Commercial Real Estate Roars Back In The Twin Cities
Call it an industrial-strength rebound for commercial real estate. Five years ago, there was not a single new industrial property under construction in the Twin Cities. But today business is booming. In April, Bloomington-based Cushman & Wakefield/NorthMarq tallied 10 local industrial projects topping 1.5 million square feet of space under construction across the metro. Projects include a new 217,000-square-foot production facility in Shakopee for California-based Shutterfly, a deal that Gov. Mark Dayton worked to help land.
But there’s much more. A new outlet mall is set to open in Eagan. A big expansion is underway at the Mall of America. Fancy new apartment buildings are going up all over town. Developers are busy again with medical, data center and hotel projects.
This spring construction workers began ripping apart a deteriorating parking ramp in downtown Minneapolis. The destruction clears the way for renewal: a gleaming new nine-story office building will rise on the site at the north end of Nicollet Mall for Fortune 500 company Xcel Energy Inc.
The build-to-suit project for Xcel is one of three big new office projects, including the Downtown East redevelopment (in the area around the new Vikings stadium), that will start construction this year. Combined, the projects will add nearly 1.5 million square feet of new office space. When the projects are finished in 2016, they will be the first new office buildings in downtown Minneapolis in 15 years.
“We’re all chasing some of the same deals,” says Tim Murnane, president and CEO of Opus Holding LLC, parent company of the Opus Group, which is developing the Xcel project. “The competition for build-to-suits right now is pretty ferocious.”
Construction cranes are sprouting like weeds across the metro. In Bloomington at the Mall of America, a $325 million hotel/retail/office expansion is underway, marking the largest expansion of the mall since it opened in 1992.
Industrial-Strength Comeback: Twin Cities commercial projects under construction
• Industrial: 1.55 million square feet
• Retail: 1.4 million square feet
• Medical Office: 449,000 square feet
“Money has come back into the real estate market,” says Bob Solfelt, vice president and general manager with Golden Valley-based Mortenson Development, a partner on the Mall of America project. “There are investment partners, both equity and debt, that make some of these projects feasible.”
As projects bounce back, jobs are returning. In 2013, the state posted the highest level for construction employment in the last five years. According to mid-April statistics from the state’s Department of Employment and Economic Development (DEED), Minnesota added more than 9,000 jobs in the 12 months through the end of March, a year-over-year gain of 11.1 percent for the industry in the state.
“It’s really outpacing all other sectors of the economy, at least over the last year,” says Steve Hine, director of the Labor Market Information Office for DEED, of the construction employment market in Minnesota.
Commercial development is now at its highest level since mid-2008, according to Bloomington-based Cushman & Wakefield/NorthMarq. The real estate firm is tracking 3.4 million square feet of new commercial projects under construction in the industrial, retail and medical office sectors across the Twin Cities.
New apartment projects are driving much of the rebound. The city of Minneapolis set a new record for construction building permits in 2013, with the project value of permitted projects topping $1.2 billion, largely for multifamily projects. That’s more than double the $547.6 million posted in Minneapolis in 2010, the recent low-water mark for new construction in the city. The brutal days of 2009 and 2010, when business ground to a halt, are slowly receding in the rear-view mirror.
Collin Barr is president of the North Central Region for Minneapolis-based Ryan Companies US Inc., and says that business is booming. “We’re more than double, if you just look at total volume, where we were in 2009.”
Ryan Cos. are building the new $63 million Lowertown Ballpark.
The Broadway entrance to the Lowertown Ballpark.
Riding the rebound: The Opus Group
The Opus name ranks among the titans of development and construction in Minnesota. But the company was badly bruised by the recession. Three of Opus Corp.’s five regional operating companies filed for bankruptcy protection in 2009. In 2010 Opus veteran Tim Murnane took the helm to lead a restructured firm, the Minnetonka-based Opus Group.
Murnane steered Opus back on course. The company now has about 329 employees, double the number of staffers when Murnane returned in 2010. Murnane says that Opus now has approximately $500 million of projects under construction or close to breaking ground. In March, the company opened an office in Phoenix as it continues to flex its muscles.
