Retail decline hurts real estate

Owners of commercial buildings like this one in downtown Duluth have fewer options when trying to lease or sell their property given the downturn in brick and mortar retailing.

There’s good and bad news about Duluth’s commercial real estate market, depending on your perspective. 

The good news involves large expenditures planned by the medical and government sectors. Between Essentia Health and St. Luke’s, more than a billion dollars is set to be invested in land, buildings and equipment during the next few years. 

Related to those projects, land near the medical district is also changing hands, and the entire neighborhood is ripe for new development, said broker Greg Follmer of Greg Follmer Commercial Real Estate, who views today’s market as the best he’s ever seen. 

“It’s pretty wild right now,” he said, especially for small commercial buildings, warehouses and industrial properties.

Bad news, however, is associated with the retail sector, which increasingly is moving away from brick-and-mortar stores to online listings. National chains are exiting malls, leaving spaces vacant and landlords worried about the future. The loss of Sears and Younkers at Miller Hill Mall puts smaller shops in jeopardy, believes Dave Holappa of Holappa Commercial Real Estate.

“Malls need anchors to attract people to smaller stores,” Holappa  said.

Fortunately, much of Younkers’ space was purchased by Essentia Health in a $3.2 million deal. It will house Essentia Health Fitness and Therapy Center when it relocates from Sixth Avenue East this fall. About 60 persons will work at the new facility. 

Joe Kleiman of Kleiman Realty thinks it will be difficult to find replacement retail for large mall spaces and big box stores, lamenting that traditional retail is dead. He and other property developers already are feeling the impact. For example, Kleiman has owned commercial parcels at the intersection of Arlington Avenue and Central Entrance – one of Duluth’s busiest intersections – for the past four years. Caribou Coffee recently took occupancy on one corner, but interest in his other lots has been slower than before the retail metamorphosis.

“I’m real happy to have them,” he said about Caribou. But finding additional leaseholders won’t be easy, Kleiman conceded. “To find somebody of their quality is very, very difficult.” 

It’s equally hard to find new occupants for empty big box properties, such as the former Kmart retail stores in Duluth and Superior. Most likely, they’ll be repurposed, Follmer anticipates. Currently in high demand is space for warehousing and industrial uses, he explained, and those could become viable options.

Small buildings, however, are a hot commodity, he said.

“Those priced from $100,000 to $300,000 are getting lots of offers,” Follmer said. Properties located in Lincoln Park, Proctor and Two Harbors are in especially high demand.

New development

In addition to hospital and clinic developments, plans for a large new Downtown Duluth apartment structure have been announced. A private investment group says it will spend $75 million to build adjacent to the Sheraton Hotel in the Historic Arts and Theater District. Plans call for the development to displace the Voyageur Lakewalk Inn, the former Hacienda del Sol restaurant and a long-vacant retail building. Titanium Partners LLC of Duluth is one of three investment groups. A preliminary design calls for about 19,000 square feet of street-level stores topped by 200 apartments in a 15-story mixed-use high rise. They hope that growth in downtown residential living will be sufficient to convince a grocery store to located in their structure.

Titanium has also purchased the Temple Opera Building adjacent to the NorShor Theater. It likely will be remodeled to suit new tenants. 

With Superior Street reconstruction just beginning Phase 2 of a three-year project, “there’s still apprehension” about moving there, Holappa said. “There are still some holes on Superior Street. I doubt if any of them will be filled until the work is done. Everybody is just trying to hang on,” he said.

Possibly breaking the mold for retail development, there are new reports that Costco may establish a Duluth store. They suggest the discounter is looking at three sites, including one large parcel on the northeast corner of the Arrowhead and Haines Road intersection. It is being represented by Holappa, who declined to discuss the unsubstantiated rumors. Costco’s size requirements are immense, with its largest warehouse spanning 235,000 square feet.

In Superior, the Cobblestone Hotel and Suites, Wissota Chophouse and a taproom will be established on the old Palace Theatre site at Tower Avenue and North 11th Street. The development is slated for completion in 2020 and will include 60 rooms.

In the City of Rice Lake on Duluth’s northern border, the development of a Kwik Trip store has led to the marketing of adjacent parcels near Martin and Rice Lake roads. Among them is Rice Lake Developments LLC, which has made about 22 acres available.

Those in the commercial real estate business are concerned about one factor that’s beyond their control: the cost of construction. Notably, many of the new developments will receive some sort of public assistance – whether through tax increment financing or outright grants – to offset costs that range from $125 to $150 per square foot.

Redevelopment

Several other noticeable Twin Ports properties have changed hands during the past 12 months.

• Another tenant will move into the former Browne Furniture space in Duluth’s Holiday Center, owned by First Properties. Townsquare Media, currently located at 14 E. Central Entrance, will move its radio stations to the western corner of the downtown building, leasing 8,200 square feet.

“We’re very excited,” said Property Manager Barb Perella. The design shows some of the disc jockeys will be working in the front window. “I think they’ll be a great addition to downtown,” she said.

• The former Duluth Business University building in West Duluth was purchased by Joseph and Nancy Bullyan, who gifted the structure to UDAC.

• UDAC’s former building along Sixth Avenue East in Duluth was purchased by Reasor Properties Inc.  It’s 28,000 square feet likely will be converted for office, retail or warehouse use.

• In Superior, Thirsty Pagan Brewery is redeveloping the historic Soo Line Depot. Built in 1908, it was operated as a Soo Line passenger terminal until 1965, then as railroad offices until 1989, when it was transformed into funky space for small retailers.

New owners

Two larger property groups have changed hands.

• United Properties, which developed Kenwood Village at the intersection of Kenwood Avenue and Arrowhead Road, sold its $20.5 million development to Chester Park View of New York for $20.9 million, according to a story published by Finance and Commerce. The two-year-old mixed-use development has 83 apartment units and several street-level businesses.

• Grand Superior Lodge in Two Harbors, Caribou Highlands in Lutsen, Beacon Pointe Resort in Duluth; Breezy Point Cabins in Two Harbors, Larsmont Cottages in Two Harbors and East Bay Suites in Grand Marais have been sold to Blackburn Investment Management of Minneapolis and Madison Hospitality Group, according to MSP Business Journal.