Industry Focus: Commercial Real Estate

Left to Right: Lee Fundanet, Complete Hospitality Management; Jeff Manning, Alliance Building Group; Matthew Reichert, Aspen Group Real Estate Services; Bill Daniel, Daniel Companies; Skip Duemeland, Duemelands Commercial Real Estate; Roger Thomas, Burke Construction Group; Roger Cymbaluk, Basin Brokers; Neil Gush, Coldwell Banker and 1st Minot Management; (not pictured) Michael Fladeland, North Dakota Department of Commerce

Commercial real estate in North Dakota, like so many of the state’s industries, is booming. With that boom comes unique challenges the industry is working through. Between finding qualified workers and qualified projects, industry leaders have their work cut out for them. Recently, several of those leaders met at the Bismarck offices of the North Dakota Department of Commerce for a roundtable discussion to examine the issues facing commercial real estate.

Connie Brennan, publisher and editor-in-chief of North Dakota Business Magazine, served as moderator for the roundtable. These monthly meetings, sponsored by North Dakota’s Department of Commerce, are designed to bring leaders together to discuss issues pertinent to their industries. Following is a condensed version of the roundtable discussion.

Is it a challenge to get projects funded?

Matthew Reichert: It’s starting to get difficult.

Skip Duemeland: Very difficult.

Reichert: Especially, as you do your market reports and then take that back to the bank. The bank is taking it one step further and doing their own due diligence. Before, they probably weren’t doing that as much.

Lee Fundanet: Part of the challenge of financing is wading through the people that like the idea. They go, “Man, that just sounds great. We’ve got some guys that we need to pitch this to and we’re going to get this thing funded.” You go through the paces of educating them on what the project is, what the market is. [You say], “This is what we found, this is your ROI.” All that takes time. By the time you do your due diligence, you go, “Ah, these guys haven’t funded anything, it’s kind of a weak group. Let’s regroup.” There are a lot of groups that want to fund it, it’s wading through to find the legit group that has an appetite for what’s going on out here and gets it. It travels so quickly, you can lose a deal if you’re with the wrong funding group. That’s been our challenges, finding the right groups. There’s enough of them that want to get in.

Jeff Manning: Where we’ve seen resistance to financing is in the general mindset that a lot of folks have been burnt in the real estate business on a national level; particularly if you have a lot of contacts in the West Coast. Regardless of the data or the numbers that you’re seeing come out of this market, there’s still fear and that creates, obviously, problems. When you’re in front of a bank, there’s a bank board that has to make a decision whether they’re going to loan on something or not. Then, you’re in a situation where you could be selling something to seven or eight different folks and some are on board and some aren’t. If it’s not unanimous, it doesn’t get funded. That’s what we’ve seen. The other area of resistance for funding in North Dakota is, people feel that it’s heavily tied to a commodity market. You’ll hear people say, “Well, what happens if oil goes bust again?” Those are the two biggest areas of resistance we’ve seen.

What is the primary source of funding for projects?

Manning: I think the primary source of funding is private equity in any real estate transaction, regardless if it’s in North Dakota or anywhere else.

Roger Cymbaluk: We tend to agree with you. There’s two groups today that are researching the market independently that are venture capital groups looking at projects. They could be looking at yours or somebody else’s, but they’re actually up there, doing their own investigation. They’ll send their own fellows in from Florida or New York. They’re up looking and they’re doing their thing. What happens is, from our observation, you guys that put together responsible projects, that do a responsible job of laying your ground work, that don’t build a lot of fluff into it, you get the second look. It isn’t hard for these guys to figure out who’s legitimate and who’s not. The ones that are legitimate all get a second look.

Duemeland: We’re finding that some of the regional banks have got a hundred million committed at the present time and they don’t want to do any more in hotels or even apartments. And, we’re finding private equity coming in. They’ll put the money together and they don’t have to go to a bank. They’ll make their own decision if they feel it’s viable. They’re eliminating the oil cities of Dickinson, Williston and Minot and they’re actually coming to Bismarck/Mandan. It’s a major change; a transition that we never expected we would see. It’s a good thing for Bismarck and Mandan.

Manning: What’s driving that diversification of Bismarck?

Duemeland: They want a very stable investment. They don’t want it dependent strictly on the oil industry. They want a community size of 109,000 and to see the stability of state and federal government here locally. They just want something that will continue for 10, 20 or 30 years.

Do you think people are waiting for the other shoe to drop?

