slump and many consumers still secluding themselves in their homes to keep themselves safe.

Budish: I had been working on this for a long while. When COVID hit, things slowed down for everybody. That was a great time to just work hard to build the foundations of the company. I spent countless hours last year doing this, getting ready to launch Endeavor Development.

But these challenging times haven’t stopped commercial real estate industry veteran Josh Budish. In late January, Budish officially launched Minneapolis-based Endeavor Development, a company focused on developing, investing in and managing Class-A industrial real estate properties in the Minneapolis-St. Paul area.

Budish brings 19 years of commercial real estate experience to his new company. This includes his time as vice president of Duke Realty’s Minneapolis-St. Paul operations.

There, Budish was responsible for the leasing, development and overall performance of Duke’s 5.1-million-square-foot Class-A industrial portfolio.

And how is Endeavor doing so far? The company is already off to a good start, having secured three infill projects totaling more than 265,000 square feet in suburban Twin Cities-area locations. Endeavor is developing Pilot Knob Business Center in Mendota Heights, Highview 610 Business Center in Brooklyn Park and Yankee Doodle Business Center in Eagan.

Midwest Real Estate News recently spoke with Budish about his career, the reasons for his success and why 2021 was the best time for him to start Endeavor Development. Here is what he had to say.

These are obviously challenging times.

Why start a development company now, in the middle of a pandemic?

How did you prepare for launching the company?

Josh Budish

Josh Budish: Personally for me, it was time. I was ready. Starting my own business was something I have always wanted to do. I’ve been working now in this industry for nearly 20 years. Frankly, I was ready to make the leap. I had accomplished everything I’d set out to do in my previous roles. I have had a lot of success and felt personally ready to start my own company.

I also feel this is a great time to start this company. Prior to COVID-19, demand for industrial real estate was growing. Today, that growth has only accelerated.

Our company’s tagline is “Institutional experience. Entrepreneurial spirit.” We are taking this opportunity to lean on the near 20 years of experience I had at Duke Realty and Liberty Property Trust and applying it to this new company. I can be flexible and creative. I can be more opportunistic.

I can bring on new partners that I wasn’t able to before. This is a great time to bring that experience and entrepreneurial spirit together and deliver for our partners.

Budish: I view building the company the same as building a building. You want to find suitable soils to begin with. That’s the industry itself, the market. Then you want to design the company properly, build a solid foundation so that everything that follows is strong. You want to build something that is solid and sturdy. I did that with our company.

It’s impressive that you are starting Endeavor Development with three projects already in process.

Budish: I am excited by that. All the projects are infill. By design, I started with three projects that I am very confident will be successful. They are infill locations within major population centers. Mendota Heights and Eagan are both seeing a lot of growth. Brooklyn Park is the most active area for industrial development. Once I got the foundations of the company poured, focusing on the right projects was crucial.

I’ve been doing this for a long time. Getting projects is nothing new. But getting them for Endeavor felt nice. The big thing was finding an investment partner. That was huge for us. I am very confident in the ENDEAVOR (continued on page 12)

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CBRE: Drive-thrus, essential businesses and grocery stores the retail stars in 2021

By Dan Rafter, Editor

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s there hope for the retail sector in 2021? The retail capital markets team in CBRE’s Minneapolis office thinks so.

And part of this optimism stems from a big fourth quarter. The CBRE team of Matt Hazelton, Sean Doyle, AJ Prins and Cory Villaume closed 14 retail sales totaling $35 million in the fourth quarter of 2020 in the Minneapolis-St. Paul market.

This could be seen as evidence that investors are again becoming interested in the retail sector.

Another reason for hope? The retail market in the Twin Cities started 2020 with solid activity. When the COVID-19 pandemic slows -- hopefully late this spring or early summer -- the hope is that the sector will return quickly to those normal levels of activity.

“We began 2020 with activity tracking at normal historical levels,” said Hazelton, in a written statement. “Once the pandemic took hold, capital was forced to sit on the sidelines while the market navigated the

everchanging landscape. Now that we are starting to see a path forward, investors are starting to show confidence in the sector again.”

