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Mark Kolsrud

Mark Kolsrud, senior vice president and principal with the Minneapolis office of Cassidy Turley, and Howard Paster, president of St. Paul-based shopping center development and management firm Paster Enterprises, aren’t naïve. They know that the commercial real estate industry in the Twin Cities and entire state of Minnesota has seen better times. But both commercial industry veterans say that the worst of the real estate slump has already hit Minneapolis. It is time now, they say, to look toward the future.

Midwest Real Estate News: I know this is a broad question, but how is the commercial real estate industry holding up in Minnesota these days?
Mark Kolsrud: Most of my time is spent in investment real estate, but I am very involved in all of the different disciplines. I have a pretty strong grasp of the different product types, of what is going on. The market today, I’d describe it as a tale of two markets. One market is unbelievably exciting in Minnesota. That market is the core, stable, solid real estate, the better real estate that is leased, the credit of the tenants is solid. That real estate has a real high value today. The interest it has from investment groups is very high right now.

On the other side of the world is real estate that is going through foreclosure. Maybe it is real estate that isn’t ideal. Maybe it should never have been built. It’s older. It’s lost its edge. Investors are very cautious about this kind of real estate.

Howard Paster

Howard Paster: It’s still soft out there. While we have seen in the last year-plus the return of the mom-and-pop tenants to the retail marketplace, there is not much beyond that. In some instances, you are getting some strong local or regional players. But in general, it’s still pretty soft out there. Vacancy overall in the marketplace is somewhere between 10 and 11 percent. That’s not great.

MWREN: Are you seeing anything different in Minnesota than what is happening in other markets?

Paster: I think that like in a lot of areas of the country, we have seen an increase in vacancy rates. We have certainly seen a compression in rents. Rents have decreased. I think in general, though, here in the upper Midwest it’s a more conservative economy. We just are not subject to the spikes in both growth and contraction that other areas in the country may experience. We certainly haven’t experienced what they have in the Arizona, Las Vegas and Florida markets.

MWREN: What commercial sectors are struggling the most right now?
Kolsrud: Retail is probably most noted now for being in the harder-to-finance category. Retail has had the most significant fall in rental rates of all the product types in Minnesota. Of course, like in everything, the retail market does have some real gems in it. You just have to look for them.

MWREN: Mark, you talked about the tale of two markets in Minnesota. Why is the strong market that you mentioned, the real solid core real estate, doing well? Why is it strong even in today’s weak economy?

Kolsrud: The real estate in this market is still well below replacement costs. If you have a tenant and a solid location, this real estate is still very attractive. If you have a quality, newer asset at a discount from replacement costs, you’ll attract the interest of investors. Nothing is being built today. No one is developing anything new. When you have a situation like this, these core assets have some real longevity as far as investment goes.

MWREN: It sounds, then, like there are some good opportunities available in commercial real estate even in today’s tough economy.
Kolsrud: We all learned a lot of lessons in 2009. I recently spoke to our younger brokers and told them not to miss this opportunity. This has been a historic event in the last 18 months. We have all come through something that is unbelievable. In these times, you can find great opportunity. Most of these assets available today, even if it’s a core asset, can be had at wonderful prices. In two or three years, people will celebrate what they purchased during these times.

MWREN: What factors are still holding commercial real estate back, both in Minnesota and across the country?
Paster: There are some signs of activity. I think people want to be positive. Unfortunately, there are not a ton of indicators that say that the bad economy is behind us. You want to say it’s behind us, that we’re moving upwards. But rents are clearly not growing. There is still too much product out there for the demand. Until we get into an environment where that reverses itself, we are going to languish. The challenge with mom-and-pop businesses is that financing them is so challenging. You really have to look under the hood and scrub the financials. You really need to see a strong business plan.

MWREN: Everyone we talk to tells us that until unemployment goes down, the recovery won’t really take off.

Paster: I think it’s troublesome. Nothing is changing on the unemployment front. If that stays the same, if we don’t see much or any job growth, I don’t see a big change in the near future for commercial real estate. Eventually, national retailers will start to do some deals again. Big box stores will do some deals again. Eventually some of these national retailers will step up. They’ll recognize that there is a lot of great real estate out there. They’ll want to start doing deals. Eventually things will turn around. When they do, we’ll be in a great location to take advantage of the new business.
Kolsrud: What I think is going to happen over next 12 months is that we’ll see the owners of property look at the market and realize the opportunity that is there. We’ll see more and more assets coming out. Unfortunately, we don’t have a lot of job growth in Minnesota. We would all like to see more job growth. Retailers are not bouncing back, no one is going to build anything until unemployment falls.

MWREN: We’re all looking forward to that day when unemployment finally does drop.
Paster: It is no secret that we are in the retail business. Everything is dependent upon consumer confidence. If consumers are not confident, they are not spending money. To date, across every retail category, whether you’re talking about grocery or soft goods or apparel tenants, sales are down. The consumers are extremely concerned. They are concerned about hanging onto their jobs. If they are unemployed, they are concerned about finding a job. We need this to change before we see a stronger recovery.

Tags | industrial, Minneapolis, Minnesota, Office, Retail

© 2012 Real Estate Communications Group. Duplication or reproduction of this article not permitted without authorization from the Real Estate Publishing Group. For information on reprint or electronic pdf of this article contact Mark Menzies at 312-644-4610 or menzies@rejournals.com