MNCAR Focus/Greater Minnesota commercial real estate markets continue recovering

Greater Minnesota commercial real estate markets continue recovering



Greater Minnesota commercial real estate markets continue recovering; target areas seeing strong pockets of activity

written by Liz Wolf 

 

Mirroring the Twin Cities, Greater Minnesota markets are experiencing a steady comeback in their commercial real estate markets with select activity in leasing, development and redevelopment.

 

We spoke with some MNCAR brokers for a snapshot of some of this activity in the cities of Duluth, St. Cloud and Rochester.

 

Duluth

 

“Some things are about ready to pop (in Duluth),” says Dave Holappa of Holappa Commercial Real Estate in Duluth.

 

One of those things is the development of an $80 million, 300,000-square foot, 15-story office tower and parking ramp in downtown Duluth. Last fall, the AtWater Group and the 425 Project Partners announced plans for the Class A tower, which would the new headquarters for Maurices, a retail chain based in Duluth.

 

Interior design firm HGA, based in Minneapolis, will be the lead design firm, and will partner with DSGW Architects, headquartered in Duluth. McGough Construction, based in Roseville, has been selected as the construction manager.

 

Holappa says he represented the AtWater Group in the purchase of the site -- located at 425 West Superior Street -- six years ago. In addition to Maurices, he says the developers are marketing some of the tower’s space to other tenants. He says it will be one of Duluth’s largest developments.

 

 

 

 

 “It’s as big as they come,” Holappa says, adding that there’s a lack of Class A office space in town. “The office market in the central business district is hot. It has not been for years. The recession was tough on Duluth. People hunkered down. The phones are busy now. I’m doing tenant rep work on a lot of 5,000- to 10,000-square-foot deals.”

 

He says there’s growing demand for Class A space, while there remains a healthy supply of B. “A is getting chewed up,” he says. “Enbridge Energy is growing and snapping up big blocks of space in the CBD, which is putting pressure on rental rates.”

 

In retail, there’s activity around the Miller Hill Mall, which is a Simon mall and the dominant retail hub in the city. Holappa says a new 20,000-square-foot development is set to break ground this summer near the mall. It will be called Hansen Center and will be developed on the former Ground Round restaurant site just west of the mall. Panera Bread will be one of four retailers in the mini-mall.

 

There’s also activity in Canal Park where the Canal Park Brewing Co. opened an 8,000-square-foot brewery last fall. The owners acquired the former Duluth Spring Co. building, cleaned up the site and remodeled the building.

 

 

Meanwhile, George Sherman of Minneapolis-based Sherman Associates is active in Duluth. For example, he’s doing a renovation of the NorShor Theatre and is investing $8 million in the old Lincoln Park School to develop a mix of affordable housing and space for nonprofits, reported the St. Paul Pioneer Press. He also recently purchased the old Irving School, which is now housing.

 

St. Cloud

 

One of the biggest stories to hit the St. Cloud industrial market recently was the announcement that a new farm equipment factory was coming to town.

 

German company Geringhoff has opened its first North American manufacturing plant in St. Cloud’s Airport Industrial Park. The company purchased a 106,000-sf, state-of-the-art building formerly occupied by The Donlin Co.; a supplier to the home-construction industry, which went out of business.

 

Geringhoff invested $20 million in the plant and created 100 agricultural manufacturing jobs. Geringhoff is a 130-year-old private company that is manufacturing corn-harvesting and other farm equipment in St. Cloud.

 

Also making headlines was a CVS Pharmacy redevelopment in the core of the city’s commercial district at 25th Avenue and Division Street. The new drugstore replaced an iconic, 60-year-old Dairy Queen, and DQ built a new facility to the south.

 

“CVS has been looking in this market for a very long time,” says Sheila DeVine, owner/broker at Warnert Commercial Real Estate LLC in St. Cloud. “They were trying to negotiate on probably four or five sites and very creatively moved one of our landmarks – Dairy Queen – which had been there for over 50 years. They negotiated moving them and buying the Dairy Queen building and the building next door and rebuilding the DQ on an inside corner. CVS took ‘the’ corner… Everybody knows that CVS and Walgreens come in and pay very good prices for land to get the locations they want.”

 

DeVine herself has been involved in a couple of recent land developments. She sold just under 3 acres for the development of a new 16,000-sf BioLife Plasma Services facility in Waite Park. It’s under construction in a retail area next to Menards. This is an example of a hot trend of medical users locating in high-traffic retail areas for the convenience to patients.

 

Another land deal was the sale of 11 acres in St. Cloud to Ken Croat, CEO of Croat-Kerfeld Homes Inc., for the development of Grand Royale Plaza, a multifamily development that will total 180 units. One building is complete, one is underway and a third is planned to begin later this fall or spring 2014.

 

“It’s on County Road 75, on the southwest side of town, which is one of our target growth areas for St. Cloud,” says Devine, who’s also on the city’s Planning Commission.” It was agricultural land, so all of the road improvements needed to be put in.

