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Commercial Real Estate Hot Zones

Commercial Real Estate Hot Zones

After finally shedding lingering effects of the recession, the industry is taking off in the Twin Cities.

Looking back, 2015 was the strongest year in many commercial real estate sectors since the end of the recession. All of the primary property categories—office, industrial and retail—posted solid gains as tenants inked deals for space amid slow but steady economic progress.

“Overall it was an exciting year and our best in many, many years,” says Mike Ohmes, executive vice president with Bloomington-based Cushman & Wakefield/NorthMarq, a commercial real estate services firm.

That’s a sharp contrast to the years after the recession, when much of the industry seemed to be at a standstill. “There were two or three years in there where there was nothing new taking place,” says Ohmes of local development activity.

Ohmes explains that 2015 was a good year for every category of property—office, retail, industrial, hotels, medical office, multifamily projects and land. “Every one of those sectors had bright spots,” Ohmes says.

But real estate remains a cyclical business. After a strong 2015, the forecast for the year ahead is slightly tempered. “It just feels like there is going to be this slight pullback in most categories,” Ohmes says.

Projects often surface in clusters. Twin Cities Business selected four corners of the metro that are currently busy with new projects for a closer look:

  • Eagan, Retail—The suburb has drawn the two largest local retail projects in recent years: Twin Cities Premium Outlets and Central Park Commons.
  • Shakopee, Industrial—Known to many as the home of Valleyfair and Canterbury Downs, Shakopee has become the metro’s busiest corner for industrial deals, drawing national names such as Amazon.com and Shutterfly.
  • Bloomington, Hotels—Business is booming for new lodging, much of it connected or close to the Mall of America.
  • St. Paul, Numerous Projects—Minneapolis might grab the headlines, but there is a wide range of projects underway across St. Paul.

Development in the four metro communities serves as a good reminder that not every local real estate project is located in downtown Minneapolis.

Eagan-dale? Suburb Becomes Retail Destination

Eagan probably is not the first city that comes to mind when people consider local retail destinations. But with two of the largest retail developments in recent years, that reputation is starting to change. Twin Cities Premium Outlets opened in Eagan in August 2014. Central Park Commons, another new project that will add roughly 400,000 square feet of new retail space to Eagan, is now under construction.

Retail will be new to the site, which was previously home to a plant operated by Maryland-based defense contractor Lockheed Martin Corp. The last Lockheed workers left the facility in 2013. Central Park Commons is the largest retail project currently being built in the metro.

Minneapolis-based CSM Corp. made several different proposals for the site before securing city approval in early 2015.

“They wanted something unique that would be a draw,” says John Johannson, a veteran retail real estate broker who has partnered with CSM on the project. “They didn’t just want another strip center with four sandwich shops.” Johannson says that the 50-acre site at the busy intersection of Yankee Doodle and Pilot Knob roads offers “the right site in the right market at the right time.”

He says that a market study underscored the developer’s instincts that Eagan could support more retail space. The project will be anchored by a Hy-Vee grocery store; the Iowa-based grocer opened its first Twin Cities stores in 2015 and continues to expand. Local chain Punch Neapolitan Pizza also plans a location there.

“Hy-Vee has been well received in the stores they’ve opened,” says Johannson.

In February, Johannson said that they already had commitments in place—leases or letters of intent—for 300,000 square feet, or about 75 percent, of the center’s retail space. As Twin Cities Business went to press, Johannson said that he could not yet name other tenants.

Another veteran retail broker asserts that Hy-Vee will offer a strong foundation for Central Park Commons. “I think that’s the key to their retail there,” says Deb Carlson, a director with Cushman & Wakefield/NorthMarq. “I think it will change the landscape up there quite a bit.”

All told, Central Park Commons calls for 440,000 square feet of space, including 42,000 square feet of medical office space. Johannson says that the first tenants will begin operations in September, and the center will then open in phases over the following six to eight months.

The developers also are encouraged that Eagan’s outlet mall, owned by Indianapolis-based Simon Property Group, one of the world’s largest shopping mall owners, appears to be hitting the right note with shoppers.

“Every report we’ve got is that it’s performed very well since opening,” says Johannson of the outlet mall.

Johannson argues that Central Park Commons will become its own destination in the southeast metro. “I think we’re going to expand the draw of Eagan,” he says.

Shakopee: Building Industrial Projects in Bulk

Central Park Commons will add a significant amount of new retail space to Eagan.

