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"STRS Ohio has invested its teacher pension funds in real estate from Boston to Seattle"

The impact of STRS Ohio's commercial retail estate investments on St. Paul's Grand Avenue


 

Grand Avenue’s Pottery Barn to close in early 2024


By Frederick Melo, Pioneer Press Dec. 7, 2023


Pottery Barn, one of the largest retailers on St. Paul’s Grand Avenue, will close its doors for good by the end of January, leaving the Grand Place mall at Grand and Victoria Street devoid of retailers or public-facing tenants.


Employees of the national furniture and home goods store were recently informed of the pending closure, which they said store managers plan to make public by Friday. A call to the store at 870 Grand Ave. on Monday afternoon was referred to a manager, scheduled to be in on Tuesday.


Employees said the St. Paul location was the only Twin Cities Pottery Barn scheduled to close. It was also the only Pottery Barn in the east metro.


The mall, owned by the State Teachers Retirement System of Ohio — Columbus-based STRS Ohio — has steadily lost commercial tenants since the start of the pandemic, including an M Health Fairview clinic and national clothing chains J. Crew and Lululemon.


The departures have raised concerns among small-business advocates who note that rather than reduce rents and negotiate with homegrown mom-and-pop retailers, out-of-state building owners appear more likely to hold out for a longer-term tenant that can afford to pay higher lease rates, even if it means keeping a building vacant for years.


Lowering rents could also lower a building’s market value, hurting resale values and the overall value of an investor’s real estate portfolio.


On Monday, several members of the Grand Avenue Business Association said they had spoken with store employees who confirmed the closure. Some hoped the building would soon come up for sale, though there’s been no indication so far that it’s on the market.


The three-story Grand Place shops and parking ramp at the southwest corner of Grand and Victoria was bitterly opposed by neighbors when it was proposed in 2000, prompting a debate about its size and its reliance on national chain retailers in St. Paul’s tony, independent business district.


Grand Place, which changed its name from Victoria Plaza to escape negative publicity surrounding the project, opened a year later after months of debate and compromise. The brick-front building was designed to look like several urban storefronts and complemented the style of its neighbors rather than dwarfing them, as many had feared.


Pottery Barn was the first of Grand Place’s initial three street-level tenants to open its doors. Bound to Be Read, a full-service bookstore owned by Hubbard Broadcasting, and J. Crew followed as the other two tenants. The bookstore later closed.


Williams-Sonoma Inc. announced in August that chief design officer Monica Bhargava had been promoted to president of the San Francisco-based Pottery Barn brand. There are upward of 180 Pottery Barn stores in the U.S., as well as more than 45 Pottery Barn Kids shops selling children’s furniture and baby items.


In the west metro, Pottery Barn locations remain in Edina, Maple Grove and Minnetonka.



 

Prominent St. Paul corners - some with notable vacancies - are owned by an out-of-state pension fund


By Frederick Melo, Pioneer Press June 19, 2023


When management consultant Sherry Johnson co-chaired a neighborhood task force looking at all the vacant properties on St. Paul’s popular Grand Avenue business corridor, she was taken aback to discover how many spaces were owned by the same out-of-state pension fund — the State Teachers Retirement System of Ohio.


Unlike some other commercial owners willing to host seasonal vendors, pop-up shops and art collectives, the retirement system has kept some of the three-mile corridor’s largest retail areas empty rather than lower rents and negotiate with small, local businesses.


The Columbus, Ohio-based retirement system, known as STRS Ohio, owns the retail malls lining three corners of Grand Avenue and Victoria Street, home to such celebrated storefronts as the Bread and Chocolate restaurant and bakery, J.W. Hulme leather goods, Evereve clothing and Cafe Latte. But its mall at the intersection’s southwest corner runs for nearly half the block approaching Milton Street, and other than a sizable Pottery Barn furniture store anchoring the corner, it’s, by all appearances, vacant.

An M Health Fairview clinic relocated during the pandemic, and nothing has arrived to take its place. Other visible departures from the block since early 2020 include national clothing chains J. Crew and Lululemon.


“All those Lululemons and J. Crews are not coming back, and now we’re just stuck with all these empty husks of buildings,” Johnson said. “Personally, I’m just wondering if they’re waiting to sell them to a developer.”


A mix of retail spaces


STRS Ohio has invested its teacher pension funds in real estate from Boston to Seattle, but it appears to have a special interest in St. Paul’s Grand Avenue, where it owns a mix of retail spaces. To the delight of customers, some of the retirement fund’s St. Paul properties — like Highland Crossing on Ford Parkway and Victoria Crossing West on Grand — are bustling with small businesses.


And to the chagrin of St. Paul business and neighborhood advocates, some of its most prominent Grand Avenue retail malls have sat vacant or near-vacant for years.


Through a separate limited liability corporation, Milton Mall LLC, the pension fund maintains ownership of the retail center on the northeast corner of Grand and Milton, comprised in part by a shuttered Anthropologie clothing store that boarded its doors last November. A Park Dental clinic is still accessible from the parking lot off the back alley.


At a time when public pension funds across the nation are increasing their real estate investments to balance volatility in the tech sector and other risks, St. Paul has become an illustrative example of out-of-state control over neighborhood commercial hubs. STRS Ohio lost some $5 billion last year, and then even more money when Silicon Valley Bank collapsed.