And what about those 14 retail sales that the CBRE team closed in the fourth quarter? These real estate pros said that they noticed some interesting trends, trends indicating that some retail property types will be more desirable in the near future.

Topping the list as most desirable are properties with tenants that are considered essential businesses and can continue to operate at a mostly normal level even if government restrictions and stay-at-home orders are enacted. The CBRE team’s fourth quarter retail sales included three auto parts stores. Auto-related businesses are considered essential and typically do well during recessions, making them especially attractive to investors.

Investors are also high on retail properties with drive-thrus. Having a drive-thru has always been a positive for retail proper-

ties, but this has now become a necessity for many investors. During the pandemic, customers have flocked to quick-service restaurants and their drive-thru lanes, after all. The CBRE retail team traded six properties with drive-thru components in the fourth quarter.

Then there is location. As always, well-located properties are desirable to investors.

As an example, the CBRE team represented the buyer of Lincoln Commons in St. Paul, a Twin Cities investment group that was attracted to the deal because of its location and the long occupancy history of the existing tenants.

The CBRE retail team also pointed to the rise of net-lease investment sales as a trend in the Twin Cities. Single-tenant properties with strong credit were top performers before the COVID-19 pandemic and economic downturn and have remained attractive throughout these challenging times.

According to recent research from CBRE, net lease properties’ share of total commercial real estate investment volume across the nation has increased from the 11 percent to 13 percent range in 2012 to 18.4 percent in the third quarter of 2020.

Retail anchored by grocery stories and smaller multitenant centers with a large proportion of essential retailers are also attracting interest from investors, CBRE said.

“There is no doubt that the retail sector is facing serious headwinds,” Hazelton said. “But there are still opportunities for capital to invest in retail properties with strong fundamentals. This will help lead the way for more broad investment as we head toward recovery.”

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Sprawling churches, indoor ski ranges and water parks: This is the what the future holds for dying malls

By Dan Rafter, Editor

W

hat will happen to all the dying shopping malls across the country? They might become megachurches, their parking lots filled with worshippers. Or maybe construction crews will raze them and build multifamily developments on the land they once filled.

Developers might add indoor amusement parks, high-tech bowling alleys or sprawling arcades to help bring new shoppers to them. Or maybe Amazon will swoop in and turn them into fulfillment centers.

“Look at the Simon deal. If I am trying to capture as many shopping dollars in a region as I can, having the key premium retail sites is important,” Janeway said.

Janeway said that malls after the pandemic will continue to do what they’ve always done, evolve. Instead of offering straight retail, they’ll continue to focus on experiences, bringing in bowling alleys that cater to adults, massive arcades, high-end restaurants and mega-sized movie theaters.

None of these options for struggling malls would surprise Kees Janeway, managing partner with Iconic Real Estate in Detroit.

That’s because Janeway has plenty of experience with indoor shopping malls and has seen them evolve over the years. This industry veteran formerly worked with major mall developer and owner Taubman Centers, where he was responsible for leasing a 28-mall national portfolio.

He pointed to the new American Dream Mall in East Rutherford, New Jersey, as an example.

This mall had the unfortunate timing of opening in March of 2020, just before the COVID-19 pandemic began making headlines. The sprawling mall, though, is poised to thrive once the pandemic loosens its grip on the country.

Janeway knows that the future of indoor shopping malls is cloudy right now. But he also knows that malls won’t disappear.

What many struggling malls will do, though, is transform, often into a mixture of retail and other uses, everything from multifamily residential to office and entertainment.

The American Dream Mall has the retail you’d expect, with brands such as Saks Fifth Avenue, H&M, Forever 21, Hermes and Foot Locker filling its halls. But that’s just the start of what this mall offers. It also includes a Nickelodeon theme park, DreamWorks Water Park and, rather incredibly, an indoor skiing range.

The key is that malls will evolve but they won’t completely disappear from the U.S. shopping scene, Janeway said.

“After a disruption, which we are seeing now, new ideas often emerge,” Janeway said. “That’s what we will see in the future.”

Just consider the Cary Towne Center mall in Cary, North Carolina. It will soon become the headquarters of Epic Games, the company famous for developing online game Fortnite.

