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Finance & Commerce: Will Minnesota law change revive condo development?

Original Article

Date: June 7th, 2017

By: Brian Johnson

 

A change in Minnesota law that makes it more difficult for homeowner associations to sue over construction defect claims may or may not revive condominium and townhome construction. But builders, developers and real estate agents who pushed for the change say it’s a good start.

House File 1538, signed by Gov. Mark Dayton last week, requires homeowner associations to implement a preventive maintenance plan, go through mediation, and get the majority of association members on board before they can proceed with a construction defect lawsuit.

“None of us have a crystal ball as to whether any of this will change the market,” said Ryan Hamilton, associate legal counsel for the Minnesota Association of Realtors, which supported the bill. “It is an effort to improve the risk environment. We hope it does that.”

Builders and developers have been clinging to that hope for a while. In recent years, they have been hesitant to move forward with condo and townhome developments for fear of litigation, despite growing demand for such homes. Another barrier: Some still feel the sting of the condo bust in the previous decade, and the lenders do, too.

As Finance & Commerce has reported, state law allows a condo owner or association to sue project teams for “major construction defects” for up to 10 years after the unit or building was completed. The law was amended in 2010 to add commercial contractors to the list of liable partners. That 10-year statute still applies, said Minneapolis attorney Peter Coyle, who worked with the Housing Options Coalition.

Homebuilding has been on the upswing overall. More than 7,600 new multifamily units were added in the seven-county metro area in 2015, up from 2,329 in 2007, according to the Housing Options Coalition, which pushed for the new law. Coalition members include the Minneapolis Downtown Council, the Associated General Contractors of Minnesota, the Builders Association of the Twin Cities and the Minnesota Association of Realtors.

But because of the liability issue, condos and townhomes represent a much smaller share of new housing units. Two years ago, 3 percent of new multifamily units were condos and townhomes, down from 23 percent in 2007, the coalition said.

Speaking to the demand side, Herb Tousley of the University of St. Thomas points specifically to downtown Minneapolis and the city’s North Loop.

Demand is solid for condos there, but “hardly any” units are for sale, said Tousley, director of real estate programs at St. Thomas. Still, he noted new ones are coming online, including developer Jim Stanton’s 374-unit Legacy Condos project at 121 12th Ave. S. in the Mill District of Minneapolis.

“I think you will see people moving in to fill that supply,” he predicted.

Abbey Bryduck, legislative director for AGC-Minnesota, hopes the change will encourage more development. In particular, the preventive maintenance requirement “goes a long way in making sure these buildings are maintained properly,” she said.

The bill, which was approved by a wide margin in the Legislature, had a Republican author in the House and a DFL author in the Senate.

Despite the bipartisan support, some language in the bill, including the requirement to get the majority of condo owners on board with a lawsuit, gives pause to David Hellmuth, an Edina attorney who represents homeowner associations.

Hellmuth said the requirement puts an “unnecessary restriction” on the association when legitimate claims need to be addressed.

A typical defense against construction defect claims is that the association didn’t do enough preventive maintenance. In other words defendants claim the association “caused their own problems,” he said.

“Whether or not that is true is debatable,” Hellmuth said.

Even so, housing industry advocates like David Siegel of the Builders Association of the Twin Cities expect to see more condo and townhome projects sprout up in the metro area and across the state with the changes in effect.

How far has townhome ownership declined?

A number of years ago, BATC held an event that showcased townhomes, condominiums and other for-sale multifamily properties. “We could not do any such thing today,” Siegel said, because the options are too limited.

“I think this legislation will lead to more condo development, and will similarly result in more townhome construction,” Siegel added.

The Builders Association of Minnesota also supported the legislation, said Remi Stone, BAM”s executive vice president.

Stone said it “improves the landscape” for builders and developers looking to produce condos and townhomes, which appeal to younger buyers just entering the market as well as empty-nesters. That goes for markets such as Rochester, St. Cloud and Duluth, as well as the Twin Cities, she said.

Stone hopes the statute changes will spur more development. “This is one feature,” she said. “We still have issues of financing, we still have regulatory costs. But there is demand. And where there’s demand, the market will go.”

