Minnesota Solar Energy Incentives
With more sun in our Minnesota day, it seems fitting that property owners are looking into the costs and benefits of turning to solar energy for providing their properties with power. In the last few years solar energy has seen considerable growth in Minnesota. By 2023, the state has a goal to have 10% of it’s power sourced through solar energy (1). Consequently, the important question is; what incentives are available to property owners to install solar panels?
Most notably, tax credits and rebates are one incentive that has been created for property owners who are establishing a solar energy panel system. Certainly, these benefits are an effort to grow the use of solar energy. Tax credits and rebates are available on the federal, state, and municipal level. The most notable of these is the Investment Tax Credit (ITC). This is a federal tax credit that applies to property owners installing a new solar energy system. It allows for the deduction of up to 26% of the installation cost from their taxes through the year 2022 (2). This, as well as the potential reduction in operating expenses of a property, adds up to making solar energy much more affordable for many owners.
Notably, the decreasing use of fossil fuels and the growing renewable energy industry is emphasized by this recent announcement; The U.S. renewable energy consumption surpassed coal consumption for the first time in 130 years (3). Accordingly, renewable energy such as solar will continue to grow in its efficiency as well as its affordability. Ultimately, to become a viable option for owners to increase the value of their property, attract new tenants, and reduce operating expenses.
To see what benefits are offered for new solar energy systems in Minnesota, go to: https://programs.dsireusa.org/system/program/mn/solar
Written By: Jack Buttenhoff
Minnesota Solar Energy Incentives
Unlocking the Value of Owner-Occupied Real Estate
Many companies prefer to own real estate that is critical to their business operations. Some privately held companies choose to have the owner of the business purchase the real estate used for their business and lease it back to their company for tax reasons and asset diversification. Often, they have owned this real estate for many years. Thus, it most likely has appreciated in value. Net leased real estate assets with long term leases in place are in high demand today, as investors look for reliable cash flow, tax shelter and a hedge against future inflation. Now may be the time to consider unlocking some of the capital that is tied up in real estate to take advantage of this sellers’ market.
We were recently asked to advise a client that was preparing to sell one of their businesses. They also wanted to sell the real estate that the business occupied. Our job was to figure out how to maximize these sale proceeds. Should they include the real estate in the business sale or sell it as a separate asset?
The buyer of the business was a strong publicly traded company. They were willing to enter into a ten-year lease for the property with options to extend beyond that. Paramount advised our client on what the real estate would be valued at with a long-term net lease in place as well as to what market rent should be and other important lease terms. In turn, our client was able to compare this valuation to what the business buyer was willing to pay for the real estate. We determined that our client would maximize his return by separating the business sale from the real estate sale. Ultimately, our client entered into a long-term net lease with the entity that purchased the business. Shortly after closing on the sale of the business, Paramount listed the net leased real estate For Sale. We quickly sold the property for over asking price.
Does a Sale Leaseback Make Sense for Your Business?
If your company is occupying real estate that it owns but you want to unlock some of the value in the real estate to reinvest back into the business or use for other purposes, today is a great time to consider entering into a sale leaseback. You can structure a long-term lease for the property under terms that fit your business requirements, and then free up your equity through an investment sale transaction. With today’s low interest rates, cap rates on good investment real estate are the lowest we have experienced in decades. This translates into a higher sale price. Most businesses can deploy the cash received from the sale of their real estate back into their business. Thus, making a higher return on this capital then they would have leaving it invested in their corporate real estate.
Please feel free to reach out to a Paramount real estate professional to see if a sale leaseback makes sense for you.
Written by: Fred Hedberg, SIOR
WHERE DID ALL OF THE WORKERS GO?