Reichert: There’s cautious optimism in the market. There are people in the state that have had their oil royalty checks starting to come to them for the past 12 to 18 months. Some of those people are looking to reinvest in their community. Some are looking for a safer investment. What do you do to mitigate the risk in your yield? Some of the hotel people are paying down debt faster than what they normally would. People in the apartment business are doing the same thing. So, I think, the local people are cautiously optimistic. They’re still willing to put their money back into their community. I don’t think they’re necessarily waiting for the shoe to drop. They’re looking for signs of a possible change that would be coming. I don’t think they’ve seen any major signs yet. There’s been a little drop in the price of oil. People are watching that saying, “Gee, we went from a hundred dollars a barrel to $80 a barrel in a matter of four weeks. How fast could this thing turn around if we’re all committing to 15-, 20-, 10-year financing?” There are people that are watching the market locally very carefully but, I don’t think they’re stopping investing in the market right now.

Bill Daniel: The majority of our business is in Western North Dakota in resale brokerage of existing buildings, investment properties and we’re dealing mostly with established local people and regional companies. What we’re finding is the financing is extremely aggressive and plentiful for these people. You’ve got banks chasing somebody that has 25 percent down, has been in business in Western North Dakota or South Dakota and is doing another hotel here. We’ve represented three different hotel projects. There’s no problems financing hotel projects in Bismarck. I see aggressive rates, five-year, fixed-term rates on commercial buildings anywhere from 3.8 percent to 4 and a half percent. They’ll even look at low 4’s for a seven-year fixed rate. The banks will chase these deals. If the deal makes sense, there is lots of money available to put in these deals locally and in Western North Dakota. What we see is companies in Bismarck that want to expand to Minot or Dickinson and their banks are behind them doing that expansion.

How do you filter the good deals from the bad ones?

Roger Cymbaluk: How do we filter? I’ll give you a quick story. We have a contractor that we’re heavily involved with. He comes in once a month for a week and we had nine scheduled meetings that day. We had them in two different conference rooms; we had people in the coffee room and people waiting up by the secretary. These two gentlemen walked through the door and said, “We’re looking for the boss.” [The secretary] said, “Which one?” And he said, “The one with the most gray hair.” Well, that happened to be me and I just happened to be walking out. I said, “Give me about 15 minutes, guys.” He said, “We don’t have time. We’re here from Idaho, we’re house builders. We’re here to solve your housing problem.” I threw him a legal pad and I said, “Sign up. Give me your phone number and your address.” They said, “How many are on your list?” I said, “Well, I think this is about the sixth or the seventh [list] and there’s 50 for the month, just on house builders.” He then said, “How do we get to the top?” I said, “You can’t. But, you can get into the top 10 percent if you have a financial statement and we can call a bank and verify that you’re legitimate or, if you’ve been sent by somebody we’ve done business with before or if you’re bringing a couple buckets of cash that I reserve the right to count. If it’s not enough, I’ll send you home for more cream cans.” He said an expletive and said, “We’ll go somewhere that wants our business.” I said, “Let me take you.” I took them out the front door. About an hour later, our top competitor down the street called and said, “Did you have two guys in there from Idaho?” I said, “Yeah, why?” He said, “As they left, they said, ‘You’re no different than that, (expletive), down the street.’ It had to be you.” So, how do we filter them? It’s very difficult. We miss some good business. The reality of it is, if somebody [I know] sends somebody, I know he’s legitimate. The guys we’ve known a long time, they’re not going to send us anybody they didn’t feel comfortable with. The biggest problem we have is that so many of these people have wonderful track records, they have great ideas, but their finances, their money is gone. They said, “We’ve got a great idea. We’ve done this before. We were very successful but then things turned haywire on us. We’ve lost all our money; can you help us find some money?” That’s just not our cup of tea.

Fundanet: You do have to have all your documentation, you have to have stories of success, stories of failure and what you learned from it. Lenders want to know that, cities want to know that and they want to know that you’re capable and that’s, kind of, the sniff test.

Neil Gush: You get the folks that come into the market that have done it before, it’s almost a gold rush mentality, “Well, I’m going to make tons of money off this market and this is how we did it here and this is how it’s going to work here. They come in with this perception. The perception is all around, it’s the perception of the person selling, the person buying, the person developing, whatever it might be. They’re coming into our market and they sit down and say, “Okay, could you tell us about your market?” I tell them and they’re just in shock and they have this blank look on their face. They came in here with a concept of wanting to do something and are told it’s going to be very difficult because of infrastructure, proper zoning, location, all the aspects. They thought, “Oh, it’s just right here, it will be available.” There’s a lot more to it.

