Strengthening the Foundation

Strengthening the Foundation

Marquette Real Estate Group—successor to United Properties—reorganized in 2008 in order to expand nationally. Turns out that those moves also positioned it to take advantage of opportunities in one of the worst downturns ever in commercial real estate.

For the past decade, the NorthMarq name had become a familiar one on commercial real estate properties across the United States. But not in the Twin Cities. In the past couple of years, though, NorthMarq signs have started popping up across the metro, too, while once-common signs for another commercial real estate company, United Properties, have vanished.

That’s no coincidence. Two years ago, United Properties reorganized under a new Bloomington-based holding company, Marquette Real Estate Group. The operating companies in the group—which is run by Boyd Stofer, who’d been United Properties’ CEO—include a general contracting firm called RJM Construction; and NorthMarq, which in turn comprises NorthMarq Real Estate Services and NorthMarq Capital. United Properties still exists, but it’s now a real estate developer and investor within Marquette Real Estate Group (see “United—It Still Stands” sidebar at the end of this article).

“In 2008, there were over 400 [United Property] listings around town, so people would see signs in front of all the properties listed by United Properties brokers,” notes Jeff Eaton. He’s president of NorthMarq Real Estate Services, which provides brokerage, advisory services, property and facility management, project management, and investment sales to commercial real estate tenants and investors.

Now those United Property signs “say NorthMarq,” NorthMarq Capital CEO Ed Padilla notes. “And people here say, ‘Who?’”

So why the changes? Leveraging the NorthMarq brand locally helps national clients see that NorthMarq is a national as well as a Minnesota entity—a company that’s pursuing opportunities despite, and even because of, one of the worst commercial real estate markets in decades.

 

One Firm, Two Families

Marquette Real Estate Group is owned by the Pohlad Family Companies, and is not to be confused with another Pohlad family holding, Marquette Financial Companies. While United Properties and its sibling firms are relatively new to the Pohlads, the United name had a long history with another well-known local family—the Hamms, who founded United Properties in 1916 to manage the brewing family’s real estate holdings.

United Properties’ first development, not surprisingly, was the Hamm Building in downtown St. Paul. Over time, the company expanded its operations into the suburbs, with later developments including Northland Center in Bloomington and the Mendota Heights Business Park. The family continued to own United Properties even after selling its brewing business in 1968.

Stofer, who has a Cornell University engineering degree and a Harvard MBA, joined United Properties in 1978 as a project developer. He’d come to Minnesota mostly because his brother, Gordon Stofer, now a principal with Minneapolis-based venture capital and investment banking firm Cherry Tree Investments, was already here.

Boyd Stofer became United’s president in 1990—the same year that saw the crash of an overbuilt, overleveraged commercial real estate market. “My role at the time was to go out and find sites, develop buildings, and try to create value,” he recalls. “I had to make a decision because no one needed developers and no one needed development. I had to redefine how I would add value to both the company and my career.”

The decision he helped United Properties make: transform United Properties from operating solely as a developer and manager of its properties to also being a supplier of building management services to third parties—that is, other property owners. These services include building maintenance as well as leasing of vacant space, marketing the property for sale or lease, and rent collection.

The cultural shift took years. While development required hard-charging competitiveness, “the things that make a service company are relentless focus on the customer, accountability, transparency, a sense of urgency on someone else’s behalf, teamwork, and strong communication,” Stofer notes. Over time, the “new” United Properties, with its added capabilities, began to thrive. Stofer added CEO to his title in 1994.

In the late 1990s, the Hamm family decided to liquidate its financial and real estate holdings. The late Carl Pohlad and his son Jim of Pohlad Family Companies represented one of several parties interested in acquiring United Properties and Northland Financial Company, a real estate capital business that the Hamm family also was shedding.

“That fourth quarter of 1998 was when the Russian bond crisis was going on,” Padilla recalls. “It was quite a mess. A lot of corporate acquisitions that were in process fell apart. A lot of companies that wanted to buy us were household names—Wachovia, Pittsburgh National Bank; all went away. The Pohlad family was the last one standing.”