The Epic Games deal is a good example of how struggling malls, especially ones that have lost their anchor tenants, can be repurposed. Epic Games plans to convert the 87-acre Cary Towne Center into its new headquarters by 2024.

The gaming company purchased the mall from Turnbridge Equities and Denali Properties, a move that is just the latest chapter in the Cary Towne Center’s struggles. Denali and Turnbridge bought the mall in early 2019 in a distressed sale after the property lost three of its anchor tenants.

“Some of the ideas people have for malls will work, some won’t,” Janeway said. “But what I think is clear is that malls aren’t going away. They will exist. They’ll just

Top: The American Dream Mall in New Jersey offers an indoor ski range. Bottom: The Mall of America in Bloomington, Minnesota, offers a Nickelodeon shop and theme park, an example of the way malls have gotten creative in drawing customers.

change and adapt. They will draw a different mix of tenants.”

A BIG MALL DEAL

A recent deal involving Janeway’s former employer, Taubman Centers, is a good example of the uncertain future faced by malls and their owners. Indianapolis-based Simon Property Group in late December finalized its purchase of an 80 percent ownership stake in the Bloomfield Hills, Michigan-based mall owner and developer Taubman Realty Group Limited Partnership.

This deal gives full ownership of Taubman Centers to Simon. This includes Taubman’s last two remaining Michigan malls, Great Lakes Crossing Outlets in Auburn Hills and Twelve Oaks Mall in Novi.

Janeway said that he wasn’t surprised by Simon Property Group’s pursuit of Taub-

man. As he says, David Simon, chairman and chief executive officer of Simon Property Group, is a smart businessman. He saw an opportunity to purchase luxury mall properties at a discounted price and jumped on it.

“If you look at Simon and Taubman, they are very different REITs,” Janeway said.

“One is highly specialized in luxury retail.

The Taubman Centers are typically the premier shopping malls in an area. Simon is more into abundance. Simon has more than 200 mall properties. They can’t all be top-of-the-market. From that perspective, this gives Simon a different type of mall property in his portfolio.”

Janeway said that the Taubman deal is further proof that shopping malls while they will change won’t disappear. Companies still value these properties.

“I was fortunate enough to walk that mall about two years ago when they were laying the tile in the main court and everything was more or less built,” Janeway said.

“What they envision at that mall is more than a shopping mall. They are focused on the concept of giving people things to do and coupling that with retail. That, to me, is where the near-term future of mall real estate is.”

And, yes, this is a difficult time for malls as it is with all retail. But Janeway says that once the pandemic eases, people will return to malls and their movie theaters, arcades, bowling alleys and restaurants.

“People are social,” Janeway said. “The reality is that whether you believe in vaccinations or herd immunity or you believe the pandemic is all a farce, at some point we are all going to be social again. We won’t all be staying inside our homes all day.

There are too many people who won’t do that. Ultimately, people will end up getting back together again. We are social. It’s what makes us human.”

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JLL report: 2021 to be a big year for the Midwest industrial sector

By Dan Rafter, Editor

E

xpect this year to be a strong one for the industrial sector in the Midwest, with the region needing an additional 275 million square feet of modern bulk warehouse product by 2025 to meet the demand from ecommerce sales.

That’s the good news from JLL’s recently published 2021 Midwest Industrial Outlook report.

The big takeaway from the report? Ecommerce will continue to fuel the industrial market, and the Midwest’s location in the center of the country makes it an ideal location for new warehouse space for companies that need to ship their product across the country quickly.

Industrial developers, then, will be busy: JLL says that the 275 million square feet of modern bulk product needed by 2025 is about 17 million square feet more than what construction crews have built in the last five years.

It might be difficult to believe considering the impact that the COVID-19 pandemic has had on the United States, but the industrial sector does remain active in the country and across the Midwest. JLL’s report offers proof of this: According to JLL, 91 percent of respondents surveyed for the company’s industrial report said that they have seen a significant increase in interest from new developers and investors since the start of 2020.

This is good news for Midwest markets as 75 percent of respondents said they expect tenant requirements to increase by at least 15 percent in 2021.

