Mike Doyle, Partner, Kenwood Commercial

Mike Doyle, a partner at Kenwood Commercial, spoke with Invest: about the company’s goals and the challenges it faces in the Minneapolis-St. Paul real estate market. He discussed trends and opportunities in the Twin Cities, and how Kenwood is uniquely positioned to help its clients.

What are some of the highlights and key milestones for Kenwood Commercial from the past year?

In the last 12 months, we’ve been keeping our heads down and helping clients. We’re at a watershed point in the market where people are trying to make long-term decisions. Our work in the last 12 months has pivoted from a ‘defense’ standpoint to a more ‘offense’ standpoint by looking at the future and how we can take advantage of the current market. We’ve been helping many different companies in the Twin Cities and on a national scale.

What is your overview of the commercial real estate market in the Twin Cities, and what trends and market dynamics are you taking into consideration?

The new standard for the market is that there is no standard. As in many cities across the United States, and the world, there are absolute winners and losers, and few product types that are status quo. Historic buildings have sold for far less than their previous values, because there is no comprehension of what the future use of the building will be. In the industrial sector, it’s an absolute winner. There are low vacancy rates and buildings are still selling at historically high values. Retail is still a reliable submarket, but once again it comes down to Class A, well-located properties where wealth is congregated and where vacancy rates are functionally zero.

Focusing on office space, how is that market performing in terms of new properties versus properties that are being leased?

Minneapolis has had limited new construction in the last 20 years. The good thing about the Twin Cities is that there’s a theoretically stable market where we don’t have a lot of large corporations moving in or out. It’s a consistent 2%-4% annual growth. In downtown Minneapolis over the last 30 years, there have been clear cycles of large corporations moving out of previous spaces and into brand new buildings. A few new buildings downtown are well occupied with Class A-plus ownership and Class A-plus tenants. We’ve seen big corporations move into these assets.

Would you define the commercial real estate market as being a buyers’ or a sellers’ market 

It’s neither, because some of the buildings are so challenged that nobody will put a value on them, especially in St. Paul. In Minneapolis, the Forum just sold for $10 per square foot, which is a 92% decrease. You could say that’s a buyers’ market. Knowing the building well and the amount of capital needed to put into it, the numbers still don’t work at $10 per square foot. On the capital side of the equation, even if you are selling a distressed asset you won’t get decent debt for it. Paying with all cash will drive down the value again. It’s a tightrope walk between the buyers and sellers to make the transaction happen. It’s all about the current lenders, how much they want to get rid of these buildings, and what cuts they’re willing to take. 

What other opportunities for growth and investment are in the Twin Cities?

There are many pockets that are doing well. Minneapolis is weird in that it has always been a block-by-block market. We’ve always had the “Target effect,” where within three blocks of a Target headquarters is a strong class-A location, and it can drop to a Class C just by one more block. We focus on the hotter submarkets in the Twin Cities, like the North Loop, which we call our 18-hour city. Minneapolis is not a 24-hour city, so the North Loop is where people live, work, and play. There are still some challenges within that submarket, but there’s a lot of money and capital moving in. Another submarket that has been doing well is 50th and France. There’s a lot of wealth in that area. Downtown Wayzata, right on the lake, is another market that is achieving all-time high-net rents on the office and retail side.

Which of your services will likely be the main drivers of growth moving forward?

Tenant representation has always been our focus, but real estate is at the forefront for companies right now. We’ve concentrated our activity in consulting, acquisitions and dispositions, and we’ve used our most creative thinking to turn real estate from liabilities to assets.

What differentiates and separates Kenwood Commercial from other commercial real estate companies operating in the Minneapolis-St. Paul area?

We were formerly at a large publicly traded real estate firm. We’ve worked on some of the largest transactions, businesses, and institutions in Minneapolis. We have all the experience with none of the barriers of larger corporations. When we engage with a client, it’s on a personal level. We can afford to spend more time understanding a company and diving into their needs. We have lower overhead expenses, which allows us to be more flexible in helping companies where they are. No matter what a company needs we can always bring in the best partners outside of Kenwood. We aren’t tied to a publicly traded company where we need to use specific contractors or vendors. We have the flexibility to bring in the best partners across the board.

Have any changes in the regulatory or legal landscape affected the commercial real estate sector, your business, your clients, or all of the above? 

All of the above. In Minneapolis, there is a Labor and Standard Board, which would allow another level of potential governance for companies (and, most specifically, restaurants), and more headaches for owners. We work with a few restaurant owners and retailers, and their No. 1 complaint is that it’s already difficult enough to run a business. Minneapolis has one of the highest tax rates in the United States for entertainment. When all those expenses are added up, it gets to the point where the capital is fluid and can move to other markets. 

What are the primary challenges for the commercial real estate industry in the Twin Cities? How is Kenwood Commercial working to address these?

One of the biggest challenges is the discount between sellers and buyers on the non-investment grade real estate. With interest rates higher than the previous few years, you can’t value a building as high. That creates a discount on valuations, but we’re starting to see balance. From the tenant side, the biggest challenge is the cost to relocate and create a space that employees actually want to come to. Real Estate is typically a company’s second-largest expense, but if it can increase retention and worker productivity, I would argue that any company would be happy to spend more to create a more efficient workplace. 

What is the outlook for Kenwood Commercial in the next two to three years? What are your priorities and goals moving forward?

We always put the client first and do what is best for them. We want to be a resource for our clients. We live by the philosophy that if we do what’s right, the money will come at the end of the day. It’s being out there as much as possible and helping our clients and potential clients any way we can.