Where did all the workers go? Some people point to March 12th, 2020 as the date that American society recognized the then-unknown virus from China as potentially dangerous. On that date, the NCAA cancelled their annual “March Madness” tournament. This was effective in communicating the seriousness of the situation to the general public. In the following weeks and months, the global economy saw historic unemployment, government-mandated stay-at-home orders, and a level of financial panic not seen in over a decade. The labor market may never again return to its pre-Covid equilibrium, forcing society to adapt to the “New Economy”. According to the Saint Louis Federal Reserve (FRED), national seasonally-adjusted unemployment reached its cyclical peak in April at 14.8%.
As medical professionals began to put a plan into action, the world slowly adapted. With people falling back into a routine that resembled the American brand of consumerism, certain segments of the economy began reopening, and some even expanding. Unemployment has steadily fallen from its April peak to 6.3% in January 2021; still well above the February 2020 level of 3.5% (FRED). In the Institute for Supply Management’s January 2021 Manufacturing report, Timothy R. Fiore, CPSM, C.P.M notes:
“The January Manufacturing PMI® registered 58.7 percent, down 1.8 percentage points from the seasonally adjusted December reading of 60.5 percent. This figure indicates expansion in the overall economy for the eighth month in a row after contraction in March, April, and May.”
While unemployment rates have dropped, employers have been seeking additional workers. For reference, the Bureau of Labor Statistics stated that in January of 2020, seasonally-adjusted total non-farm, private payrolls expanded by 255,000 jobs. In November, 359,000 jobs went unfilled. December gave back a significant portion of November’s gain, but the three month average change remained positive at 239,000 jobs. Moving ahead to February of 2021, non-farm payrolls expanded by 379,000. Inflation fell to 6.2% the same period.
What does this mean?
The data indicated that employers are adding jobs at a faster rate than unemployment is decreasing. One hypothesis explaining this is that frictional unemployment will increase as an economy adapts to using new technology. Essentially, existing worker skills are mismatched with current employer needs. Workers with outdated skills may not be able to find comparable jobs and be forced to unemployment or less-specialized work. Another hypothesis is that low-skilled workers that have been temporarily unemployed have an incentive to stay unemployed, so long that the government extends benefits.
The aim of this article is not to challenge unemployment insurance or to suggest structural changes to the economy. It is to point out the state of the labor market in its current condition.
Breaking the Chain
As government-imposed shut-downs have helped accelerate the long-coming ecommerce boom, certain restrictions have made online shopping wait-times longer. These same restrictions have similarly affected business-to-business transactions, and the era of the global supply chain more generally.
The Cost of Restrictions
As consumers and businesses accelerate their purchasing to meet demand, the Port of Los Angeles is less equipped to handle the increase in volume. As of February 23rd, the Port of LA is seeing a year-over-year increase in import volume of 294.94% (The Signal – LA). Volume reached 169,602 Twenty-Foot Equivalent Units (TEUs) the week of February 21st. It is expected to reach 174,500 TEUs by the week of March 7th.
California state and municipal restrictions on the amount of workers in a given area at any one time have increased the amount of time it takes for a ship to be unloaded, its contents delivered to a warehouse, and subsequently sorted and reorganized for further distribution. Ships are forced to anchor at harbor as crews wait their turn to unload; incurring further costs and lengthening delays. According to the same report, eighteen container vessels were at anchor, with an average time at anchor of 7.8 days. There are fifteen additional ships expected to anchor between February 23rd and 27th.
Many of the goods that come into the country on the west coast go on to various hubs around the nation for the next leg of distribution. Dallas/Fort Worth is one of these major hubs. The recent inclement weather in this area has further complicated supply chains and distribution flow. Last week, Union Pacific shut down all intermodal gates impacted by the weather (SupplyChainDive). BNSF issued a notification to customers indicating extended delays throughout Texas and the Gulf region. Power outages left more than four million residents and thousands of businesses in the dark; grinding one of America’s most important logistic centers to a halt.
The uncooperative weather was unfortunate, but is not a sustainable problem for the logistics industry. On the other side, the global supply chain is delicate even under the best conditions, let alone when government imposes labor restrictions. The fragility of supply chains is an issue for business owners and strategists to solve for decades to come.
INDUSTRIAL MARKET UPDATE: YEAR END 2020
2020 was a challenging year to say the least. COVID-19 had a significant impact on the economy, everyone’s daily lives, and of course the commercial real estate industry. Unemployment has still not recovered from the impact of the pandemic. It remains over 3% higher than the previous year on a national level. At year-end, unemployment was 6.7%. Minnesota’s unemployment rate at year-end 2020 was 4.4%, up from 3.3% at year-end 2019.
Industrial Absorption Remains Strong
The Industrial real estate market demonstrated surprising strength after a significant pause during Q2 and Q3 of 2020. Net absorption of available industrial space for Q4 totaled a robust 1.24 million square feet and 2.48 million square feet (Multi & Single Tenant) for the entire year. In comparison, total net absorption for Q4 2019 was 728,962 square feet and a robust 3.186 million square feet for all of 2019. This shows there is a decreasing supply of industrial real estate in the current market.
Industrial Category Stats
In both 2019 and 2020, Warehouse Distribution space (buildings with 24’ clear height or higher) outperformed Flex/R&D and Office Warehouse net absorption; totaling more than both other categories combined. Net absorption for Warehouse Distribution space totaled 1.973 million square feet in 2020 and 1.769 million square feet in 2019. Clearly Warehouse Distribution has been the best performing industrial product type. Overall, the industrial vacancy rate Year End for 2020 stood at 4.9%. Warehouse Distribution space stood at 4.5% and Office Warehouse vacancy rates were 0.2% lower than Warehouse Distribution space. When accounting for the 3.68 million square feet of new speculative development currently under construction, most of which is Warehouse Distribution space, this additional square footage has little impact on vacancy rates.
The weakest portion of the industrial market continues to be the Flex/R&D (Office Showroom) product. COVID-19 has exacerbated an already weak 2019 performance. YTD Net Absorption for Flex/R&D was a -182,645 square feet and has the highest vacancy rate at 9.5%.
Factors Driving Demand
Warehouse Distribution product will continue to perform better than any other segment of the market in 2021. Demand is driven by a number of variables that appear will only increase the need for more and higher quality high bay space going forward. Tenants are willing to pay new construction rates to benefit from operational efficiencies of new construction, particularly for in-fill locations in urban areas. The demand from 3PL (Third Party Logistics) companies and Last Mile Home delivery companies will increase. This will be a direct result of more consumer purchases online. In addition, investor demand to acquire this product type is stronger than ever. Investors are driven by strong property-level fundamentals, relative liquidity, and a broadening of their appetite due to the global yield environment.
While COVID-19 has negatively impacted the market, this high demand and low supply in the industrial real estate market has resulted in property sales and lease rates to increase over the last year. We expect this trend to continue into and throughout 2021.
Written By: Phil Simonet, Principal | Industrial Sales & Leasing
Q4 2020 Industrial Market Update
OFFICE MARKET UPDATE: YEAR END 2020
Most everyone will agree that 2020 was an exhausting year. Challenges brought on by the pandemic, social unrest and a polarized political environment kept the mood just below tolerable. Working from home and state mandates have left streets empty, restaurants closed and frustratingly vaccinations are just not happening as expected. Not surprisingly, state unemployment numbers rose. Reaching 3.9% up from 2.7% at year-end 2019 and business pushed decision making out to the future.
Q4 office leasing data does not bring too many surprises as overall absorption for the quarter came in at a negative 203,552 across all property types in all submarkets. The only winner appears to be the Northwest submarket. It experienced 4th quarter positive absorption of nearly 300,000 square feet. Overall vacancy rates have increased by over a full percentage point year over year. They came in at 13% for all properties and 17.2% in multi-tenant properties, nearly 2% over year end 2019.
What about Rental Rates?
While vacancies are up and the market still struggles, rental rates have not changed. Landlords are likely willing to incentivize new deals with free rent and larger allowances but for now aren’t moving off their quoted rental rates. Overall quoted rental rates are averaging $24.81 per square foot gross, slightly higher than 2019.
Total sales volume for Q3 surpassed 1.4 million square feet. Low interest rates continue to drive sales but inventory is low and investors have few options readily available. Working from home continues and the expectation is that employees will start returning to the office late in 2021. In the meantime, landlords are working to make their properties cleaner with bi-polar ionization and touchless doors/elevators/restrooms. Rearranging office layouts to meet 6’ social distancing recommendations is the primary tool being utilized and we all hope vaccination levels ramp up and the local economy starts humming again.
Written By: Nancy Powell, Vice President | Office Sales & Leasing
THE ECONOMIC OUTLOOK FOR CRE INVESTMENTS WITH DR. MARK DOTZOUR
We are proud to present this special TCN Worldwide webinar featuring Dr. Mark Dotzour. He is a frequent participant at TCN conferences and one of the truly ‘entertaining economists’ to provide an economic outlook and forecast for TCN members as well as their clients, prospects, friends, and family.
Join TCN Worldwide and Dr. Mark Dotzour as he discusses:
The outlook for job growth in the US.
Will the recovery be quick or prolonged?
What is the outlook for inflation in 2021 and beyond?
The outlook for borrowing rates
What is the outlook for cap rates?
What is the outlook for investor demand for US commercial real estate?
SPECIAL GUEST SPEAKER:
Dr. Mark G. Dotzour (CRE Economist)
Former Chief Economist and Director of Research at Texas A & M University
Dr. Mark G. Dotzour is a real estate economist who served for 18 years as Chief Economist of the Real Estate Center at Texas A&M University in College Station. He has given more than 1,450 presentations to more than 250,000 people. He has written over 90 articles for magazines and journals.
Dr. Dotzour makes complex economic issues easily understandable. Above all, Mark’s goal is to provide his audience with a “tool kit” of useful information that will help them make good business decisions. Ultimately, helping their families, their clients, and their company.
His research findings have appeared in the Wall Street Journal, USA Today, Money Magazine and Business Week. Similarly, his clients include banks, private equity firms, real estate investment trusts, construction firms, engineering companies, wealth managers, private foundations, and commercial and residential brokerage firms. In addition, he has made presentations to local and national trade associations all over America.
Special thanks to TCN Worldwide for hosting this webinar.
Questions? Call Paramount Real Estate Corporation.
A CONVERSATION ABOUT CONSTRUCTION COSTS
Construction costs are going down due to the slower economy: True or False? Our clients are asking us this question. So we asked an expert, Jamey Flannery, Owner of Flannery Construction, to help us with an answer. Flannery Construction is a mid-sized, woman-owned construction company that works all over the metro area. They do ground-up construction of multi-family, industrial, and office. They also do tenant build-outs. Look for their signature building on I-94 just east of Allianz Field.
Q: Are construction costs going down?
A: I will say that as much as we would like it to be true, there is a lot of upward pressure on construction costs. We are seeing huge increases on lumber. That seems to have leveled off recently and even declined a little bit. However, we were up almost 100% from pre-COVID levels. We are seeing cost increases in PVC and a few other materials. That has putting a lot of pressure on contractors. While we are slower than we anticipated this year, we’re still fighting against really long lead times for materials. We’re also fighting against cost increases for materials. So the answer is “NO” construction costs have not declined.
Q: Is now the time for businesses to do that $1 million construction project they have been considering?
A: I think they should do the $1,000,000 construction project that they are planning to do. I think the only reason that the prices aren’t higher, is because contractors are absorbing cost increases.
Q: Is this in the form of reductions in fees and/or general conditions or just lower profits overall?
A: We are see lower profit margins overall.
Q: How are you doing with your supply of labor and is COVID affecting availability of labor?
A: COVID is keeping labor prices stable and we are seeing a lot of inquiries for jobs in the trades. We’re seeing a lot of hungry subcontractors right now and good pricing. They are essentially absorbing some of these cost increases. However, we’re also seeing a few subs that have a crew or two who are down with COVID, so planned work isn’t exactly staying on schedule.