Murnane says that the revived Opus has focused on market-rate apartments and student housing, speculative industrial projects and build-to-suit office deals. Locally, the company’s marquee projects include the Nic on Fifth, a luxury downtown Minneapolis apartment tower opening in August, and the 222,000-square-foot building for Xcel Energy.
Opus is also betting big on the rebound of the industrial markets by pursuing “spec” (speculative) projects—that is, buildings without committed tenants. Murnane says that Opus currently has 2.5 million square feet of spec industrial projects under construction in several markets (Chicago, Indianapolis and Columbus, Ohio), as well as the 200,000-square-foot Valley Park Business Center in Shakopee, which has been a busy local niche for industrial projects.
“The spec industrial market is something that we’re definitely bullish on. I think the thing that distinguishes Opus in the market today is that we are taking development risk,” says Murnane. “We are putting our own equity into these development projects. In some cases we’re doing 100 percent [of] our own equity. In other cases we’re doing joint ventures.”
Opus was a newcomer to the multifamily market when it was part of the development team for Grant Park and the Carlyle in downtown Minneapolis. Now it’s one of the anchors of the Opus book of business.
“We diversified our approach. Our strategic plan called for us to make a concentrated effort to be in the student housing space and to take risk in that area … as well as in the multifamily market. That was part of our strategy,” reflects Murnane. “We’re in that space for the long term.”
While Opus has both development and construction arms, Murnane says that the company’s development division is driving the bulk of its business.
Even so, Murnane remains cautious about the big picture.
“The pace of the recovery has been kind of tepid. … I think it’s really premature to declare victory. This economy is not growing like it should or it could,” he says. “I think we all have to remember what 2008 and 2009 were like, because it doesn’t take long to get right back there.”
Ryan’s hope: Busy beyond Downtown East
During the downturn, Ryan Cos. rode out the tough times by doing work for some long-term customers. But that often meant traveling to other parts of the country for projects.
“In some of the toughest times for us in 2009, 2010, only about 30 [to] 40 percent of our work was in the state of Minnesota,” recalls Barr. “Now when I look at our workload, we’re about 80 percent in the state of Minnesota.”
The private, family-owned Ryan Cos., which now has 873 employees, posted revenue of $708.4 million in 2013, as new projects continued to surge. The company declines to disclose specific revenue figures for 2009.
Ryan’s project list is topped by the ambitious Downtown East redevelopment plan, which calls for 1 million square feet of office space in two new towers to be owned by Wells Fargo & Co. But the company is also finishing up a two-building expansion for Target Corp.’s northern campus in Brooklyn Park, totaling about 650,000 square feet of space. Both projects reflect a trend for larger companies looking to own their own property, rather than lease space in the multitenant market.
Barr has tallied up about 4.5 million square feet of major corporate facilities (3 million square feet built and developed by Ryan) and construction projects in the Twin Cities since 2012, counting projects in the pipeline such as the Downtown East deal, the Target project and the expansion of Minnetonka-based UnitedHealth Group Inc.
“That’s a big number for the Twin Cities metro area,” says Barr.
Ryan’s growing project list also includes the Shutterfly project in Shakopee, an 180,000-square-foot office/warehouse/manufacturing facility for Olympus Surgical Technologies America in Brooklyn Park, and an expansion of the Toro Co. headquarters in Bloomington.
In addition to corporate work, Ryan has also become a player in multifamily projects. The Downtown East plan will include 193 apartments; in St. Paul, Ryan is part of the team developing the Vintage on Selby, which calls for 210 apartments (208 developed by Ryan) and a Whole Foods grocery store. Barr says that Ryan is looking at apartment projects in other cities, including Chicago.
Ryan, traditionally a commercial developer, gravitated to housing projects because of the growth it saw for urban apartments and the available capital for multifamily deals, Barr says. The developer’s strategy? “Skate to where the puck’s going to be,” says Barr.
Looking ahead, Barr sees opportunities in health care (“We’re doing medical office buildings and clinics all throughout this region”), but a shakier outlook for hotels. “Those opportunities are spotty. It depends on the market, it depends on the location, it depends on the product type.”
Ryan looks to strike a 50-50 balance between third-party construction work, such as building the new $63 million Lowertown ballpark for the City of St. Paul, and development projects where it has an ownership interest.