Not all industrial product types, though, are created equal. This is clear in JLL’s report. According to JLL, industrial demand is clearly tipping toward new modern bulk product in the Midwest. JLL said that modern bulk has seen 234 million square feet of net absorption in the region since 2016.

This accounts for 70 percent of overall net industrial absorption in the Midwest during this period.

How strong is the industrial market in the Midwest? JLL reported that 90 percent of survey respondents forecast occupier demand to increase in their markets. Just more than 70 percent anticipate that speculative development and groundbreakings will rise, too.

And an impressive 100 percent of respondents told JLL that there has been a noticeable increase in interest from both existing and new developers in the last 12 months.

Jll forecasts that more than 1 billion square feet of new product is needed to accommodate ecommerce demand across the country by 2025. As mentioned earlier, the Midwest will need an additional 275

“How strong is the industrial market in the Midwest? JLL reported that 90 percent of survey respondents forecast occupier demand to increase in their markets.

Just more than 70 percent anticipate that speculative development and groundbreakings will rise, too.”

million square feet to accommodate this new demand.

The biggest Midwest player today? To no one’s surprise, it’s Amazon. According to JLL, Amazon has a significant presence in every Midwest market tracked by the brokerage. JLL says that Amazon is responsible for 95 percent of the leasing tagged as ecommerce in the region.

Amazon, though, isn’t the only company active in the ecommerce space. The report says that many 3PL firms, logistics operators and traditional retailers are also running ecommerce operations. These three industries combine for 31 percent of overall modern bulk leasing. Overall, ecommerce and 3PL firms are responsible for 71 percent of modern bulk leasing in the industrial space since 2016.

As demand rises, so will asking rents. JLL says that 66 percent of survey respondents expect rates to rise by at least 5 percent in 2021. Since 2016, industrial rents have risen 2.8 percent a year on average.

In little surprise, 100 percent of survey respondents said that ecommerce continues to play a major role in supply and demand metrics in their markets. But in more good news, 65 percent said that 3PLs are noticeably more active now than compared with January of 2020.

Investors are eying the Midwest industrial market, too. A total of 91 percent of survey respondents said they have seen an increase in interest from both new and existing investors in their markets.

For the top 50 buyers in the Midwest, institutional product acquired totals $13.2 billion and 209.4 million square feet, according to the report. The top 50 sellers are responsible for $9 billion and 150 million square feet.

And for 2021? All of JLL’s respondents said that they expect sales volume and pricing to increase this year. More than half the markets are forecasting up to a 10 percent increase in both.

All Midwest markets expect cap rates to further compress. The average cap rate in the Midwest is currently 6.5 percent, with most modern bulk assets garnering a reduction of at least 50 basis points from the market average.

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F E B R UA RY 2 0 2 1 tan areas, regions and property types. Gateway and coastal markets have typically seen a larger decline in deals than have secondary and tertiary markets, Yardi Matrix reports.

According to the company’s December report, investors moved from urban core areas to inner-ring suburbs and from primary to tertiary markets throughout 2020.

And the immediate future? Yardi Matrix researchers say that sales will remain down for at least the early part of 2021. As the report says, until people can return to their normal daily activities after enough of the country is vaccinated, uncertainty will linger in the apartment market.

In some good news, Yardi Matrix said that in comparison to most other commercial real estate sectors, the multifamily market has held up well during the pandemic, with loan delinquencies in this segment remaining low.

Yardi Matrix: Midwest multifamily property sales take a big fall in 2020

By Dan Rafter, Editor

R

emember those record-setting apartment sales in 2019? COVID-19 made sure that there’d be no repeat performance this year.

According to the December report from Yardi Matrix, multifamily transaction activity has fallen sharply in 2020 thanks, of course, to the COVID-19 pandemic.

ENDEAVOR (continued from page 4)

game plan and the business plan. It’s nice to have three projects going. We also have several more in the works. We are very confident and comfortable with our strategy. It’s great to be able to hit the ground running. After announcing the company in January, having three projects starting in the spring is exciting.

You mention the entrepreneurial spirit in Endeavor’s tagline. Have you always been an entrepreneur at heart?

