Industry Watch

West is West. East is East.

Why doesn’t the East Metro grow as fast as the West Metro?

Wednesday, June 24, 2015

We are in a commercial real estate boom in the Twin Cities, but is the growth developing evenly? Minnesota Business talked with Todd Hanson, senior director of real estate brokerage firm Cushman and Wakefield/NorthMarq. He has 25 years of experience in keeping an eye on development in the Twin Cities.

MNBIZ: We’re seeing some major activity in the East Metro, from the new Saints ballpark in a booming Lowertown, to the new St. Croix Crossing into Wisconsin. Are we finally going to see the East Metro catch up with the West Metro?
HANSON: In the world of commercial real estate, the East Metro always lags behind its West Metro counterpart. In the West growth is red hot. We’ve seen transactions and new development that are almost unheard of until recently — a million square feet for Amazon, 800,000 square feet for Polaris, Room & Board leasing almost a half a million square feet, Emerson for half a million, Shutterfly, TCF and the list goes on. In the East there is some growth happening in fits and starts. Woodbury has seen explosive growth over the past couple of decades in residential and retail and now medical. Oakdale and Eagan have also seen new things, but it has not been the growth that we have seen in the West. The East Metro has never quite had the same panache, the same demographics, the same concentration of both financial and business factors coming together.

MNBIZ: So the East and West are growing, but it is not symmetrical?
HANSON: Let’s look at two corners of the loop highway — the intersection at 94 and 494 — and compare Lake Elmo, Grant Township and Mahtomedi in the East Metro, to Maple Grove and Plymouth in the West. Well, it is not even close. There has been way more development, way more housing and way more office and industrial. Every form of development has been significant in this whole Northwest quadrant — extending into areas that 15 years ago would have been impossible to think about. Rogers was a truck stop on the way to Alexandria until about 10 years ago, and now it’s the most active industrial market in the Twin Cities in terms of speculative development.

You’ve got some fairly large tracts of land just sitting there on the East side, including numerous development sites on or near I-94 with OPUS and United Properties and others. These are significant potential commercial parks with 20-30 acres or more with terrific access and visibility to 94. Everything you typically want in a development site. But we haven’t seen a significant new deal there in years.

But if you look at the same type of stretch in the West Metro, the equivalent of 394 or Highway 55 — well, there is just no land there. The idea of 20-40 acres of land just sitting in Minnetonka and Plymouth or on 394 is inconceivable. The only way you can develop there is if you tear something down and redevelop.

Now we have 610 coming through Brooklyn Park and Maple Grove, connecting that whole area; we’re seeing a huge amount of activity there. That one little area has seen more development in the last year or two than the entire East Metro has seen in the last decade.

MNBIZ: So why would someone go out to Rogers and not do something in the East Metro right on the loop highway?
HANSON: It is hard to say. I tend to think that a lot of real estate is just based on human nature and human behavior, and the economics are just a part of it. Business reflects people.

Part of the reason for the East-West growth disparity is that growth extends off of the critical mass. It is going to be natural organic growth. Where can they get employees? Where can they expand their company? Where is there some kind of synergy between their industry and other industries around them?

For the West side, a certain amount of growth promotes growth. You get to a critical mass and it starts to feed on itself. That starts with people; when you have of a lot of housing in the nicer areas that people want to go to, that becomes the essential feeder. You’ve got executive housing and a nice community in White Bear, but it’s not near the magnitude of the Lake Minnetonka area and its executive housing. That difference between Minnetonka and White Bear, I think, defines the differences between East and West.

MNBIZ: What about the economic factors?
HANSON: The economic factor is important, but it is so homogeneous now. There are slight variations, but no one area is so distinctly better, or so much more economically aggressive that you just have to go there. There is no real cheap side of town anymore.

Incentives have become more regionalized with competition in Rochester or Owatonna or Duluth. And then we always compete with our neighbor states. Wisconsin and South Dakota have been particularly aggressive in coming after companies in the Twin Cities.

It gets back to the human thing. You can save a lot of money by going 200 miles west to South Dakota — but then you have to live in South Dakota. That has been an obvious economic advantage for years, but it’s natural for people to be attracted to what a major metropolitan area offers. The quality-of-life issue still counts, because if you run a business there’s typically not a fundamental financial reason to be far away from your home. So business owners will naturally try to stay close to where they live.

You can have tremendous business incentives, say, in Forest Lake, but that does not mean you’re going to see Medtronic go to Forest Lake, because they are going to have trouble getting their employees to go with them. For the same reason, why is St. Paul not nearly as lively and vibrant as downtown Minneapolis? It just isn’t, and hasn’t been, and probably never will be. Even with the light rail, the Saints stadium, Lowertown and all the great strides the city has made in increasing its livability and hip factor, the condo and apartment growth in Minneapolis still dwarfs what’s happening in St. Paul. Take the office market in downtown St. Paul. It’s probably as aggressive as any in the entire area. You can get great deals if you’re a big user, traditionally, because it always has a fairly significant high vacancy rate of 20% to 30%. But that is not the only thing. Major employers will look at that and say, “Yes, but, where do my people live? Where do they go to lunch? What do they do after work? Where are they living now?” If you have a lot of employees on the West side, then going to downtown St. Paul is not that great. So they will pay more money to be in Minneapolis.

MNBIZ: I’ve heard people say — from St. Paul to Stillwater — that they’re glad to avoid the hustle and bustle of Minneapolis.
HANSON: I would agree that the East Metro area has maintained a more small-town, a more inward-looking rural attitude. Lake Elmo definitely takes that position. That small town feel is still one of the fundamental differences between the East and West side. Growth and change will continue to occur on the East side, but I don’t think there’s any reason to think it will change from the slower, more measured pace we’ve seen for the last 20 years.