Post-COVID Commercial Real Estate Trend Not Yet Clear | BusinessNorth Exclusives
While the real estate mantra “location, location, location” is probably still true, experts in the commercial real estate field, from practitioners to academics, have added the COVID motto: challenges and opportunities.
Monica Haynes, director of the Bureau of Business and Economic Research at the Labovitz School of Business and Economics, said the commercial real estate market is an industry that has not seen major negative impacts from COVID-19, from less in the twin ports, and points out that in 2020, the city of Duluth issued permits for construction projects collectively valued at more than $ 399 million – a record year.
“However,” she said, “the nature of the commercial real estate market is that these projects take many years to materialize, so the projects that were happening in 2020 were the ones that had been planned well in the past. ‘advance,’ said Haynes. “It is unclear now whether the economic downturn will have a negative impact on commercial real estate in the years to come, but according to the media, 2021 is also expected to be a busy year for construction.”
She pointed out that the town of Duluth has yet to issue the largest building permit Essentia will need for its three-year project. “This project has generated a lot of additional interest in vacant units between Lake Avenue and the Fitger complex.
Haynes cited the recent passage of the US bailout and the possible passage of a major infrastructure plan that plays an important role in the sustainability and expansion of small businesses that can benefit from it. She advises commercial real estate investors and owners to keep a close watch on small businesses and be prepared to seize opportunities. This should lead to better economic conditions, she added.
“Downtown Duluth currently has several office buildings in the market, including the Duluth News Tribune building and the US Bank office building,” said Haynes. “Many business owners may not realize that the entire town of Duluth, including downtown, is designated as a Federal Opportunity Zone. Opportunity Zones are an economic development tool designed to stimulate economic growth and job creation in low-income communities while providing tax benefits to investors.
There are some unique features of Twin Ports to consider, she said.
“Despite a number of new apartment buildings which have increased in recent years, the Twin Ports are still experiencing a severe housing shortage, so investment in new housing combined with commercial or retail space is expected to increase. to pursue.” For example, she continued, plans to build the 15-story mixed-use housing / retail complex at the corner of Superior Street and Fourth Avenue East in Duluth are finally moving forward after several postponements.
Haynes assumes that Twin Ports have the potential to benefit from the remote working trend. She noted that Duluth was recently named one of the top 10 “Remote Ready Cities in the United States” by Livability.com for its “unparalleled access to nature and outdoor recreation opportunities”. It has also recently gained attention as a so-called “climate refuge”.
“If companies continue to allow their employees to work remotely permanently after the pandemic, Duluth could see an increase in the number of residents in the years to come, increasing the demand for housing and commercial real estate investments,” said Haynes .
Holappa Commercial Real Estates, Inc. (HCRE) has been serving sellers, buyers, owners and tenants of commercial real estate in the Twin Ports area since 1990. Dave Holappa joined the firm in 1999 as a sales agent, and in 2002 became the main broker and president.
While 2020 hasn’t been a complete disaster for the HCRE, it certainly hasn’t been as active as in previous years, Holappa said. This year has started off relatively flat, with a few small deals that have helped pay the rent.
“The firm has been able to help some local businesses in their desire to grow even in the midst of the pandemic, which has resulted in relocation to new, larger spaces, some as tenants and some by purchasing new properties,” he said. said Holappa.
He agreed that due to the threats of an ongoing pandemic, forecasts for the future of the CRE market are still not clear and that there will always be a “wait and see” attitude. But with the roll-out of vaccinations, the lifting of restrictions and more federal stimulus and infrastructure initiatives underway, there are positive signs that the recovery of the overall market is well underway.
“I see opportunities coming this year as restrictions are lifted, people start to move again and businesses open up,” Holappa said. “However, the office market is a real question mark. Many people have become accustomed to working remotely, and while office spaces welcome staff back to the office, the question of whether people will want to return remains. Some companies found that they had not experienced any loss in productivity due to remote working of their staff. The office market has already suffered negative pressure on rental rates, with some long-term vacant homes remaining in the central business district. There may be opportunities in the business brokerage industry as companies determine whether or not they want to keep the current level of office space or potentially downsize.
Regarding federal initiatives under the Biden administration and how they might affect CRE investments, Holappa explained that commercial real estate investors of all levels use a number of tools available to them. in the tax code, such as IRS Section 1031, which allows capital gains deferral and depreciation recapture when the proceeds of a sale are reinvested in similar investments. The way he sees it, Holappa said, this section of the code is potentially going to be restricted or limited under current federal proposals.
“The ability to transfer assets at death on an increased basis, you know, the value at the time of death to heirs, is also going to be potentially limited under the current proposals,” said Holappa. “Losing these tools would negatively impact investors and could cause them to just sit on investments rather than sell and trade. If this happens, it will negatively affect the CRE market across the country, including the twin ports, and therefore the brokerage services provided by the HCRE.
Holappa said the twin ports market has long needed additional industrial / warehouse space. He wouldn’t be surprised to see speculation arise with a new build. However, he added, the cost of construction is so high right now that it will likely be delayed and not happen in 2021.
Like Holappa, Tiffany Hughes has seen the ups and downs of commercial real estate for decades. Currently, she is President of A&L Properties, leasing and overseeing all areas of the company’s properties, from tenant relations to facilities management. She admitted that 2020 was undoubtedly a challenge, but other than most of the empty A&L buildings as many tenants were working from home, the business was very little affected by the rental. She said they had lost less than half a dozen tenants, the majority of which were one or two person farms. On the other hand, A&L brought in new tenants who leased a combined 16,000 square foot space, and they were able to retain and renew the leases with existing tenants filling over 55,000 square feet of space.
“The biggest challenges our business faced in 2020 was around facilities management,” said Hughes. “We had to secure hard-to-find supplies and rearrange what was needed in our buildings so that tenants who weren’t working from home felt comfortable. We also continued to prepare our buildings to be ready when those who had worked from home returned to their offices. “
Regarding Twin Ports as a whole, Hughes said she knew some companies were struggling to retain tenants, but believed larger companies had not been too affected. The loans and assistance provided to businesses at the federal, state and local levels have been a lifeline for many businesses and landlords as businesses have been able to use the funds to pay rent, she added.
“Things are going well for A&L Properties so far this year,” said Hughes. “To date in 2021, A&L Properties has recruited two new tenants and we have renewed seven other large tenants. “
She noted that over the past year tenants have expressed two sets of concerns. First and foremost, everyone wanted to make sure that the offices and common areas of the building were cleaned thoroughly and frequently to provide a safe environment for their employees. Second, there were concerns that the challenges of the pandemic would make paying rent difficult, if not impossible.
“Our staff at A&L have worked tirelessly to keep their spaces and common areas clean, implementing additional special requests that tenants may also have,” said Hughes. “For tenants whose budgets were suddenly tight, we made individual plans until things turned around. “
For Titanium Partners, the hardest hit assets have been hospitality and retail, said Brian Forcier, President and CEO.
“Multi-family and industrial farms have resisted the pandemic well. I would say 2021 has started slowly in terms of rentals, but the development side of our business is very busy. “
Titanium Partners is currently overseeing the redevelopment effort of Duluth’s largest office building, the United HealthCare facility on Rice Lake Road. Forcier said he has seen strong interest in the property from potential tenants and expects success over the next two years at the current pace of rental activity.