Posted: 3:27 pm Thu, September 12, 2013
Tags: Andy Deckas, Best Buy, CSM Corp. Kelly Doran, Cushman & Wakefield/NorthMarq, Doran Cos., Industrial Equities, Jim Jetland, John Allen, Mill & Main, Minneapolis, Minnesota Commercial Association of Realtors,Shakopee, St. Paul
It was part analysis, part shop talk and part roast as a panel of local commercial real estate notables got together Wednesday afternoon for a rapid-fire look at some industry issues.
The discussion, sponsored by theMinnesota Commercial Association of Realtors, borrowed the format of ESPN’s popular sports discussion program “Pardon the Interruption” as panelists addressed issues — ranging from speculative industrial development to Best Buy’s corporate campus — in timed discussion segments. The event was held at the Showplace Icon West End Theater in St. Louis Park.
Panelists included John Allen, CEO of Minneapolis-based Industrial Equities; Andy Deckas, president of commercial properties for CSM Corp. of Minneapolis; and Kelly Doran, founder and principal of Bloomington-based Doran Cos. The moderator was Jim Jetland, executive director of brokerage services at Bloomington-based Cushman & Wakefield/NorthMarq.
In front of an audience of more than 200 MNCAR members, the three panelists came in for some good-natured ribbing from Jetland and from one another. But in return, they took the opportunity to grind some axes of their own. Allen bemoaned what he saw as an oppressively anti-business attitude at the state Capitol, and all three expressed reservations over the growing presence of “O.P.M.” – other people’s money – in Twin Cities developments.
“Subsidized financing doesn’t bode well for our business,” said Doran. “Real estate will always be a local business, but developers don’t have equity in projects when they’re completely financed by government agencies and out-of-town parties.”
The panel also took a look at markets that some fear might be nearing saturation – such as apartments, with 7,000 units under construction in the metro area and several thousand more planned. Finance & Commerce’s Apartment Development Tracker lists close to 18,700 units proposed or in development in the Twin Cities area.
But Doran pointed out that in some parts of the Twin Cities market, apartment activity might be considered muted.
“People are living in apartments by choice – this isn’t transitional housing,” he said. “Our Mill & Main project opened in June at about 70 percent (occupancy), and now it’s at 95 percent. Thirty percent of the renters are empty-nesters.”
While retail space might not be at the saturation point, one of the Twin Cities’ leading retailers, Best Buy, is still trying to lease space in its Richfield corporate campus, with talk that more such activity is coming to the headquarters.
Deckas said that despite Best Buy doing a good job of cost containment overall with shuttering its stores, it might be tough for it to sublet much more of its campus because of what he described as minimum space requirements of 50,000 square feet.
“And, they’ve still got to downsize their retail stores, which could be challenging,” he said.
Generous public-private partnerships of the type that has encouraged building in cities like Shakopee came in for criticism because of the drain that such deals are thought to put on development closer to Minneapolis and St. Paul.
“It becomes a question of public policy when you spend billions of dollars to try to bring development inside the (metro) loop,” said Allen. “Why does the Legislature let third-tier communities abate taxes when that same money could be used to employ people in the core?”
The downward trend in capitalization rates in a variety of property categories – as low as 6.1 percent in a recent industrial deal in Shakopee – also was discussed. All three panelists maintained that cap rates are due to increase, at least in the short term.
“If you look at all property types, the cap-rate spread over the 10-year Treasury (rate) has been just under 4 percent on average,” said Deckas. “Cap rates will inch up.”
The three also said that another shared obstacle in ongoing development efforts is growing costs in construction.
“Our construction costs are $42-$43 per foot on shell (structures),” said Allen. “It’s very difficult to do a small build-out right now for less than $40 (per square foot).”
Doran agreed but added that a mitigating factor could be what he sees as great growth in quality, qualified non-union workers. “That’s bound to bring costs down at some point,” he said.
When asked what made for a good real estate broker, Deckas said communication and the ability to be transparent and fair were essential. While they’re often seen as a necessary evil, he said, the role of the broker has grown over time.
“Once upon a time, those of us involved in capital markets could have told you with some certainty who the most likely buyers of a given building would be, because we knew them all,” he said. “That isn’t the case anymore, and that’s where brokers come in.”