Cymbaluk: It really is and it’s not fair to a lot of the good people because a lot of people have the ability to put it together. We see some great people come in. You guys that are in the development business, the first thing you ask for is a due diligence period. The reality of it is, when they come in and tell us they want this and money is no problem, [we say] show me the money. We actually make them wire the money in full before we’ll let them sign a buy-sell agreement. It drives them absolutely crazy but if they want it that bad, they can go do their due diligences. Then, if you meet all the due diligences, we put the contingencies on there. The last one was 4 million bucks, he squealed like a stuck hog, but the money was wired. The money was in the bank they had all the contingencies. We closed in three days.

How has the market changed in recent months?

Reichert: There was no market. Well, we had a market here but the terms of when we put deals together are totally different today than the way you put deals together 18, 24 months ago. You had earnest money, you had due diligence, you didn’t have proof of funds many times. What happens is you have people that are coming from other parts of the country here from areas where it’s a much softer economic climate, much softer real estate market and they’re saying this is the way we can do it in their market and why can’t we do that here? We have sellers here saying [we need] hard earnest money, due diligence of 30 or 45 days, pre-wiring full funds, proving that you have the ability to close, those types of things. That’s just a sign of the times, it’s a sign of our market right now.

Cymbaluk: The other problem we have is that North Dakota is an island in the way we do things. We’re behind in some ways. We’re only one of three states in the union that is still an abstract state. Abstracts drive your out-of-state attorneys and your bankers completely nuts. If you originate the title insurance with the local title company, title insurance doesn’t get to be an issue. If it’s originated in other states and they pick up and use a title company on this end, it is an absolute nightmare because we do things differently in different markets. I’m not saying they’re right and we’re wrong or we’re right and they’re wrong, it’s just that they don’t understand it. Sometimes, the end user doesn’t understand exactly what they’re doing, that there is going to be these changes. What they’ve seen, customarily, in their loan underwriters, they find some tremendous holes in the dike and the frustration level just goes through the rough. When the closing is on a Wednesday and on Tuesday somebody has taken a look at the exception page and found out there’s two things in there that historically they don’t live with, it’s a real problem.

How have property values changed from recent years?

Duemeland: We’ve seen increases in rents even within one year. Out in Dickinson, they’ve gone from $700 on up to $1,800, $2,150 for a two bedroom per month. In Williston, we’re seeing prices going up to $3,300 per month for two bedrooms. They are just going through the roof. It depends upon whether the oil companies still need workers, an increased number of rigs in North Dakota. As I understand it, each rig accounts for 120 workers and each job in North Dakota translates into two-thirds of a housing unit. That puts the demand for housing going up.

Fundanet: We’ve been meeting with the West Fargo area and, because there’s a limited amount of commercial space left on the right side of the dike, they’re talking about a major impact that’s happened over the last 18 months and they see it continuing. The prices are subjective to the heart of the Bakken but they’re trying to take advantage of that as well. They want development and it seems like they want more sophisticated developments than just a smaller hotel. They want convention space and infrastructure. It’s interesting to see that market develop in West Fargo, too.

Reichert: The rumor on the street I’ve been hearing is that West Fargo, Fargo and Grand Forks have really gotten the manufacturing side of the Bakken play. Where their market did soften a little in 2009, 2010, that has added stability back into the market over the last 18 to 24 months.

Daniel: I talked to a commercial broker in Fargo, a week or so ago, and the part of their market that’s very brisk is the manufacturing, as Matt mentioned. They basically have a 1 percent vacancy in industrial buildings. In the retail sector, he said they have quite a bit of vacant strip mall space and some junior box space on the market. That’s a little softer market and, in general, has not been as robust as Western North Dakota. But, the industrial sector out there is growing quicker and they’re at the confluence of two interstates, I-29 and 94, which always helps. In office space, and there aren’t any formal studies done in Bismarck so it’s strictly a guess, I’d say Class A office space in Bismarck is probably only about 3 percent vacancy. There’s very little Class A space. Class B space, I’d say that is probably closer to 7 percent.

Are officials easy to work with in regards to zoning and regulations in commercial real estate?

Reichert: There’s a lack of knowledge in some of the communities, they need help. They don’t have a zoning department, they don’t have an engineering department in some of the smaller communities around the state that are being impacted. When you’re going into some of those communities and you’re trying to get properties zoned, they’re having a hard time giving you the answers, figuring out how they’re going to pay for infrastructure and things like that. They’ve never been down this road. They’ve never had to do community planning, per se. They’ve never had to think more than two years out or one year out because there wasn’t that much growth going on in their community. You want to get water extended and ask, “Do you have enough water pressure?” [They say,] “Yeah, I think we do.” You come to find out, after you have your contract, they don’t and that’s getting challenging. It’s getting really hard. A lot of the property that could be served has now been served and has been sold and developed in the last 24 months. Now, the towns are getting to the edge of town and they’re having a hard time deciding how to bring utilities to the projects that are building.