In the southwest metro, Shakopee has been a boomtown for industrial projects in recent years. Seattle-based e-commerce giant Amazon.com will occupy a large, brand-new 820,000-square-foot fulfillment center, set to open this summer. In another high-profile deal, California-based Shutterfly Inc., which produces personalized photo books and related products, moved into a new 217,000-square-foot building there in 2014.

In another large deal, Medina-based Polaris Industries Inc. signed a lease in 2015 for an eye-popping 850,000 square feet at an overhauled Shakopee facility that once served as a distribution center for Kmart.

But Minnetonka-based Opus Group sees room for more industrial space in the market. Opus is wrapping up construction in Shakopee this spring on a 215,000-square-foot build-to-suit project for Pennsylvania-based AmerisourceBergen, which sources and distributes pharmaceuticals. As that wraps up, Opus is planning to start with a speculative or “spec” industrial project with 122,000 square feet. The two buildings mark the second and third phases of its Valley Park Business Center.

Build-to-suit projects are tailored to a specific tenant, who usually has agreed to lease all of the space in a new building. In a “spec” deal, the developer presses ahead with no signed leases in hand, a riskier proposition. But spec projects are typically a signal that developers have confidence in the strength of the market.

“I think right now we’re just seeing there’s a user demand out there that is still pretty deep in Shakopee,” says Phil Cattanach, a director with Opus Development Co.

“We’re still pretty bullish on that market,” he says. “We’ve been very impressed with the depth of the market.”

Shakopee has been a draw for industrial projects because it offers large tracts of land that can support industrial development, Cattanach says. He adds that companies have a desire for new buildings with higher ceiling heights.

“People see it as a well-suited location with an acreage that allowed them to build a more modern facility,” Cattanach says of the Shakopee market.

But after a slew of large projects, he says that potential sites for more development are becoming tougher to find. “A lot of the land in Shakopee is pretty well spoken for,” Cattanach says.

Indianapolis-based Duke Realty, which owns more than 4 million square feet of space in the Twin Cities, also is busy in Shakopee. Duke is under construction on a 242,000-square-foot build-to-suit industrial project for Milestone AV Technologies in Shakopee. Josh Budish, vice president of leasing and development for Duke’s local office, says that the building will be completed this summer.

Duke still has 25 acres of land in Shakopee that could accommodate up to 440,000 square feet of industrial space on the site. Budish says that Duke is pitching the site to companies, trying to land other build-to-suit deals.

Budish agrees that the list of possible industrial development sites in Shakopee is dwindling.

“There are still a few quality sites still available but they’re being gobbled up relatively quickly. We’re teeing it up so that we can react quickly to our future customers’ needs,” says Budish of Duke’s site. “We can get off the ground quickly and move fast.”

Hotel Boomlet in Bloomington

The Opus Group The Opus Group

The new JW Marriott hotel (top) opened at the Mall of America in November. The second phase of the Valley Park Business Center (middle) will be finished in Shakopee this spring. OXBO (bottom) will add luxury apartments to downtown St. Paul.

If fancy new apartments are the favored projects in downtown Minneapolis, in Bloomington the priority projects are hotels. During 2015, three new hotels opened in Bloomington, adding 560 rooms to the market. By the end of 2016, another three hotels will have been added, with an additional 559 rooms. Another project is set to open in 2017 and there are signals that the hotel boomlet will continue.

“There are lots of other hotels being talked about,” says Schane Rudlang, Port Authority administrator for the Bloomington Port Authority. “We’re definitely a hotel town. People want to build hotels out by the mall and the airport; those are the two magnets for sure.”

Rudlang says that for many years, no new hotels were being developed in Bloomington amid the economic slowdown. He also notes that a few older hotels were demolished when the Minneapolis-St. Paul International Airport added a runway. Before the latest round of new projects, a new hotel had not opened in Bloomington since 2007, before the recession. Today, Rudlang says, developers are simply catching up after an extended drought.

As part of the expansion of the Mall of America, there are now two hotels connected to the mall: the 500-room Radisson Blu, which opened in 2013, and the 342-room JW Marriott that opened in November 2015.

“Both properties have been outstanding partners to the mall,” says Jill Renslow, senior vice president of marketing and business development for MOA. “Nearly half of our guest traffic comes from out of state and internationally, and our connected hotels allow us the opportunity to enhance the guest experience while keeping them entertained longer.”