Commercial Lending, Commercial Real Estate

Impact of Surface-Restoration Business on Commercial Properties

A book may not be judged by its cover but when it comes to commercial properties, their image really matters as emphasized by REJournals.com in a recent article. While businesses and property owners are trying to cut their expenses in today’s economy, they cannot remain indifferent about their building surfaces that are getting deteriorated. Also, it is in the best interest of building owners to give a good first impression to their potential tenants through appealing exterior spaces.

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Concrete stairs before restoration … (Source: REJournals.com)

stairs-after

… and after (Source: REJournals.com)

The surface-restoration business offers an economical solution to commercial buildings owners who cannot repeatedly afford the high cost of hiring a company to come replace surfaces degraded by the weather, the sun, and even road salt. Speaking of saving money through surface restoration instead of replacement, Minnesota-based Twin Cities Outdoor Services shares an interesting information about their business. According to the company, services offered by its Surface Restoration Division can help businesses and building owners save up to 70 percent of the money that would be spent for surface replacement done by another company.

To clarify the advantage of surface restoration over replacement, Kai Milota, director of sales with Plymouth, Minn.-based Twin Cities Outdoor Services, states “In a retail environment, if you replace concrete, if you’re ripping out materials, you might have to shut your doors for some time. With restoration that doesn’t have to happen. It’s less disruptive on business and customer traffic.”

Commercial Lending, Industry News, Retail Real Estate, UST Class Profile

Neiman Marcus closes its doors: What’s next? Highlights from REAL 746

This post was written by Dan Jackson, a 2012 UST MBA graduate. Dan completed many of his electives in real estate including participation in the spring 2012 REAL 714 International Real Estate Development course in the Cayman Islands.

Photo from startribune.com.

The Minneapolis-St. Paul Business Journal recently reported that Neiman Marcus, a high-end retailer in downtown Minneapolis would be closing its doors in July of 2013.  This is not the first time that a high-end retailer has decided to close its doors or had to alter its image in downtown Minneapolis.  The article stated that in 2004, Saks Fifth Avenue reconfigured its main store concept into Saks Off Fifth, a lower-priced version of the well-known retailer. 

With the announcement of this closure, I got to thinking about the possibilities of a tenant that could fit into the space that has been held by Neiman Marcus for about 20 years.  I reflected on a moment from my studies at St. Thomas.  One particular UST real estate course (REAL 746), introduces students to the techniques used to determine the best and highest use of a site from a market analysis and feasibility perspective.  It is a course that I took this past spring.  While there were many techniques that we learned throughout the course of the semester, six factors immediately come to mind when trying to provide market analysis for a particular site.  I’d like to walk you through each of these six factors and highlight important elements about the site that relate to each of these factors, but ultimately will leave it up to you to decide what kind of tenant(s) would be a good fit for a replacement.

The market analysis process reviewed during the semester consisted of six points that guide real estate professionals through a market and feasibility analysis of a particular site.  The six steps, as outlined here will be used to provide a general idea and outline, but will not go too much in depth, given the length of this post.  The purpose of this post is to examine and look for trends that will help real estate professionals begin to identify the next best tenant(s) for this space.  The six steps that I refer to here are specifically related to identifying a space for a shopping center, but similarities exist between this process and the processes for other types of properties. Continue Reading

Commercial Lending, Commercial Real Estate, Development, Economics, Industry News, Real Estate Trends, UST Real Estate in the News

Latest Minnesota Commercial Real Estate Survey Reveals Subdued Market Outlook

The latest Minnesota Commercial Real Estate Survey from University of St. Thomas posts first decline since inception,  forecasts that land and building materials will wax while rent and occupancy rates wane.

MPLS Skyline Graphic 

The University of St. Thomas Shenehon Center for Real Estate’s latest Minnesota Commercial Real Estate Survey has been released, showing the first step back from positive outlook in its two-year history.  Fifty supply-side commercial real estate leaders were polled about their beliefs and expectations of the local market conditions over the next two years, and their collective responses registered a decline from somewhat optimistic in the spring to neutral today.