The Pohlads’ purchase of Northland Financial and United Properties was completed in December 1998. At the time, Northland Financial was operating in seven markets with 354 employees; United Properties, with 275 employees, was strictly local. Northland Financial’s parent, Northland Insurance Company, was bought along with the Northland name by Dallas-based Associates First Capital, a subsidiary of the Ford Motor Company. Because the Pohlads owned the Marquette financial name, they combined the names Northland Financial and Marquette to create NorthMarq Capital, and made the resulting firm a subsidiary of Marquette Financial. United Properties remained a standalone company, continuing to operate its development, investment, and third-party services businesses.

“The United Properties acquisition was opportunity driven more than strategic,” Jim Pohlad recalls. “Boyd Stofer and I were good friends, the sellers wanted to put the company up for sale, and the fact we hadn’t been involved in real estate up to that point came together to make the decision to move ahead.”

Says Padilla, “At the core of the Pohlad philosophy was that you buy when there is an opportunity. They bought into a business at what they thought was a good price, and in retrospect, they were absolutely right.”

NorthMarq Capital, whose clients use its funding to buy commercial real estate, “grew rapidly because the Pohlads allowed it to,” Padilla adds. “They allowed us to take all of our earnings and roll them back into acquisitions.” Between 1998 and 2007, NorthMarq Capital completed nine major acquisitions. The largest was the 2003 purchase of the financing arm of Baltimore-headquartered asset management firm Legg Mason and its 17 offices, located along the Eastern Seaboard from Boston to Miami. NorthMarq Capital now has 32 offices across the U.S.

By 2007, United Properties was the largest property services company in the Twin Cities. It worked with commercial real estate investment groups based outside the Twin Cities. It also was performing management work for properties outside the metro that were owned by Twin Cities–headquartered companies (United has several such clients in its portfolio). All the properties that United either owned or managed were located in the Twin Cities.

“We had reached the crossroads where we had to decide whether we were going to be content to just maintain our large market share in the Twin Cities region or elect to grow beyond that,” Eaton says. National clients that use real estate services don’t confine themselves to a region, and multiregional clients are not common enough to provide an adequate customer base. “There’s not much in-between space,” Eaton adds. “You are either a primarily local company focused on a particular geography, or a national company. It’s kind of a no-man’s land in between.”

For United Properties, no-man’s land was not a desirable location.

The idea behind the reorganizing and rebranding of United Properties and NorthMarq was to establish clearer identities for the business units—and also clearer interconnections—to the companies’ respective clients. A key step in this process was the establishment in 2008 of a joint venture between United and NorthMarq Capital, adding a real estate investment sales practice to NorthMarq’s commercial mortgage banking services in several markets. This new venture, in effect, combined NorthMarq Capital’s debt-equity business with United Properties’ investment brokerage work. In the process of setting up the venture, United Properties’ real estate services operations were rebranded as NorthMarq.

Also in 2008, United acquired Minneapolis firm RJM Construction, then folded its construction arm under the RJM name. These moves made reorganization necessary to minimize confusion in the market. So Stofer and Pohlad Family Companies shifted NorthMarq Capital to the family’s commercial real estate group. All these units were placed under the Marquette Real Estate Group umbrella.

On October 1, 2009, NorthMarq Real Estate Services announced its purchase of Opus Property Services from that company’s parent, Minnetonka-based developer Opus Corporation. Opus Property Services worked with national clients in properties in 22 markets across the country. The acquisition doubled NorthMarq Real Estate Services’ management portfolio to 60 million square feet. With that acquisition, NorthMarq’s national strategy took a great leap forward. In addition, the Opus contracts were located in many of the same markets as NorthMarq Capital’s.