Budish: Yes. Starting my own business is something I’ve always wanted to do. I’ve always wanted to start a real estate development business. I am very thankful for the time I spent working at Liberty and Duke. In my opinion, this is not the kind of industry you should just jump into without experience. We will be developing three projects that are significant in value. There is always a level of risk when you are investing. I am very thankful for

Through the first three quarters of this year, $50.6 billion of multifamily property sales were completed in the United States. That seems like an impressive number but is actually down 41.7 percent from the $86.5 billion in multifamily sales reported during the same period a year ago, according to Yardi Matrix.

The year 2019 was a record-setting one for the multifamily sector, with apartment property sales hitting $127.8 billion back then. Thanks to COVID, final multifamily sales in 2020 will come nowhere near this record-setting figure.

the opportunities I’ve had. I’ve learned so much during the last several years. I have confidence in myself and teammates to be successful.

What traits have helped you build your CRE career?

Once you hit a certain level of experience and confidence, you are ready to try your own ideas. Now I can do that. I’m excited to be able to offer that flexibility and creativity. Having that flexibility is critical for today’s world and where it is headed.

How strong is the industrial market in the Twin Cities today?

Budish: The market is very strong. We see demand continuing for both users and investors. While you can still find land to develop, it is getting harder. For the more desirable sites, there is not only competition, you need a lot of know-how.

You have to work through the entitlement process. You have to make the numbers work. That is a skillset that I have, a skillset that I can bring to this company and its partners.

The slowdown in multifamily sales, though, has not been seen evenly across metropoli-

Budish: I’ve always relied on getting smart about a certain product or skillset. I’ve done that. I’ve worked hard. Hard work is a big piece of this company. You have to focus on relationships. I do that. I found a passion for real estate at a very young age.

I’ve had an interest in this business for a long time. I feel like I don’t actually work because I enjoy what I do so much. That combined with this long-desired goal to build a company from the ground up is all the motivation I need to get up every morning and work hard.

The relationship piece is important. I’ve already had deep-rooted relationships in the marketplace. That is so important. I’ve worked in this industry my whole career.

That is fertile soil to start growing a company.

How many employees do you have right now?

The Midwest saw more than $4.2 billion in apartment property sales from January through September of 2020. For all of 2019, the Midwest saw more than $9.2 billion of sales. Yardi Matrix said multifamily property sales for the first three quarters of 2020 in the Midwest were down 32.6 percent when compared to the first nine months of 2019.

Different Midwest cities, of course, have seen bigger drops than others. In the Minneapolis/St. Paul area, for instance, Yardi Matrix reported that apartment property sales had fallen 43.6 percent in the first three quarters of 2020 when compared to the same period in 2019. In Chicago, that drop is 49.5 percent.

In Columbus, apartment property sales were down 55.2 percent, while in Nashville they were off by a smaller 26.7 percent.

Budish: Right now, it’s just me and Alison Donohue, our project specialist. She brings more than 10 years of real estate experience to the company and came with me from Duke. She has been such a big help in getting things going. We are looking to hire, too. Right now, we are focusing on winning business. We have more projects we will announce soon. We will be looking to hire soon, too.

What are your goals for the company for the rest of 2021?

Budish: The number-one goal for this year is to deliver. We spent all of 2020 and part of 2019 building the company. Now that we have a true company with true projects coming out of the ground, our number-one goal is to deliver. The goal for the next couple of years will be to deliver and to execute, to come through on our promises and projections. So long as we do that, we will continue to grow. There is a tremendous amount of opportunity out there. It is going to be an exciting time.

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INDUSTRIAL (continued from page 1)

Dan Larew, vice president with the Minneapolis office of JLL, said that the future looks bright for industrial in this market.

And, he added, this bright future isn’t coming at the expense of retail.

The growing demand for ecommerce, of course, continues to drive the Twin Cities industrial market. As more people order products online, companies need to discover ways to get these items to customers faster. That’s where all the distribution centers popping up across the country come in. As Larew says, customers don’t want their products delivered in five days.

They want them in two days ... or less.

“At the end of the day, the factors that make for a strong industrial market were not impacted by the pandemic,” Larew said. “Yes, there was a shock when the pandemic first hit. We did see a slowdown in the first and second quarter of 2020.