Daniel: Local government agencies are overwhelmed at this point. This growth has happened so quickly they just were not prepared and geared up to handle it. It’s not that they don’t want to. It’s just, for them to go out and hire engineers to come to Williston, Dickinson, to Minot, is not an easy task. It’s tough for the governmental agencies to gear up for this kind of growth this quickly. They’re trying to. They’re doing the best they can with the parameters they have as governmental entities that have to answer to the taxpayer.

How can developers help with those issues?

Gush: To expand the infrastructure, for one, to help us be a part of contributing to the economy. But, that’s not necessarily a successful formula because there’s too many people involved in that. There always seems to be a plan in place, a future developed plan of the city, but that seems to change almost day to day. I went in, in December, and the map of certain industrial and residential areas changed. They had been used to not changing it too often. Now it seems to be a fast changing environment and it’s difficult to keep up with it. In Minot, we already had a demand for housing to begin with and then the flood on top of it and developing and all the infrastructure that went down and having to redevelop that and expand, put the town back a little bit.

Cymbaluk: I sat on the committee that was designing the future growth for Williston and that committee was organized in about 2007 and finally got to the table in written ink about 2010. We surpassed the projections of 2020 in 2011 and it’s 2012 now. That’s part of the problem. We’re growing and it’s a wild growth. How can the developers and planners work [together]? Our experience has been that the experienced developers come in and take the time to understand the market. They understand the project. They understand the challenges and they try to solve the problem. It doesn’t take long and it doesn’t boil down to the money but it boils down to the ones that are really successful because they say, “This has worked before, we think it will work in this market.” Or, “We don’t think it will work in this market.” To be honest with you, those are the ones that get the time. They know that they probably aren’t going to get the biggest return on their investment, but they know they’re going to get the longest return. It takes a while to vet those out because not everybody takes the time to talk to you.

Reichert: It’s funny you say that because I was at a city commission or a zoning commission meeting held in Belfield two weeks ago. What you’re seeing is some developers come in and try to jam projects through a pipeline and not give the local zoning and planning people, who don’t have a lot of experience, the chance to digest the information. “We want to get it done, we need to get it done now,” is the attitude they’re taking. As opposed to coming in and saying, “This is our plan. How do you, the City, fell about that? What do you think we can do partnership-wise to extend the utilities? We’re willing to pay our share of it. We don’t want to be taken for the whole thing.” We’re starting to hear some of that. I’m also hearing the cities pushing back now and saying, developers pay for it all, we’re not going to special assess anything anymore.

Roger Thomas: When you come in front of the planning and zoning commission or the city commission, it is talking about the solution, what’s proven, what’s going to work. So often, what happens is people come to town and say, “I’ve got the perfect widget and this is going to solve all of your problems.” We have all heard that dozens and dozens of times. It’s the folks who come into town and say, “Here’s our plan. Here’s how we think it’s going to work here. Here’s how we’re going to apply it to what you’re doing.” Then they have the players involved. I’ll be there supporting the developer in their project. They’ll have, sometimes, their financing people with them. Sometimes, they’ll have their architect with them. It’s showing the cohesive plan is thought through, that it is proven and we’re going to implement it. You treat people with dignity and respect rather than trying to ramrod it through. You will find that the people here in North Dakota are extremely pro-business, are extremely willing to bend over backwards to meet your needs. Provided you can say, “This is why we need it. Here’s how it’s proven and here’s how it’s going to work.” You’ve got to lay the whole plan out, not just parts of the plan.

Duemeland: We’re seeing developers having to bring the infrastructure through contractors and they’re going clear to Bismarck or to Fargo to bring them in. They’re seeing the cost being double and triple what the cost is in Bismarck.

Is finding qualified sub-contractors an issue?

Thomas: That is the operative word, “qualified”. You have to find the people who, first of all, understand some of the barriers that are here in Western North Dakota, whether it’s housing, which we can help solve. Sometimes it’s going to be licensing. Electricians, for instance, don’t understand what the particular codes are for North Dakota. Or, it’s going to be a sub-contractor who doesn’t understand what cold-weather building is, how that affects what they’re going to do, how that’s going to impact the schedule. What I find most often though, is when sub-contractors come up here and they want to work, what they really don’t understand the pricing in Williston and the surrounding area is really construction pricing. It’s not a boom pricing. People are coming up here, sub-contractors, thinking that this one job is going to save their company because they’re going to make X margin. That is really the difficult thing. The challenge then is finding those qualified sub-contractors at the right price for the right project. It’s constantly talking to people and vetting them out. Sometimes, you are looking at their financials and ask, “Are you going to be able to make it through the project? Are you going to be able to stick through the project? Tell me about your experience.” Then we get down into the details of understanding what their numbers are so we can communicate to our developers and to our owners. It’s just making decisions based on data. It’s a very challenging process.