Opus Corporation’s travails have become a high-profile business tale locally. “We believe short-term, floating-rate bank-debt high leverage is not good. That’s the Opus story,” Padilla says. Marquette Real Estate Group, by contrast, prefers to operate with low leverage, maintaining a balance of capital risk management activities to smooth out commercial real estate’s cyclical swings.

The year the Pohlads acquired Northland Financial and United Properties, the two companies’ gross revenue was $140 million. Stofer projects that 2010 revenue for Marquette Real Estate Group will hit $350 million. Total assets are expected to climb from $300 million in 2008 to $750 million this year. The loan-servicing portfolio has increased from $4.8 billion to more than $40 billion, managed square feet have risen from 18 million to 60 million, and employee numbers have grown from 629 to 1,010.

 

The Long Cold

“I’ve known Boyd Stofer for 30 years,” says George Karvel, professor of real estate at the University of St. Thomas. “He has systematically built the company over that period of time.” The fact that Marquette Real Estate Group is well capitalized “means they are in a position to make advantageous purchases at the bottom of the real estate market,” Karvel adds. “And that’s how you make money.”

Karvel notes that in downturns like the current one, most companies don’t have the courage to forge ahead and purchase devalued properties or companies; or if they do, they often don’t have the money. Marquette Real Estate Group has both: “They will emerge from the downturn as a real significant player on the national scene,” Karvel says.

About the only risk facing the company, according to Karvel, is the highly unlikely possibility that the Pohlads could tire of waiting for the real estate market to recover. Karvel believes that full recovery of the market could take more than five years.

Stofer calls the current real estate environment “a growth opportunity. It doesn’t mean there is not pain. There are not a lot of transactions out there in terms of leasing and sales.” Stofer has been through similar—although not worse—downturns in the commercial real estate market. The late 1970s and early 1980s was one rough period, as was 1990 to 1994.

Stofer believes that the current downturn will linger for another three years, “like a cold that won’t go away.” Positive space absorption won’t occur until next year, he believes: “Vacancy rates are approaching 20 percent in commercial space markets in the U.S. and locally.” Meanwhile, the U.S. government’s ability to provide liquidity to the system is limited. “What we need is private-sector job growth to create absorption and heal the commercial real estate markets,” Stofer says.

Once the healing occurs, Marquette Real Estate Group should be strong enough to take advantage. It has been using the down period to get ready. Now it’s looking for signs of better times.

United—It Still Stands
United Properties hasn’t disappeared. But its work is now more behind the scenes.

Its signs may have vanished, but United Properties is alive and well as a developer of company-owned property for the Marquette Real Estate Group.

One of United Properties’ high-profile projects is the 11-story, 90-year-old Ford Centre across from Target Field in downtown Minneapolis. Carl Pohlad purchased the building in 2007 on the off chance that office space wouldn’t be available for the Minnesota Twins (another Pohlad holding) in the new ballpark, according to his son Jim.

United Properties plans to continue to operate the Ford Centre as an office building and begin renovations by year’s end. In early July, sister company NorthMarq Real Estate Services was talking to a number of possible tenants. “There’s surprisingly strong interest,” United Properties President Frank Dutke says.

Though the downturn has brought development to a near standstill, United Properties is moving forward on a few high-profile projects, including one on an eight-acre site at Penn Avenue South and American Boulevard in Bloomington. Slated for a spring 2011 opening, the development will include 80,000 square feet of retail and restaurant space, 20,000 square feet of office space, and 230 apartment units.

The company’s chief support during the real estate crash has been its Applewood senior housing projects. “It’s a good, strong, consistent business,” Dutke says. The company moved into senior housing during the recession of 2001. Applewood Pointe of Bloomington near Southtown opened in August as United Properties’ sixth senior cooperative. All Applewood properties are located in the Twin Cities metro; three more are in the works.

In addition, United Properties has created an investment fund in a joint venture with a large institutional investor to purchase distressed real estate assets, both loans and buildings, across the country. United also plans to look for opportunities in Denver, Milwaukee, Madison, and other urban areas, as well as in the Twin Cities.

Related Stories