The company is also expanding into senior housing, looking for projects where it can be a developer with an ownership interest in the deal. Ryan is a partner in the SilverCreek on Main, a planned senior housing in Maple Grove that will be the first senior housing project that Ryan has developed in Minnesota.
But Barr notes that the current uptick has not been as strong or consistent as past economic recoveries.
“This economic recovery is not robust from any measure,” says Barr. “It’s spotty. There’s pockets of growth. Probably the best overall commercial markets right now are industrial development and multifamily development.”
Kelly Doran: Industry vet pivots to cut new path
Kelly Doran has been in the real estate development business for 30 years. A few years ago, he took a detour: In 2006, he mounted a run for governor as a DFL candidate before dropping out of the race.
Doran spent the bulk of his career developing retail properties, but when he returned to the industry in 2007, he saw that a changing industry meant diminishing prospects for retail development.
“It was pretty evident to me that I needed to pivot and go in a different direction if I wanted to stay in the real estate business, which is what I wanted to do,” says Doran, principal with the Bloomington-based Doran Cos. “We looked at a lot of different things and we ended up getting into the student housing business somewhat because of our retail experience. There were some retailers that wanted to do some stores over by the university [of Minnesota].”
Doran’s first student housing project was Sydney Hall in Dinkytown, anchored by a street-level CVS store. The project, which opened in 2010, helped kick off a new wave of student housing projects near the university.
“To some extent it was trial and error and to some extent it was it dumb luck. But in either case, it was a lot of hard work,” Doran says of his path into multifamily development.
New Projects of Note
• The Twin Cities Premium Outlets, a 409,000-square-foot outlet-store center in Eagan set to open in August.
• An office building for Fortune 500 utility Xcel Energy Inc. in downtown Minneapolis. The 222,000-square-foot office building, which will replace a parking ramp, will be completed in 2016.
• A Hampton Inn & Suites hotel is under construction near Target Center in downtown Minneapolis on the site of a surface parking lot.
• In Shakopee, construction is underway for a new 217,000-square-foot production facility for California-based Shutterfly Inc., a deal that Gov. Mark Dayton worked to land for the state.
Like larger industry players, Doran has both a development and construction arm to his business.
“Last year we did about $125 million in construction. This year we’ll do a number in excess of that,” says Doran. “Five years ago we did about $30 million.”
The company’s construction group is building more than 1,000 units for itself and other developers. In recent years, the company has built numerous stores for Eau Claire, Wisc.-based retailer Menards.
Doran Cos. has about 80 employees, up from fewer than 30 five years ago. As business has increased, Doran is looking to expand nationally. Doran says the company is scouting several out-of-state markets, but declines to say where. “Let’s put it this way: It will definitely be warmer,” he says.
Doran’s own developments include the Bridges, another student housing project, and the second phase of Mill & Main, a market-rate apartment complex. But for the moment, Doran does not have any new apartment deals teed up in Minnesota. He’s looking at possibilities in other states, and also looking at the hotel market.
As he looks toward the horizon, he doesn’t think that the apartment building boom will last forever.
“I think the amount of new development in urban housing will probably slow down,” says Doran. “Common sense would tell you to take a pause.”
But Doran says that even in tough markets, developers can find deals.
“I’ve always been one who’s reluctant to make generalized statements about markets, because that’s not how development works. Development is a case-by-case scenario. The retail market could be absolutely horrible, but that doesn’t mean that a new shopping center can’t get built in a specific location,” Doran says. “The same thing for housing. The overall market may be softening, but that doesn’t mean that there’s not an opportunity at a select location to build a multifamily project.”
Hotels, health care and mission-critical work drive Mortenson development
Golden Valley-based M.A. Mortenson Co. is primarily known as a builder. Locally, they’re among the biggest. Mortenson Construction is the builder of the new $975 million stadium for the Minnesota Vikings, now underway in downtown Minneapolis.
The Building Boom in Minneapolis: Project Value of Permitted Projects
2004: $944.7 million
2005: $855.2 million
2006: $839.6 million
2007: $761.3 million
2008: $772.5 million
2009: $778 million
2010: $547.6 million
2011: $752.8 million
2012: $1.1 billion
2013: $1.2 billion
Source: City of Minneapolis
The firm’s development work may sometimes draw less attention, but Mortenson Development has a number of irons in the fire. The firm is developing a 211-room Hampton Inn & Suites in downtown Minneapolis and expects to start construction in June on 4Marq, a 260-unit, 30-story luxury apartment tower also in downtown Minneapolis.
