Tate Krosschell, Principal & Managing Director, Avison Young
Avison Young has an optimistic near-term view of Minnesota’s commercial real estate sector. “I think we will continue to see the market stabilizing. Rents have stayed strong, and there are great opportunities for agile investors to get in at a really low basis and do some transformative things,” Principal and Managing Director Tate Krosschell told Invest:.
What were the main highlights and key milestones for Avison Young in the last year?
We had a good year. My office does a lot of national and international portfolio work, and that has a way of buffering against any local or regional ebbs and flows. We ended the year positively and are excited about the opportunities we’ve lined up with our clients across all their markets.
What is your overview of the market in the Twin Cities?
We’re feeling optimistic. It seems that most companies have found their “new normal” on what kind of footprints they need, and many of the big blocks of sublease space are converting back to direct vacancy, so a lot of the Covid-era uncertainty is dissipating. Tenants continue to seek high-quality product, so there is an incentive for owners to invest in their assets. On the other side of that coin, I think we’ll continue to see much of the functionally obsolete product being taken off the market, which is prompting discussion about conversions to multifamily or to some other highest and best use.
Based on conversations I’ve had with my team and their clients, we think there’s going to be a shake-up on the ownership side with so many loans maturing. A lot of assets will go back to the bank, but that will leave opportunity for creative and aggressive investors who are well-capitalized to come in and get space at more competitive rates and invest that capital for repositioning. We’ll see a revitalization of a lot of our mid-tier assets.
Meanwhile, the industrial market has stayed strong, with the Twin Cities market taking a more prominent position nationally with both investors and developers. The development pipeline that had flattened over the last few quarters is heating up again and I think we’ll continue to see strong absorption.
What is your overview of the commercial sector?
Unlike the overall U.S. market, the Twin Cities are continuing to see vacancies go up. It’s now standing at just over 18%, which is not surprising. Many occupiers are right-sizing – determining how much space they actually need and getting rid of surplus and moving to a nicer space. But the interesting aspect is that asking rents have not gone down. It’s natural to think that as demand goes down and supply goes up, there would be a correlating drop in asking rates, but that’s not the case. There is still such a flight to quality that tenants are willing to pay more money for, in some cases, less space at nicer buildings. Construction costs also continue to increase, which is contributing to the rent rate growth due to landlords needing to provide higher and higher tenant improvement allowances to build out the space.
Which services are driving growth and demand for the company in Minneapolis?
The last five years have introduced a lot of turmoil and uncertainty, not just for the commercial real estate industry, but our economy and country. It’s during times of adversity and instability that good real estate services teams and professionals can add the most value to our clients. Uncertainty makes it difficult and scary for decision makers to make decisions, and that’s when they really need to lean on us to guide them. Whether it’s workplace optimization, location analysis, where and how to invest, or needing to find savings across a portfolio, our expertise and ability to help make smart business decisions has been the biggest driver of growth.
What differentiates Avison Young from its competitors?
The last five years have taught us a lot about resilience and adaptability, but they’ve also redefined how we interact with each other. We’re no longer doing things just to do them, we’re more purposeful, and our clients operate in the same way. Avison Young has one of the best data platforms in the industry, which is what drew me to this firm and why I’m still here. We can home in on the right opportunities for our clients where it makes the most sense for them. Our tools help businesses make smart, data-based decisions so that they can adapt as they navigate how their people work and focus on their strategic growth by finding the best space for their operations.
What are you watching closely in terms of regulatory changes in your local market?
There are many eyes on Minnesota for data center development. The reason our market is attractive is because we have committed to being carbon free by 2040, which meets the carbon goals or similar requirements for many companies who would want to bring their data centers here. However, the key component to advance this sort of development is to create enough energy – in Minnesota, we’d need as much as we currently produce to power every household in the state. This type of energy creation, especially clean energy, will affect us in real estate because of the land requirements for development, not to mention the level of investment needed for the land, energy production, and transmission. I can see opportunities to open new markets for development, particularly industrial, and it’s worth keeping an eye on.
What is your outlook for the Twin Cities real estate market and what are your priorities for the next two to three years?
I’m optimistic, overall. I think we will continue to see the market stabilize. We have not seen rents go down. Additionally, I believe that the capital markets will begin to recover this year, with a full recovery in the next couple of years.
As a company, Avison Young’s priority is to grow and establish centers of excellence. The sectors we have our eyes on include healthcare, retail, and industrial, which is still red-hot. Avison Young continues to invest in the parts of the business that continue to flourish.