Manning: I concur. It’s very challenging.

Michael Fladeland: It’s interesting that you say it’s not boom pricing. It’s construction pricing because it seems like everything else is boom pricing, whether it’s land or existing buildings.

Thomas: Certainly, labor pricing and material pricing are elevated in this area but, what it is, is holding back. The construction market nationwide has been hit particularly hard. There’s a lot of people who are holding on by their fingertips and they think that their salvation is going to be coming to this region and getting that one job that’s going to save their company. So, they’re looking for very large margins that’s going to support a boom mentality, which they may or may not understand what a boom is. They just know that they’re going to get rich and they’re going to come here. It’s reputable general contractors who are going to vet those people out and help keep the margins on a construction project reasonable with what’s going on in the region.

Manning: It is difficult with subs in that they’ll bring folks up here and they’re snatched away by the oil companies. They’ll have qualified individuals and, well, don’t let your guys go to the bar because they’ll be gone. They won’t come to work the next day. Not because they have a hangover; because they got a job for twice the wage. That’s the challenge. The other thing is supplies. Concrete is ridiculous up here. It’s 124 to 130 dollars a cubic yard. A lot of projects can’t get it and it impacts their schedules.

Duemeland: The sub-contractors are being asked right on the job site to take another job and they have to post a man just to keep the competition from coming on-site and prevent them from being hired away. When they are on-site, sometimes they take shortcuts and put on siding when the weather is extremely cold and, rather than fastening it like it should be, they just point it into the wall and you have curvy siding. Or, you find sub-contractors walking off the job because somebody else has paid them a higher fee and they want to go ahead and secure that other job and not even finish. It really is a problem.

Cymbaluk: It’s a huge problem. The other problem we have up there is that some of those sub-contractors haven’t the ability to get bonded. I think the last pass-through that Al Jaeger’s office [Secretary of State] did, they found like 70-some unlicensed contractors. It’s a huge problem. I think there are 200 and some sub-contractors licensed just in the City of Williston right now, which is up from 50-some back in 2008. That’s just licensed. You guys that are doing the business, you’re trying to get legitimate and solid people.

Reichert: What you’re seeing with the general contractors, they are hiring the subs and the subs don’t have a place for their guys to live. They’re not doing their homework before they come up to do the project. Some of the successful generals that I’ve seen come up have brought their subs with them. Then, what they’ve done is found housing for their subs as part of their process. Then they’ve had a discussion with their subs ahead of time saying, “Here’s what’s going to happen when you get to the market. Your guys are going to be offered jobs at more money. But, you’ve found them a place to live and that’s going to help you out. You control the housing.”

Cymbaluk: The camps, in my opinion, are an excellent solution, if they’re run properly.

Does the media do a good job of portraying what’s actually happening in North Dakota?

Cymbaluk: No. We were just interviewed the other day by a reporter from a Los Angeles market and her question was, “How do you deal with the people that get off the train and don’t have a place to live?” I said, “Let’s talk, first of all, how they got here to begin with. What media told them about the jobs and without reading the rest of the section about getting housing and having to wait a week or ten days before your application clears at any responsible job.” They’re going to bring a crew out here sometime next month because we spent about two hours on the phone.

Thomas: It’s just like the Williston chief of police that reported to the city commission, three months ago. He was saying Williston crime rates have decreased. Per capita, crime is going down. That’s what the media is failing to capture. I think that Williston is still a very safe place to live. Yes, it’s congested; yes, there’s a lot of traffic; yes, you need to be careful when you’re walking across the street. But, it’s still a Midwest community with good people who live there; hard working people.

What do you think commercial real estate will look like a year from now?

Reichert: It’s going to take longer than a year to solve this.

Duemeland: We’ll be faced with this for the next five years.

Daniel: Housing is the biggest challenge right now. Just to get enough houses so we can get the employees that we need in the whole western part of the state. Every city, including Bismarck, is short on apartments and housing right now. Everybody needs employees and there are people who would be willing to move here if they could get affordable housing.

Fladeland: It is a process of simply catching up because the development has happened so quickly. It will take longer than a year, but slowly but surely the communities are catching up and they’re realizing what they need to do.

Speak Your Mind