Some observers see the many vacancies in its Grand Avenue portfolio as just another symptom of traditional retail’s national malaise in the era of online shopping, but neighborhood advocates like Johnson have noted there are alternatives.


In 2019, Edina-based Lunds and Byerlys purchased 791 Grand Ave. and adjoining properties with the intent of building a new grocery attached to housing. The plan stalled during the pandemic, so Lunds allowed the Grand Collective, a pop-up clothing store that drew inventory from 14 independent Twin Cities shops, to lease the former Ann Taylor/Restoration Hardware storefront.


The pop-up, which closed in 2022, lasted two years, ending only when storeowners got busy with their primary storefronts.


“I have nothing but good things to say about Lunds,” said Patric Richardson, a founder of the Grand Collective. “For me, that was a really great experience.”


‘They are remote’


Dan Marshall, who purchased a commercial building near Grand and Victoria in 2016, can name a number of locally-owned small businesses that no longer operate in the STRS Ohio properties, like the Lotus restaurant, Amore Coffee and Ten Thousand Villages jewelry and gift shop. He sees a pattern, and a lack of local accountability.


“The issue here is that they are a remote, institutional landlord making decisions in the interests of their portfolio of investments, not in the interests of the city or neighborhood,” said Marshall, proprietor of Mischief Toy Store. “There’s a long history of independent business getting pushed out of these buildings in favor of chain stores and health clinics. (But vacancies) make the avenue look blighted, and it doesn’t drive traffic.”


Speaking generally, Lisa Christianson, owner of Christianson & Company Commercial Real Estate in Bloomington, said there are a number of reasons why large landlords might prefer to keep a retail center vacant rather than lower rent.


“We get that question a lot — ‘Why don’t they just lease it to us for cheap?’ They may just be waiting for the right tenant, and they may need to get a certain face rate to justify the value of the building for their lenders or their investors,” Christianson said. “If they put a tenant in there at a low rent, that dramatically reduces the value of the property. If you’ve got investors in the property, you’ve got to make sure you achieve those returns you’ve promised your investors.”


She added: “They may have a strategy where they’re waiting to redevelop the property. It’s expensive and a lot of work to put a tenant in a space. There may be a tenant that moved out that is still paying rent, so it looks vacant to you and I, but they’re not going to let that tenant off the lease until they find a tenant that can pay as much or better.”


Then there’s the fact that commercial leases routinely run five to 10 years, which could block rather than help a future lease or building sale. Commercial “landlords are willing to wait for a higher rent offer because signing a lease involves tying their hands for a long period of time,” wrote researchers last month in a report for Harvard University’s Joint Center for Housing Studies.


Some see better days ahead


At Grand and Victoria, some foresee better days ahead.


Ari Parritz, a developer working with Reuter Walton on the Kenton House — 80 units of luxury housing above 12,000 square feet of retail at 695 Grand Ave., where the popular Dixie’s on Grand restaurant was once situated — said marketing a large commercial footprint is tough, given the national downturn of brick-and-mortar retailers. He’s found more promising leads breaking his retail space into smooth, smaller rectangles.


By fall, Parritz expects the longstanding Emmett’s Public House and Saji-Ya Sushi and Japanese Kitchen to reopen their doors in his space, to be joined shortly afterward by two new restaurants or retailers occupying 1,100 square feet and 2,500 square feet at ground level, respectively.


“Those are both substantially smaller than the vacant spaces at Victoria and Milton, and smaller typically means less expensive,” Parritz said. “That’s another way of saying accessible for more retailers that may not have a national brand or national footprint. If they’re only taking 1,100 square feet, the barrier to entry is less than 8,000 square feet.”


The four STRS Ohio retail malls on Grand Avenue are managed by Escom Properties, a Minneapolis-based firm that advertises its Grand Avenue tenants at AGrandExperience.com. Representatives of the firm and their leasing agents did not return calls. STRS Ohio spokesman Dan Minnich said the fund declined to comment.


The Highland Crossing retail center on the 2100 block of Ford Parkway is also managed by Escom Properties, and it’s mostly full, occupied by national chains like Chipotle, Visionworks and SportClips.


A $5 billion loss for STRS Ohio


Like STRS Ohio, major pension funds systems like the California Public Employees’ Retirement System, the California State Teachers’ Retirement System and the Alaska Retirement Management Board have increased their real estate holdings in recent years to offset other investment risks, including volatility in the tech industry.


On its website, STRS Ohio indicates it currently holds $8.9 billion in real estate investments, comprising 10% of its overall investment portfolio by value.


The Ohio Capital Journal reported in March that the retirement system paid out $10 million in bonuses last August — two months before actual losses of $5.3 billion came in for the prior year.


Executive director Bill Neville lost a confidence vote last February when the system’s board deadlocked 5-5. The slide continued the next month. When Silicon Valley Bank failed in March, STRS Ohio issued a statement saying it had invested $27 million with the bank, a massive sum but far less than one-tenth of 1% of the $90 billion that the pension system controls overall.


Still, those losses have drawn increased scrutiny of STRS Ohio’s decision to manage much of its investments in-house, rather than farming out the responsibility to large outside firms, a point raised by the Ohio Retired Teachers Association, a frequent critic of the pension system. Last December, however, the Ohio state auditor said the practice had actually saved substantial sums for the retirement system, which serves some 500,000 teachers.




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