“I think, selectively, we are busy,” says Solfelt. “The market in certain areas has recovered nicely.”
Mortenson is also a development and construction partner in the $325 million expansion of the Mall of America in Bloomington, which calls for a 342-room JW Marriott hotel, plus retail and office space. The expansion is set to open in the fall of 2015.
Solfelt says that Mortenson’s project volume is up, but did not discuss specifics.
“What has changed is the velocity of new deals that are in the marketplace,” Solfelt says, comparing today’s market to the landscape of five years ago. “The hospitality market, as an example, was really down. Nobody was doing any new hotels. And now there’s quite a bit of activity as travel and business has picked up. … We’re active across the country with hospitality.”
For all of the attention drawn by big projects like the Vikings stadium, Ken Sorensen, vice president with Mortenson Construction, notes that the company’s average project is less than $7 million. Many of those projects are renovation work. But business is clearly picking up.
“It just seems like there’s more activity on the corporate front,” says Sorensen. “We’re more optimistic than we have been.”
Doran Cos.’ Bridges, will be a student housing complex in Minneapolis.
A 211-room Hampton Inn & Suites is coming to downtown Minneapolis.
Xcel Energy has a 222,000-square-foot building in the works.
Mortenson Development is finding work in other select industries that are growing, with numerous medical office building and “mission-critical” projects: data centers. In Fridley, Mortenson Development is partnering with developer Paul Hyde on a large site that could accommodate more than 1 million square feet of new industrial space.
Solfelt says that Mortenson is continuing to chase more development projects in its areas of specialty, but will be prudent in its approach.
“We think there’s a strong runway for all of those product types, when you do your research and when you put a good product into the market,” says Solfelt. “You’re going to see Mortenson with more development in the market, but it’s cautious development.”
Oil boom opportunity for Oppidan
Last year, Minnetonka-based developer Oppidan Investment Co. enjoyed the company’s best year in its 23-year history. The company has struck gold in the booming Bakken oil region of North Dakota, where it’s been building retail projects, new apartments and even a few silo storage projects.
While Oppidan is not a player on the scale of Opus or Ryan, the company developed 1.8 million square feet of projects nationally in 2013 and has a dozen development projects in the pipeline. Oppidan declined to provide revenue figures.
About three years ago, when the economy was still in tough shape, Oppidan executives began traveling to North Dakota to see if there really was a market for new projects, or if it was just hype.
“We heard that there were opportunities, but we needed to see it firsthand. That’s what motivated us. It was the right thing for us to go up and at least investigate,” says Paul Tucci, a developer with Oppidan. “You got to some of these towns, you couldn’t get a hotel room.”
Oppidan, which developed numerous stores for St. Paul’s Gander Mountain, is best known as a retail developer. Tucci says that in North Dakota, deals can be challenging because land and labor costs are high, and the census data that retailers rely on to gauge markets is often out of date given the fast growth of the area. But he says that some retailers are now embracing the Bakken region.
“We’ve been able to do multiple deals with the same tenants in cities up there because they understand what’s happening up there,” Tucci says, mentioning Petco as an example.
In 2013, Oppidan completed two North Dakota retail projects, the 180,000-square-foot Southgate Crossing in Minot and the 130,000-square-foot Watford Plaza in Watford City, The emerging boomtowns of North Dakota have been fueling business for Oppidan. “That was a real shot in the arm for what we were doing,” says Tucci.
But the company has landed other new projects as well. In March, Oppidan announced that it had an exclusive development agreement to work with San Jose, Cal.-based Orchard Supply Hardware, which is a subsidiary of home improvement giant Lowe’s. Oppidan has offices in both North Dakota and California to support projects in those regions.
Tucci says that reading the headlines is one thing, but that there’s no substitute for being on the ground up in North Dakota.
“You can read a lot about it, you can hear a lot about it on radio and TV, but it doesn’t compare to being up there and spending some time to try and understand what exactly is happening and how its happening,” Tucci says. “It was not quite our backyard. It was our big backyard.”