But even though the JW Marriott at the mall has only been open a few months, it’s not even the newest hotel in Bloomington. The 303-room Hyatt Regency and the 108-room Home2 Suites both opened in February. While the Hyatt Regency is close to the Mall of America, the Home2 Suites project, developed by United Properties, sits in the Penn American District, just south of Penn Avenue South and Interstate 494.

One veteran hotel broker and analyst is not concerned that the Bloomington market is becoming overbuilt, which would leave too many empty rooms.

“The market has been strong,” says Ted Leines, CEO of Eden Prairie-based Leines Hotel Advisors, of the Bloomington hotel market. “I think business is so strong there, I think they’ll be fine.”

Roseville-based McGough developed the Hyatt Regency on the company’s large Bloomington Central Station mixed-use redevelopment site. The site is about one mile east of the Mall of America.

“From the very beginning, we always contemplated having a hotel,” says Mark Fabel, vice president of development with McGough. “We knew we wanted to go with a luxury-brand product.”

Fabel says that McGough had originally planned to start construction of the project back in 2008, but pulled back amid economic concerns. The project did not move ahead until the market had bounced back; construction started in August 2014.

Fabel says that the new Hyatt Regency hotel sits right next to a light rail transit stop, which can quickly connect guests to the Mall of America, airport or downtown Minneapolis.

“Our hotel is definitely the closest to the train line,” says Fabel. “Bloomington has always been a very strong and stable hotel market. We think there’s room for all of us to be successful.”

Projects Move Ahead in St. Paul

When it comes to real estate development, St. Paul often is overshadowed by Minneapolis. But today there are a host of projects underway and on the drawing board there, including apartments and hotels, a rehab for the former Macy’s store in downtown St. Paul and a new soccer stadium in the Midway area. The Vintage on Selby project, developed by Minneapolis-based Ryan Cos., added 210 new apartments and a Whole Foods Market grocery store, which opened in mid-March.

In downtown St. Paul, Opus is building OXBO, which will include 191 luxury apartments and 11,500 square feet of retail space on the former Seven Corners Hardware site. Opus began construction in September; OXBO opens in January 2017. Opus also sold off a parcel to another developer, which will build a new Hampton Inn & Suites hotel there.

Matt Rauenhorst, vice president with Opus Development Co., says that unlike Minneapolis, there haven’t been new, upscale apartments to rent in St. Paul.

“It’s the entertainment district,” says Rauenhorst of the site near Xcel Energy Center.

“The demand is there in St. Paul and there hasn’t been the supply to meet that demand. We really believe in the demand and we believe that we’re first with this type of product.”

When that project nears completion, Opus plans to start another project on the nearby Seven Corners Gateway site, currently a surface parking lot. For that development, Opus has partnered with Minneapolis-based Greco, a prolific multifamily developer. Rauenhorst says that the pending project calls for 125 to 150 “higher-end market-rate apartments” and a Radisson Red hotel with 150 to 200 rooms.

“We’re very bullish on St. Paul,” says Rauenhorst. “We are still looking for additional sites in St. Paul.”

The former Macy’s store in downtown St. Paul has been sitting empty for three years. But now the St. Paul Port Authority has formed a joint venture with Excelsior-based Oppidan Investment Co. Plans call for redeveloping the space to include a mix of office and retail space, plus a practice facility for the Minnesota Wild. A new Walgreens pharmacy will be incorporated into the building by another developer.

“There are a number of projects here that will have a transformative effect on the city,” says Lee Krueger, new president and CEO of the St. Paul Port Authority.

Another big project on the radar of many in St. Paul is the redevelopment of the 17-story former post office in downtown, now called Custom House. St. Paul-based Exeter Group is remaking the art deco tower, which will include 202 apartments, a 149-room Hyatt Place hotel and self-storage space. The hotel is being developed by a different group: Iowa-based Nelson Construction & Development. The total project budget is $120 million.

Jim Stolpestad, chairman and principal with Exeter Group, says that they will start opening apartments in April. An Exeter affiliate acquired the empty building from the postal service for $5.25 million in 2013 after an auction. But the large, complex building did not daunt Stolpestad.

“At the beginning I suppose it was a little bit of a leap of faith. We had confidence in the upward trend of downtown,” says Stolpestad. “I think our appearance on the scene helped solidify that a bit. We’re pretty excited about it. It’s going to be great.” tcbmag

Burl Gilyard is senior writer for TCB.