The Minnesota Commercial Real Estate Survey, conducted earlier in November and available for review at http://www.stthomas.edu/business/centers/shenehon/pdf/MNCRE_2011Fall_Web.pdf, analyzes forecasts for future rental rate growth, vacancy rates, land development costs, building material costs, ROI and loan-to-value equity in the Twin Cities. Aggregating these measures into a 0-100 index where numbers over 50 are bullish, the composite index revealed a score of 51.2 versus 55.6 when the study was last conducted in June.  While the sentiment isn’t bearish, its noticeable decline – the single largest movement observed in the composite index since inception – is a sign of eroding confidence. Continue Reading

Appraisal, Business Valuation, Commercial Lending, Commercial Real Estate, Development, Economics, Government Policy, Green Building, Industry News, Multifamily, Property Management, Real Estate Trends, Residential Real Estate, Retail Real Estate

Location, Location, Location

Whether you are looking for ways to position Minnesota as a good location to buy real estate or simply need a reminder of why we like living here next time it snows, the Greater MSP, the Minneapolis St. Paul Regional Economic Development Partnership website is a great resource. Not only do they put together videos about the highlights of the areas on their  YouTube channel, they provide statistics to backup why this is a great area to do business (location, transportation, financing & incentives, demographics, taxes, utilities, innovation, the economy), to live (education, cost of living, healthy lifestyles, philanthropy and volunteerism, sports and recreation, arts and culture, shopping and attractions) and workforce information (labor force statistics and projections, wages, employment by industry and occupation, colleges and universities.)

YouTube Preview Image

Just a few of the reasons Minnesota is a great place to live, go to school and do business:

  • #1 region to be an urban cyclist.  Bicycling Magazine
  • More golfers per capita than any other region in America.
  • Top 4 states for workforce quality. CEO Magazine
  • Among America’s top regions for brainpower. The Daily Beast, 2010
  • Where you can get a good cappuccino and eat Thai food yet live on a quiet tree-lined street with a backyard and send your kids to public school. Garrison Keillor Continue Reading
Commercial Lending, Commercial Real Estate, Government Policy, Industry News, Minnesota Real Estate Hall of Fame, Real Estate Trends, Upcoming Industry Events, Upcoming UST Events

Why real estate has become a drag on the economy – a year in review.

chartsLast October, Dr. Anthony Downs provided the keynote address at the first annual Minnesota Real Estate Hall of Fame induction ceremony. His address, Why real estate has become a drag on the US economy was a realistic, unvarnished assessment of the issues that our country was facing at the time. He noted that in previous recessions, real estate had often led the way to recovery. Today, however, real estate is a serious drag on our economy’s ability to return to prosperity.

Dr. Downs will return to the University of St. Thomas on October 26 to present the keynote address, “2012 Real Estate Market Update” for the second annual Minnesota Real Estate Hall of Fame induction ceremony. In preparation for this event, I looked back at his presentation from last fall and was surprised by how relevant his address remains today. I thought it would be interesting to revisit his remarks to see how they compare to actual events in the last year. 

Most of the key issues that Dr. Downs mentioned last year are still with us today and many of his predictions have come to pass in the ensuing year. Here are several examples:

Unemployment. Dr. Downs observed “high rates of employment are likely to continue for several more years”. He mentioned consumers will not have the cash to increase spending and small businesses will have little reason to hire more. Related to employment he foresaw “no sudden change in conditions is likely to radically increase the demand for new workers and for new production”. Looking at the national employment rate that has been hovering at just over 9% and the Minnesota rate that has been over 7% since last fall with little prospect of near term improvement, his observations seem to be right on. Continue Reading

Commercial Lending, Commercial Real Estate, Industry News, Uncategorized

How will the credit downgrade impact real estate?

Due to the US’s downgraded S&P credit rating, interest rates will rise, but the question is when and how much.  Opinions vary about the significance of this historic event, but all agree it will have some effect on real estate, both residential and commercial.

DSNews.com reports that on Monday, the S&P downgraded credit for Fannie Mae, Freddie Mac, and 10 of the 12 spimageFederal Home Loan Banks from AAA to AA+, sending shock waves through the market and resulting in decreased yields on US Treasuries.

Some experts expect interest rates to climb 500 basis points within the next six months.  Others disagree.  The National Association of Realtors expects that within the next 3-5 years, loan demand will be much higher and at that point the downgraded credit rating might contribute to higher interest rates.  Analysts say if Moody’s and Fitch downgrade US credit, the impact could be more drastic.  National Real Estate Investor reports the impact on potential multifamily borrowers:

“The emerging consensus among the U.S. commercial real estate community is that long-term interest rates will begin to rise in the near future. This is especially true for multifamily borrowers who have relied on Fannie Mae and Freddie Mac to finance their projects.”

