Post-COVID commercial real estate trend not yet clear | BusinessNorth Exclusives

While the real estate mantra “location, location, location” still applies, experts in the field of commercial real estate, 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 had a major negative impact from COVID-19, at least in the Twin Ports. and points out that the city of Duluth granted construction permits totaling more than $ 399 million in 2020 – a record year.

“However,” she said, “the nature of the commercial real estate market is that these projects take many years to bear fruit, so the projects that took place in 2020 were planned well in advance,” said Haynes. “Whether the economic downturn will have a negative impact on commercial real estate in the coming years is difficult to predict at the moment, but according to news reports, 2021 will also be a busy year for construction.”

She pointed out that the city of Duluth has not yet issued the largest building permit Essentia will need for its three-year project. “This project generated a lot of additional interest in vacancies between Lake Avenue and the Fitger Complex.”

Haynes cited the recent passage of the American rescue plan and the possible passage of a major infrastructure plan, which will play a significant role in the sustainability and expansion of small businesses that can benefit from it. She advises commercial property investors and owners to keep a close eye on small businesses and seize opportunities. This should lead to better economic conditions, she added.

“There are several office buildings in downtown Duluth right now, including the Duluth News Tribune building and the US Bank office building,” said Haynes. “Many business owners may not be aware that the entire city of Duluth, including downtown, is designated as a Federal Chancellery Zone. Opportunity zones are an economic development tool designed to fuel economic growth and job creation in low-income communities while providing tax benefits for investors. “

There are some unique characteristics of the twin ports to consider, she said.

“Despite a number of new residential buildings having emerged in recent years, the Twin Ports still have a severe housing shortage so investment in new residential space combined with commercial or retail space is likely to continue.” For example, she continued move forward, plans to build the 15-story mixed-use residential and retail complex on the corner of Superior Street and Fourth Avenue East in Duluth are finally moving forward after several postponements.

Haynes speculates that the twin ports have the potential to benefit from the remote working trend. She noted that Duluth was recently named one of the top 10 “Most Remote Cities in the US” by Livability.com for “Unparalleled Access to Nature and Outdoor Recreation”. Lately it has also gained attention as a supposed “climate refuge”.

“If companies continue to allow their employees to work remotely permanently after the pandemic, Duluth could see population growth in the years to come, which would drive demand for residential and commercial property investments,” said Haynes.

Holappa Commercial Real Estates, Inc. (HCRE) has been in business with commercial property sellers, buyers, landlords and tenants in the Twin Ports area since 1990. Dave Holappa joined the company as a sales representative in 1999 and became Chief Agent and President in 2002.

While 2020 wasn’t a complete disaster for HCRE, it certainly wasn’t as active as it had been in previous years, Holappa said. This year started relatively flat, with some smaller deals helping to pay the rent.

“The company has been able to support some local businesses in their desire to grow even in the midst of the pandemic, which has resulted in a relocation to newer larger spaces, some as tenants and some in buying new properties,” said Holappa.

He agreed that with the ongoing threats posed by a pandemic, predictions for the future of the commercial property market are still unclear and the “wait and see” attitude will continue. But with the introduction of vaccinations, the lifting of restrictions, and further federal stimulus and infrastructure initiatives, there are positive signs that the overall market recovery is in full swing.

“I see opportunities this year as restrictions are lifted, people are moving again, and businesses are opening up,” says Holappa. “However, the office market is a real question mark. Many people have become used to working remotely, and with office space welcoming employees back into the office, the question remains whether people want to return. Some organizations have found that they have not suffered any loss of productivity from working remotely. The office market has already experienced negative rent pressure as some long-term vacancies remain in the central business district. Opportunities can arise in the commercial brokerage business as companies decide whether to maintain the current level of office space or possibly shrink it. “

Regarding federal initiatives under the Biden administration and their potential impact on commercial real estate investments, Holappa stated that commercial real estate investors at all levels use a number of tools offered to them in tax law, such as capital gains and recovery of depreciation when sales proceeds are reinvested in like assets become. The way he sees it, said Holappa, this section in the code may be restricted or restricted as part of current federal proposals.

“The ability to transfer assets after death on an increased basis, you know, the time of death value to heirs may also be limited under current proposals,” Holappa said. “Losing these instruments would have a negative impact on investors and could result in them simply sitting on investments instead of selling and trading. If that happens, it will adversely affect the CRE market across the country, including the Twin Ports, and thus the brokerage services provided by HCRE. “

Holappa said the Twin Ports market has long needed additional industrial / warehouse space. It would not surprise him if speculation about new buildings arises. However, construction costs are currently so high that they will likely be delayed and not take place in 2021.

Like Holappa, Tiffany Hughes has seen the ups and downs of commercial real estate for decades. She is currently President of A&L Properties and rents and oversees all areas of the company’s real estate, from tenant relationships to facility management. She admitted 2020 was undoubtedly a challenge, but other than most of A & L’s buildings that were vacant with many tenants working from home, the company was minimally affected in terms of letting. She said they had lost less than half a dozen tenants, most of whom were one- or two-person businesses. On the flip side, A&L has attracted new tenants who have rented a total of 16,000 square feet, and they have been able to hold and renew leases with existing tenants totaling more than 55,000 square feet.

“The biggest challenges our company faced in 2020 were related to facility management,” said Hughes. “We had to secure supplies that were hard to find and replace what was needed in our buildings to accommodate tenants who did not work from home. We also continued to prepare our buildings to be ready when those who had worked from home returned to their offices. “

Speaking of Twin Ports as a whole, Hughes said she knew there were companies struggling to retain tenants, but believes the larger companies weren’t too badly affected. The loans and aid given to businesses at the federal, state and local levels are a lifesaver for many businesses and landlords as businesses can use the funds to pay rents, she added.

“A&L Properties has been doing well so far this year,” said Hughes. “A&L Properties has won two new tenants so far in 2021 and we have renewed seven other major tenants.”

She noted that tenants raised two types of concerns over the past year. First, everyone wanted offices and common areas of the building to be cleaned thoroughly and regularly to provide a safe environment for their employees. Second, some feared the pandemic challenges would make it difficult or impossible for them to pay rent.

“Our A&L employees have worked tirelessly to keep their rooms and common areas clean and to accommodate additional special requests from tenants,” said Hughes. “For tenants whose budgets were suddenly tight, we have worked out individual plans until the turnaround. “

For Titanium Partners, the hospitality and retail sectors were the hardest hit assets, said President and CEO Brian Forcerier.

“Multi-family and industrial companies weathered the pandemic well. I would say 2021 has started slowly in leasing, but the development side of our business is very busy. “

Titanium Partners is currently overseeing the redevelopment efforts 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.