But the dynamics pushing industrial demand -- that surge in ecommerce -- have not fundamentally changed.”

The pandemic, in fact, has only boosted the demand for online shopping that had already existed before the government stay-at-home orders and business restrictions that hit the country starting in the middle of March.

“I am not one of those who say traditional retail is dead,” Larew said. “The retail and industrial markets instead are merging, more than one is dying and one is growing. Retail, at the end of the day, is what is driving the whole rise in the industrial

market. Consumers are just changing the way we buy and sell.”

says, the Twin Cities doesn’t rely solely on one industry.

Of course, good news is far from rare in the industrial sector. As JLL points out in its report, since 2018 the Twin Cities industrial market has captured at least $1 billion in investment annually. For both warehouse and flex assets, that investment peaked at $1.7 billion in 2019, with 2020 closely trailing with $1.6 billion in total transaction volume.

“We don’t just rely on oil or tourism,” Larew said. “We have life sciences, a strong banking presence, a strong manufacturing presence. That helps mitigate any ebbs and flows in the economy. We don’t get the lowest lows that some other markets get. Some of those markets might have higher highs, but we are protected from the biggest downturns.”

Last year saw some major deals. That includes Blackstone’s record-breaking acquisition of CSM’s industrial portfolio in the third quarter of 2020 and Prologis’ acquisition of Liberty Property Trust in the second quarter.

And the future? JLL says it looks bright.

That’s partly because of the Twin Cities’ strength in the growing life sciences industry. Life sciences is hot, partly because of the growing need for public health solutions in a pandemic and partly because the U.S. population continues to age.

JLL says that the mix of investors changed significantly last year. Institutional and REIT investment now account for 62 percent of the Minneapolis-St. Paul market’s industrial buyers. In 2019, that share was just 40 percent.

JLL points out, too, that build-to-suit construction propped up absorption in 2020.

Anderson Window’s 350,000-square-foot expansion was completed in the fourth quarter at its manufacturing campus in Cottage Grove, Minnesota. In the second quarter, Graco expanded its Rogers, Minnesota, facility by nearly 500,000 square feet.

Larew said that there are plenty of reasons for industrial users to seek space in the Twin Cities market. First, there’s the population. Larew says Minneapolis-St. Paul boasts a highly educated workforce. That makes it easy for industrial users to find the right people to staff their facilities.

The Twin Cities also offers a high quality of life at an affordable price. It boasts a balanced and diverse economy. As Larew

JLL says that the Northwest submarket surrounding Plymouth and the Northeast submarket extending from Northeast Minneapolis into its adjacent suburbs are poised to capture growing user demand among medical device and digital health users.

Larew said that industrial construction will rise during 2021, and most of these new buildings will be speculative. JLL tracks demand, and is currently tracking groups that, in total, are looking to lease or purchase 8 million square feet of industrial space in the Twin Cities market.

Not all of this demand will come to fruition, of course, but the fact that there is so much activity is evidence that 2021 will be a busy year for industrial.

“We see demand outweighing supply in 2021,” Larew said. “We see groups willing to take a risk on constructing new spec projects. There is a great demand for quality, institutional industrial space here.”

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LOOK WHO’S SPEAKING Brent Webb, Development Executive, Mortenson Development

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Brent Rogers, Owner, Saturday Properties

