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Duluth-based AtWater expands its Twin Cities holdings

Brian Forcier is president and chief operating officer of Duluth-based AtWater Group

The Duluth-based AtWater Group is on a buying spree.

But not in the Twin Ports.

The real estate arm of Capstan Corp., formerly known as Reuben Johnson & Son Inc., is rapidly building a portfolio of income-producing office buildings in suburban Minneapolis.

“We’re getting very active in the Twin Cities now,” said Brian Forcier, AtWater’s president and chief operating officer. “It’s become a big focus of AtWater.”

In just over a year, they’re on track to acquire seven 1980s-era office buildings with the company’s total investment exceeding $40 million and with plans to invest a couple million more into building improvements.

So, in the Twin Cities real estate investment world, AtWater has become a player.

The purchase of the first two buildings came last April when AtWater bought the Normandale Place in Bloomington for $9.8 million and the Ridge Point Medical Building in Burnsville for $5.7 million.

Next up was the purchase of Park Glen Corporate Center in St. Louis Park in June for $6 million.

In December, AtWater bought two more buildings — the Atrium Building in Bloomington for $5.2 million and the Brookdale Corporate Center III in Brooklyn Center for $ 4.5 million. At 104,000 square feet, the Brookdale building — renamed Concord Executive Center — is AtWater’s largest.

But there’s more.

Forcier expects to close by June on the purchases of two more multitenant, multistory office buildings — one in Bloomington and one in Minnetonka.

“We’re negotiating hard and heavy on the two properties now,” he said.

While it would be welcomed if AtWater was making those kind of investments in Duluth, University of Minnesota Duluth economist

Jim Skurla said Minneapolis makes more sense.

“The Minneapolis market is so much bigger and stronger than we are,” he said. “There’s not many opportunities here.”

The key is population trends, which are growing in the Twin Cities, Forcier said.

“Where you get more job growth, you need more real estate,” he said. “In Duluth, population trends are not growing.”

Changing focus

In recent years, AtWater had focused on property management, brokerage and leasing services and developing special projects, most notably Maurices’ new downtown Duluth headquarters to be built.

While AtWater still does all that, it’s morphing into more of a real estate investment company.

With a new business strategy, AtWater is now focusing on income-producing commercial properties. That includes buying properties with high occupancy and a stable cash flow, as well as less-stable properties with more vacancies and gotten at a discount.

The time was right for the shift, explained Forcier. Market values on commercial buildings still are low and just starting to climb. And since the early 2000s, construction of new office buildings has been down, as developers switched to building multifamily housing.

“There’s been a real lack of development going on in the Twin Cities,” Forcier said. “It’s shrunk office space. So it’s a good time for investment.”

While AtWater has purchased some Duluth property in the last couple of years, the suburbs of Minneapolis, which were hit hard by the recession, are particularly appealing. AtWater is finding good deals in the suburbs where it’s more of a buyers’ market than in downtown Minneapolis, Forcier said.

AtWater is betting on a growing demand for office space as the economy improves and real estate values cycle upward.

Skurla agrees with the strategy.

“It’s probably going to be a good investment for them,” he said. “Commercial properties are becoming hotter all over the world. And the Minnesota economy is growing steadily.”

Moreover, Skurla views AtWater’s investments as an encouraging sign.

“Putting that much money in, in that short of time, shows they’re very optimistic about the future of Minnesota commercial real estate,” he said. “They’re catching it at a lower price. As the Minnesota economy grows, values of buildings will grow, and they’ll probably be able to raise rents down the line to recapture their investment.

Money source

But where is AtWater getting all the money to buy these buildings?

According to Forcier, the purchases were made with private investment from Capstan Corp., which has sold some of its property in recent years.

Private investors also are involved in some of the building purchases.

 “A lot of them are local individuals or corporations,” Forcier said of the partners. “Capstan represents and invests on behalf of other owners. It’s part of our growth.”

Forcier isn’t ruling out buying more Twin Cities office buildings.

“We’re always looking for opportunistic investments in commercial real estate,” he said.

But with real estate generally going in seven- to 10-year cycles, the window of opportunity eventually will close. Market values will rise, more office buildings will be built and office space will become more available.

“There will be a time when it’s not the right time to buy,” Forcier said. “That’s when you start seeing cranes going up and office buildings being built. And that’s not too far off.

To manage its Twin Cities portfolio, AtWater has opened offices at two of its buildings — the Atrium Building in Bloomington and the Concord Executive Center in Brooklyn Center. Each will have a staff of three or four people by the end of the year. The other three buildings are being managed by Cushman & Wakefield/NorthMarq.