Continue Reading

Commercial Lending, Commercial Real Estate, Industry News, Residential Real Estate, Uncategorized

The End of GSE’s: How will mortgage markets be affected?

Finance & Commerce reported on Friday that S&P will downgrade Fannie Mae and Freddie Mac credit if no agreementgse is reached to raise the borrowing limit for the US government.  With Fannie and Freddie owning or guaranteeing nearly half of all mortgages, and taxpayers having spent $150 billion to bail out these government-sponsored enterprises, it’s critical that proper steps are taken to minimize the impact on the economy and housing market when these agencies are eventually phased out.

Opinions vary greatly among those in real estate as to whether privatization of the secondary mortgage market is a realistic goal.  Eduardo Padilla, CEO of Northmarq Capital, cautions:

“The private sector does not have the capacity to replace the $324 billion portfolio of fixed-rate mortgage capital for multi-family rental properties held or sponsored by the GSEs and related agencies.”

Padilla emphasizes that while many are focused of the effect of these changes on single-family home buyers, multi-family property investors rely on the stability of the financing products offered by GSE’s, especially when the market is turbulent.  “A critical component of every apartment investment is consistently available fixed-rate mortgages.”  Padilla attributes Fannie & Freddie’s less than 1 percent multi-family rental delinquency rate (compared to a 15.7% delinquency rate in the CMBS market for the same property type) to the standards and management of the professionals who run the GSE’s, many of whom have recently stepped down.

Continue Reading

Appraisal, Business Valuation, Commercial Lending, Commercial Real Estate, Development, Property Management, Real Estate Trends, Residential Real Estate, Retail Real Estate, Uncategorized

Ask the Real Estate Expert!

askexpert

Do you have questions about the Twin Cities commercial real estate market, valuation of commercial property, real estate finance, real estate law, development, property management, education and careers in real estate, or other industry topics?

Whether you’re a student, novice, or a seasoned industry professional, our experts are here to help!  Send us your real estate questions, no matter how simple or complex, and faculty from the Master of Science in Real Estate program will respond to your questions weekly on the Real Estate Matters blog and via Twitter @USTRealEstate.

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Commercial Lending, Commercial Real Estate, Industry News, Real Estate Trends

Commercial Real Estate’s Race To Maturity

Below is an interesting article about the looming problem of loan maturities in commercial real estate that will need to be dealt with in the next few years. 
 
By: Chris Macke
Chris Macke is a senior real estate strategist for the CoStar Group and a former vice president with GE Real Estate. He has 20 years experience in commercial real estate development, acquisition, leasing and financing.
 
 
 
As a native of Indiana, every Memorial Day my attention turns to the “Greatest Spectacle in Racing,” the Indianapolis 500.

However, as senior commercial real estatestrategist with CoStar Group, I have my eyes set on another race — the one between maturing commercial real estate loans and the prices of the underlying properties securing those loans. And in that race, commercial real estate has recently been issued a yellow flag.

In CoStar’s Commercial Repeat-Sale Index, which tracks pricing among commercial real estate properties, almost three out of every four properties that had been acquired between 2005 and 2007 and then resold in the first quarter of 2011 sold at a lower price. This is an ominous percentage considering that many of the “extend-and-pretend” loans are related to acquisitions made during the 2005-2007 period.

The idea behind extend-and-pretend was the following: Properties facing loan maturities and that have current values that are lower than the current loan balance would have their loan maturity dates extended, as long as the property owners are current on their payments. This was intended to extend the time for the properties to recover their values, enabling successful refinancing of those loans.

However, one result of these loan extensions is a concentration of these loans maturing over the next few years, rather than being dispersed over a longer period of time had they kept their original due dates.

The result is a steepening of what has been called the “loan maturity cliff.” In 2008, it was estimated that the United States would see $450 billion in 2011 loan maturities related to commercial real estate. Today that number is estimated at $900 billion. Each year that lenders continue this practice, this concentration risk increases.

 Follow the link below to read the entire article: