Reflecting on 2024, Looking Toward 2025

Drone photo of Hillcrest Development, LLLP development 9th Street Center in NE Minneapolis, MN

A commercial real estate outlook from Hillcrest Development’s Scott Tankenoff

Scott Tankenoff is the Managing Partner of Hillcrest Development LLLP, a third-generation

family business specializing in the redevelopment and management of commercial properties for more than 75 years. As a local long-term owner of properties throughout the Twin Cities metropolitan area, Tankenoff has witnessed a great deal in his 35-plus years in the marketplace. He is uniquely positioned to speak on the industry’s current and future challenges and opportunities.

How would you describe the current state of the commercial real estate market?

There are certain product types that are doing very well. Industrial properties, especially those in suburban locations close to major interstates with good quality tenants and reasonable market lease terms are doing incredibly well. Pricing is very strong, very aggressive and a lot of people have interest in purchasing those assets.

Scott Tankenoff, Managing Partner, Hillcrest Development, LLLP

Certain retail is doing quite well (with the same characteristics as industrial), but there is more differentiation. It’s still a challenged market, but retailers offering a unique experience are drawing people back to brick-and-mortar locations.

It should come as no surprise that office continues to be anemic. In a post-Covid world, companies are still struggling to find an in-person/hybrid/remote work balance and formula for their businesses and employees. It remains a big issue as recruiting and retention remain high priorities for many companies. I think we underestimate how unprecedented the shift in how we work and use space has been. There is a crisis in leadership within major cities government; owners of properties within impacted communities as well as businesses which lease or own space are directly impacted. Crisis creates uncertainties and doubts, all this negatively impacts property values and creates further uncertainty and discomfort. This all leads to negative values. I expect some improvement in 2025, but it will be slow.

Landlords and property owners cannot sell their assets with such high vacancies, tight financing, and high interest rates. 18 months ago, cash didn’t really matter as much as today — now it matters!  Decisions to convert their property, renovate, add more amenities or to sell haven’t been easy or feasible for many property owners.

Looking back at 2024, what has stood out to you?

Many of our clients and tenants were under tremendous pressure because they didn’t know  (and still don’t in some ways) where things were going. Change invariably breeds anxiety, and elections at all levels of government means changes are coming. Change is challenging for many.

In 2024, we know the economy grew, but money and labor were still tight. People seem to feel a little bit better about downtown Minneapolis, but there are still concerns about security and the political climate. The downtowns are not back to our pre-Covid entrepreneurship levels, which is something we’ve always been proud of as a society. Entrepreneurship feeds so many other areas of our economy. When people are nervous, they hold on to their money; lack of visibility makes people nervous.

What was a highlight for Hillcrest in 2024?

We are very excited to have signed a lease for a national fitness company at our 9th Street Center, which is a legacy property we purchased more than 25 years ago. The neighborhood around 9th Street Center is thriving with a ton of new housing, restaurants, breweries and creative businesses that have been establish within the past five to seven years. To have a high-quality national fitness tenant enter the NE Minneapolis market is a difference maker for us as the property owner and for our tenants and the people working in 9th Street Center.

We’ve experienced growth at our Highlight Center, also in NE Minneapolis, and Pentagon Park in Edina. Pentagon Park has more than 1,000 people working there and 800 units of housing now, so the retailers that have since opened their doors are now killing it. We’re optimistic about the small number of vacancies we have left.

If you’re looking for space in 2025 or to invest in real estate, what should you be looking for?

Whether you are a manufacturer, a retailer, or you’re looking for office space, the quality of the building owner should be as high of a consideration as location and cost. Who you are working with really matters. For example, a landlord will want to see your financials. In turn, the landlord should also make their financials available. If a building is in good condition, code-compliant, and well-maintained, that reflects on your business. So does a landlord’s track record for working with people, their knowledge and their reputation for trustworthiness.

As a landlord, we must believe in our tenants and their businesses. It all comes down to character. In business, the road isn’t always straight and smooth. We as landlords must be adaptable to our tenants’ needs and changing circumstances. If we’re already in alignment when a tenant needs to downsize or upsize, we can have flexibility and work with them to navigate the ups and downs. There is no reason a landlord shouldn’t have your back if you’ve proven to be trustworthy.

What do you think we can expect for Minneapolis-St. Paul’s commercial real estate in 2025 when there is still so much we don’t know?

Uncertainty is where opportunity is. It’s a chance to ask yourself, ‘What do I have in my business model that can make this better?’ For Hillcrest, we’re fortunate to have a good balance sheet with low debt and the ability to make almost any investment that makes economic sense. We can purchase, act as a lender, solve someone’s problem…we can look at any and all of that. Hillcrest has a proven, repeatable business model and a long track record for success and client/tenant satisfaction.  

I believe there will be good opportunities for investment in 2025. There are properties that are less expensive today than they were six months ago. We’re looking to buy assets that make sense for our business model and take our approach that has been so successful in Minneapolis to the suburbs.

As far as trends, I think we’ll see the same as in 2024. Industrial will remain strong. Office will slowly begin to stabilize, but vacancies in the downtowns of Minneapolis and St. Paul will continue to rise. New multi-family will remain challenged due to high construction costs and interest rates. We may see more opportunities for housing through the conversion of office spaces, especially if governments make conversions attractive with tax benefits and/or tax increment financing (TIF).

I am convinced banks will be more forthcoming about some of the issues they’re seeing whether it’s lender or property issues or bankruptcies. People are going to be forced to face and also deal with nonperforming assets, entities and processes. That’s not a bad thing; it allows people to make decisions and act instead of waiting, which is what the market has been doing since Covid.  But once that happens, we’ll be that much closer to pragmatism, action and recovery.