 

With the multihousing development as the anchor, additional land has been subdivided for commercial and low-density multifamily. “We jumpstarted it with the multifamily,” DeVine says, “and now we can do more things on the front half like retail and restaurants.” DeVine says these deals are good signs that the market is improving.

 

She was also involved in a recent sale where R.E. Michel Co., a wholesaler of HVAC equipment, acquired a 15,000-square-foot industrial building on 5 acres in St. Cloud. It’s a new company to the market and has room to expand.

 

“It wasn’t just a lateral move or a company in distress and reducing their size,” DeVine says. “This is exciting because it’s a new company… For them to come into the market, they had to see that there was money to be made. This is an active market.”

 

Mike Bobick, senior commercial broker at Granite City Real Estate LLC in Waite Park, is also optimistic about the market’s comeback following the downturn.

 

“Nobody did anything for two years; everybody sat on the sidelines,” he says. “But there’s a tremendous amount more going on.”

 

However, he says deals are taking longer.

 

 

“Overall, our microcosm is not too much different than what you’re finding in the Twin Cities or other parts of the country,” he says. “Generally, transactions are taking longer and are more complicated. Lenders are more cautious. Those involved are more cautious.”

 

Bobick says the St. Cloud-area apartment market is strong, and he sold about 18 apartment complexes in the last 30 months. In the retail arena, the strongest sector is thrift stores/discounters/dollar stores. For example, he’s working on a former Walgreen’s site and has a thrift store concept interested.

 

In the office market, Class A is strong, but it’s a small market with little space available. For example, Bobick says the College St. Scholastica was in the market for high-profile, high-visibility space to relocate its St. Cloud campus -- including its nursing programs -- but couldn’t find any existing space to meet its requirements. Therefore, it will be anchoring a new, two-story building being developed on Highway 15 in Sartell by Bob Strack, CEO of the Strack Cos. The $4 million building –called SilverCrest -- will be located near the Health Partners Central Minnesota Clinics building and Sauk Prairie Medical Center. The college will move into the facility in September. The other signed tenant is Resource Training & Solutions. A second phase is planned.

 

Rochester

 

The Mayo Clinic has a big economic development project planned in Rochester called Destination Medical Center, which would be developed over 20 years and include a $3.5 billion investment by the clinic and some $2.1 billion from other private investors. However, before moving forward with expansion plans, Mayo officials asked the state for $525 million to $565 million in funding needed for infrastructure in Rochester.

 

While the clinic didn't get all that it asked for during the last legislative session, the state did commit $327 million to help build the Destination Medical Center, reported the Twin Cities Business Journal.

 

 

Infrastructure improvements are needed to help Mayo recruit and retain talent and also meet the needs of patients traveling to Rochester for healthcare from around the world.

 

The Rochester brokerage and development community is excited about the possibilities.

 

“Things are only going to continue to grow,” says Barb Phelps of Paramark Real Estate Services in Rochester. “We’re in very, very early stages but it’s spurring a lot of interest…Rochester is going to expand and it’s exciting.”

 

She says the city is going to need hotels, housing, restaurants and museums as part of the development.

 

“We’re projecting 40,000 to 50,000 new jobs over the next 20 years, including not only at the Mayo Clinic, but all of the infrastructure needed to support it as well as the hospitality and entertainment,” Phelps says.

 

Activity is already ramping up. A Rochester developer has announced plans for a 25-story downtown mixed-use tower that would include a high-end hotel, 30,000 square feet of Class A office space, a high-end grocery store and about 150 apartments. It’s called Broadway at Center and the developer is Andy Chafoulias of Titan Development and Investments. HGA in Minneapolis is the architect. It is proposed for the corner of South Broadway and East Center Street.

 

A big development that just broke ground is Metropolitan Market Place, which will include a four-story apartment complex and a new People’s Food Co-op grocery store on the main level. Gerrard Corp. based in La Crosse, Wis., is the developer. The site is at First Avenue and Sixth Street S.W. An August 2013 opening is planned.

 

In retail activity, Phelps says a big project was kicked off late last year in northwest Rochester after Kwik Trip’s real estate arm purchased more than 100 acres for retail development, and Costco confirmed plans to build a 150,000-square-foot store there and anchor the development. Kwik Trip, which will build a new convenience store there, is looking to sell off other parcels to retail developers.

 

“There has been a lot of interest,” Phelps says. “The last time I had contact with them everybody was in the due diligence period.”  Plans also include sites for a grocery store, several restaurants, a pharmacy, a bank and industrial sites.

 

In other retail news, Shoppes on Second was built last year on Highway 52 and Second Street Southwest. It’s about an 8,500-square-foot retail center and a 3,000-square-foot building for a freestanding food user. It also included a Holiday Inn Express & Suites.

 

Also making headlines this year was Sunstone Hotel Investors, a California-based REIT, sold four downtown Rochester hotels to a Minnesota investment group for $210 million. The sale also included a commercial laundry, which pushed the total sale price to $230 million. The hotels are the Kahler Grand, Rochester Marriott, Kahler Inn & Suites, and Residence Inn Rochester.