Duluth Superior real estate market improving

Sales and leasing of commercial and industrial real estate are gradually rising from the recessionary doldrums, but the independent development of new properties remains stalled without a turnaround in sight.

The rebound for existing properties is especially evident in parts of eastern Duluth, said Greg Follmer of Greg Follmer Commercial Real Estate.

"Our industrial market is one of the most positive areas. Warehouse spaces are now filling, and that's a testament to Duluth's industrial market,"� he said.

Space for retail and service companies also enjoys growing demand, noted Follmer, who recited a long list of firms, some new and some established, that are filling the market. Firms such as Habaneros, AimClear, United Piping, Lake Superior Art Glass, Tri-Power Trading, Tycoons, Fire-X, Midwest Communications and Pet Care of Duluth are establishing new or larger footprints, he said.

A&L Properties has secured 15 leases for new and/or totally refurbished space, said Rob Link, president. The average lease term is seven years and average per-foot rate $18.90.

"The long-term leases tell me people are confident about business again, and the rates say people have the ability to pay. That's really a strong message,"� he said. But that's for Class A space, Link explained, noting the market still has an oversupply of Class B, C and D space.

Overall, the vacancy rate in downtown Duluth is about 14 percent, said Steve LaFlamme, CEO at Oneida Realty, which owns and/or manages more than 2.1 million square feet. But that calculation, he said, does not include vacant space at the Government Services Center, Depot, Federal Building or some owner-occupied structures such as Advanstar and maurices, where the amount of empty footage isn't listed or actively being marketed.

"The buildings that are pretty well established are pretty well occupied,"� LaFlamme said.

Most recently, he said, engineering companies that serve Iron Range mines are seeking additional space. One significant development is the decision by Enbridge Energy to lease office space in A&L's new Wieland Building. Enbridge intends to employ about 100 persons in the structure, which will enhance commerce for other downtown businesses.

"It's a really positive thing for downtown to get those new jobs,"� LaFlamme said.

"Duluth is really well positioned as a great place to live," Follmer said. "The old myth that Duluth doesn't have enough to offer youth is going away."

Bold plan for Old Downtown

Unlike residents of some metros, Duluthians haven't yet kicked the desire to park on the street as closely as possible to their destination. That's created a fair amount of grumbling about Old Downtown, the city's latest and coolest hot spot, where curbside parking is difficult to find adjacent to many popular destinations.

Follmer hopes to address that issue by establishing small outdoor parking lots "a cross between parking ramps (which many Duluthians don't seem to like) and on-street parking (which can't be expanded). A large number of Old Downtown business owners have signed a petition of support, which Follmer has discussed with municipal officials.

"There's a major outdoor surface next to (Deluxe) Coney Island"� at 112 W. First St., he said. "That concept needs to be replicated in Old Downtown."�

The proposal is in its very early stages, said city Parking Manager Matthew Kennedy. Analysis and due diligence are the next steps.

The district's growth potential also could be increased if there were stronger connections between Old Downtown and the city's primary tourist magnet Canal Park, said Follmer, who has assembled sites for a number of projects, including CVS pharmacy developments in Superior and eastern Duluth. Additional access points and sight lines would help convince customers to move from one neighborhood to the other, increasing business for both, he believes.

The districts have much in common, including multiple hotels, restaurants and nightclubs - a mix ideal for generating traffic with tourists, college students and downtown workers. The city's newest meeting venue is at Tycoons, a former city hall where owners Tim Nelson and Rod Raymond have refurbished the city council chambers.

Another opportunity rests with the former National Guard Armory, which served as a concert venue during the early rock and roll years. AtWater Group has been retained as listing agent for the property, which gained room for 48 parking spots last month through the acquisition of an additional parcel.

Owners of the Armory Arts and Music Center hope to refurbish the building's north side to resurrect a concert venue. To make the plan a financial success, "The trick is to lease out 35,000 square feet of space facing Lake Superior,"� said Atwater's Jens Torgrimson. Historic tax credits are available to help defray the costs of a build-out.

"A charter school would be ideal, especially one having a music focus, because it would fit with the arts center theme," he said. The space, which is spread across four levels, also has much to offer if developed into commercial offices. "The views are spectacular,"� he said, and the site provides quick access to the Lakewalk. Located directly across London Road from the Rose Garden, it's also positioned well as a reception site for outdoor weddings.

End of an era

Regulatory requirements, lower property valuations and tighter money have made the development of new commercial properties virtually impossible, Link said.

"I don't know how anyone can build right now, given this environment," he said. "Nobody is building on spec."

Duluth's Unified Development Chapter, form-based codes and life safety codes have escalated construction costs beyond the point most independent developers can afford, he said. Tighter bank lending ratios, Link added, restrict borrowing to about 36 cents on the dollar versus about 80 cents before the real estate crisis. New development, he believes, will be restricted to only the most deep-pocketed individuals and those who have access to significant tax, historic or similar credits.

"Guys like me are dinosaurs - we're done,"� he said, predicting Duluth will see little new commercial construction during the next decade. Even heavy renovation has become too expensive, Link said, lamenting that he's upside down on six such projects.

Time of transition

While slower than in Duluth, commercial property sales also are picking up in Superior, said RE/MAX Broker Jim Ronding.

"Residential sales are much busier than commercial," he said, and "leasing is faring better than purchasing."

One impediment in Superior is the upcoming reconstruction of Tower Avenue north of Belknap Street. The work won't begin until next spring, Ronding said, but it's difficult to sell property facing a thoroughfare that awaits major reconstruction.

"It has put a serious damper on people wanting to invest down there,"� he said.

Complicating matters is the degree of uncertainty about what lies beneath Tower Avenue. Designers know they'll encounter utilities that may be more than a century old, but they also anticipate the pavement hides things such as trolley tracks.

"There are rumors about tunnels, and old coal bins apparently extend out in front of some buildings"� beneath the street, said Mayor Bruce Hagen. "What we find may be interesting, but it makes me nervous,"� he said, because uncharted underground caverns and their contents could delay construction work.

The upcoming construction of a CVS pharmacy at Tower Avenue and North 28th Street plus the future construction of a Kestrel assembly plant near the Richard I. Bong Municipal Airport are very positive developments, Ronding said.

"With all these jobs coming up, I suspect there definitely will be new development,"� he said.

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