Matt Mullins, Vice President, Maxfield Research

Evan Doran, Vice President of Development, Doran Family Development

Joyce Stupnik, President, Partner, BDH

Abe Roberts, Vice President Investments, Marcus & Millichap

Chris Sherman, Senior Vice President, Sherman Associates

Tina Burns, Senior Director, Real Estate, Greystar

Cory Bultinck, Partner, Wipfli

Andy Finn, Vice President, NorthMarq Capital

Thomas O'Neil, Vice President of Market Development, Colliers Mortgage

Jackson Phillips, Partner, BXD Apartments

Keith Collins, Executive Vice President, CBRE

Bjorn Strommen, Director of Development, Timberland Partners

Josh Talberg, Senior Vice President, JLL

Leanna Stefaniak, Chief Real Estate Office, At Home Apartments, LLC

Ted Bickel, Senior Vice President, Colliers International

Steve Michel, President, Michel Commercial Real Estate

Grant Campbell, Senior Vice President of Investments, Centerspace

Josh Brandsted, President, Greco

Nick Place, Chief Lending Officer, Bridgewater

Nick Murnane, Senior Manager, Real Estate Development, The Opus Group

Jason Wilsey, Vice President/Executive Shareholder, CSDZ

Kent Roers, Co-Founder & Owner, Roers Companies

Tony Kuechle, President of Development, Doran Companies

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16 OUTLOOK (continued from page 1)

Midwest Real Estate News recently spoke to two commercial real estate professionals in the St. Louis Park, Minnesota, office of Colliers International, Andy Heieie, senior vice president for land and investment services, and Andrew Odney, vice president of industrial brokerage.

Both said that while challenges remain, the future looks bright for the Twin Cites commercial real estate market.

Here’s some of what these CRE veterans had to say.

This has been a challenging time across the country. How is the commercial real estate market performing today in the Twin Cities area?

Andy Heieie: I broker third-party deals for raw land and redevelopments, both urban and suburban in nature. I work on everything from multifamily deals in downtown to deals on 100 acres in Victoria, Minnesota. And I work on everything from retail and office to industrial and multifamily, all new development. The deals in my pipeline, then, can show what the future holds for market and development activity and what the construction market will bring and look like for the next two to three years. The development mindset and sentiment in the Twin Cities right now is very positive. What I’m seeing now is that a lot of the new development coming up is mostly suburban in nature.

And we are talking more multifamily.

That has been the gold star asset class in our market for the last decade.

It’s good that 2021 has the potential to be a promising year. How challenging was 2020 here?

Heieie: Last year didn’t start out all that well from a developer perspective. All new developments that were high-density in nature were now required to have a certain level of affordability. Developers didn’t necessarily like that. Then COVID happened and shut everything down.

Then we had the social unrest with George Floyd and what followed. It has been the perfect storm. But I do think this year will be better, especially when it comes to development in the suburbs and the areas outside of downtown. In 2021, downtown Minneapolis will still struggle, though.

Things will look better downtown in 2022.

Offices will start to reopen. I think we will see positive activity for downtown Minneapolis in the early part of 2022.

And how about the industrial market?

How strong has that been even during the pandemic?

Andrew Odney: It is holding up really well. Like everyone else, in the early spring, March and April, there was a bit of a pause from both occupiers and landlords. For those couple of months, everyone was waiting to see what was going to happen. Certainly, there were some companies, the smaller ones, the

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

“People are coming to the realization as they hit their upper 20s and low 30s that they can buy a house for what they are paying in rent.” mom-and-pops, depending on the industry they were in, that didn’t have such a great time. They had a hard time paying rent. For the most part, though, the vast majority of industrial tenants remain strong. In some sectors, industrial tenants are even stronger today than they were before the pandemic. This strength has carried through summer and into the fall.

In the fourth quarter, we saw quite a bit of absorption in the industrial market.

We saw a lot of positivity surrounding the industrial sector.

Why has the industrial market performed so well?

Odney: It really has been fueled by all the common buzz words people talk about today. Near shoring manufacturing is one key component we are seeing coming online as we continue through the pandemic. Ecommerce and getting goods closer to consumers has fueled a lot of this. The way consumers have had to behave during the pandemic has played a role, too. They aren’t going to the mall or grocery store.

They are ordering their food and goods online. That has all fueled a frankly insatiable demand for industrial real estate.

Industrial real estate that is well-located is in great demand right now.

Do you think the industrial market will continue to benefit from these trends long after the pandemic ends?

Odney: I do. Think of the 65-year-old person who might have been stuck in their ways before this. That person would never dream of ordering something on Target. com or have their groceries delivered to their front door. They are forced to do that now as a result of the pandemic. I think people will go back to stores and malls and buying stuff in person. But the pandemic has also created a level of comfort with consumers who weren’t comfortable buying things online before, who were not comfortable putting their credit card information out there. The pandemic has helped these consumers break through that barrier. This will create a long-standing demand for industrial real estate.

How has the multifamily market performed throughout the pandemic?

Heieie: Multifamily has been very active.

There might not be more demand for multifamily development than there was pre-pandemic. But it has still been very active. Development is now focusing on

the first- and second-tier markets in the Twin Cities area, places like St. Louis Park, Minnetonka, Hopkins, Maple Grove and Eden Prairie. Those markets are all still very strong. These markets are all on the light-rail transit line that is under construction. A lot of projects are going on right now around the stations on that line. We are very excited to see the future potential growth along the light rail line and in these suburban markets. Things are very active there.

Is it true, then, to say that for now, the suburbs will see more new development in the near future than the CBD? Heieie: When people hear Minneapolis, they think of the city. But the downtown CBD is not seeing the activity right now.

Certain neighborhoods like the North Loop, Mill District and Linden Hills are still attractive. But Minneapolis is not seeing the level of interest that the suburbs are seeing now. That is a reversal from what we had been seeing. Dating back to 2012, we really started seeing downtown Minneapolis take off. In 2012, there was a tipping point, and it grew exponentially.

Downtown became very attractive. You had new bars and restaurants. We got Target Field and U.S. Bank Stadium. Downtown became a destination. People loved going there. Since March of 2020, it’s been a reversal. It’s been quiet. No one is going to work physically at the office. Bars and restaurants are closed or are only offering takeout. There is no extra foot traffic.

Will that activity come back to downtown?

Heieie: Yes. 100 percent. There is built-up demand mentally for all these people who have been working from home for nearly a year. They want to go out and spend money on restaurants. They want to go to Vikings and Twins games, once it is safe to do so.

What about the suburbs? Do you think they will continue to see a boost in CRE activity even after downtown comes back to life?

Heieie: Definitely. People are coming to the realization as they hit their upper 20s and low 30s that they can buy a house for what they are paying in rent. They can have access to good schools. Our homebuilders here locally can’t build homes fast enough. Since May or June of 2020,

F E B R UA RY 2 0 2 1 they have been going full steam. There is so much demand.

What amenities are developers adding to new apartment developments today?

Heieie: That’s a good question. Are you just building the same thing the other guy did? How are you differentiating yourself?

We have been getting to the point were everyone is doubling the size of their rooftop decks. They are adding movie theaters or bowling alleys. Everyone is trying to offer something different. Now we are seeing co-working space in these developments as a lot of renters might continue to work at least part of the time from home. A lot of renters want a different place to work other than their apartment unit. Then there is safety. That is the biggest concern for many renters. If they move out of Minneapolis to St. Louis Park, they want the feeling of being safe. In their units, they want 9-foot to 10-foot ceilings and stainless-steel appliances. They want to be close to retail. That’s what they expect in these new buildings.

When it comes to industrial, what makes the Twin Cities area an attractive place for industrial tenants to do business?

Odney: We have a very strong medical device industry. The proximity to the Mayo Clinic has always been a driver for our industrial market. In 2021, the industrial market is all about getting goods closer to the consumers. It’s all about having functional real estate that is well-located and has ease of access so that companies can get their trucks in and out efficiently. We can offer that to industrial tenants.

What amenities are industrial tenants looking for today?

Odney: Location is key. They want proximity to their customers. What we are seeing more of, and what is maybe becoming more of a trend, are industrial parks that have the ability to drop trailers.

As these companies come into the market, they have so many goods on their trucks.

They have to be able to drop them off and switch them. The ability to do this is not always a necessity, but it is nice to have. If one building has the ability to drop some trailers and the other doesn’t, tenants will choose the one that has that ability.

What kind of year will 2021 be for the industrial market in the Twin Cities?

Odney: Developers are very bullish on this market. Investors have certainly been bullish on Minneapolis for the past couple of years. That will continue into 2021. A lot of brand-new buildings will be coming online this year. Speculative development projects are slated all over the metro from the main developers in this town. It has been a narrative for the past four or five years. We will at least keep that same level of growth if not accelerate into this year, especially with all this COVID-driven demand for industrial real estate.

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