Q: Are wages for labor increasing too or is that staying pretty much stable?
A: We are a union shop so we will have a labor increase in May, but I think that, generally speaking, wages are going down and it’s favoring the employer right now.
Q: If you had to give some advice to people who are looking at a construction project, what delivery method would you say is the best way for them to go about it?
A: It is entirely up to the owner, but what I think is the best delivery method is negotiated or design build. The reason for that is, if every team member really has a firm understanding of the intent behind the project, we’re going to make better decisions. If the contractor really understands the project well up front, they’re going to help the owner make very informed decisions. With the delays and with the cost increases, we are having to build our contracts a little bit differently. We might have to submit a letter of intent to some of our subcontractors before we sign a contract because of the long lead times.
Q: Do you have any recent examples of the long lead times?
A: We had a conversation with a subcontractor supplier today where we need Hardie plank siding panel delivered on January 7th. If we had placed that order one day later, we would be looking at a 30% cost increase to receive an order on a specific date. That is true through April because they are so backlogged. So, working with your contractor to understand what’s happening in the marketplace and what conversations need to happen before the contract is signed is important. That really does emphasize the need to have a general contractor partner with a negotiated project.
Q: Some of our clients get concerned that without a full-on multiple bid process, they won’t get the lowest price. What do you think about that?
A: There has been a fair amount of research on delivery methods and while the hard bid may have an initial lower cost, the total cost can creep up pretty quickly because of change orders. Having that group and team understanding of the project, leaves less room for change orders when we are delivering a turnkey project. In a hard bid scenario, if there is a mistake on the plans or an omission or an assumption, then we’re going to assume the lower number because we want the project. I’ve seen it many times where the hard bid is low and then the change orders start because there wasn’t complete understanding of the total project.
Q: What is hot right now in the marketplace in terms of construction projects?
A: Multifamily is still running hot. There’s still a hot market in Saint Paul, Minneapolis and in the surrounding suburbs. We’re not seeing very much in retail. We’re not seeing very much in hospitality right now, which understandably so. Industrial is a hot market as well.
Q: How are you seeing the approval processes in cities now that many of the city’s employees are working from home?
A: It is excruciating. It is taking longer now. This is an anecdote in the City of Minneapolis. While they are being as responsive as they can be while working from home, the process to upload plans is one page at a time. Everything is just taking longer because there’s not a lot of collaboration so the person who’s reviewing can say to the person next to them “hey, what do you do in this situation”? So there is less collaboration, and everyone is just a little burnt out.
Q: What’s your prediction for the future?
A: I am an optimist. I think that we were due for a market correction anyway. Unfortunately, it really is hitting a lot of people hard, and I’m not minimizing that on any level. I do think that this correction is taking place of a market downturn that had been anticipated for 2021. When there’s a widely available vaccine and it’s in place for at least a little bit, I think that we’re going to come back pretty strong. I look at Architectural Billings as my leading indicator. Contractors follow about six months to a year behind architects. They have been down since March, April, and May. The only positive indicator that they have is that new inquiries are up significantly as of September and October. Money is cheap right now and I think that we are going to come back strong. So, we’ll have a strong second half of 2021 going into 2022. I am looking at shoring up my project management staff so that we can be ready to take on the increased workload that I am anticipating.
Q: Thank you Jamie and where can our clients get in touch with you?
A: Thank you, John they can find us at Flanneryconstruction.com or stop in our building on I-94 by Allianz Field.
1375 St Anthony Ave | Saint Paul, MN 55104
Written By: John Young, CCIM | Vice President
ADOPTION OF NEW TECHNOLOGY
The top-rated business trend in 2020 is adoption of new technology. This is not new. Anyone who is running a business or making decisions about business growth has been clamoring to create efficiency through technology. In fact, over $4 trillion was spent by businesses world-wide on acquiring new technology, most of it for value creation.
One metric used by companies is sales per employee. By any measure, this metric is growing, undoubtedly due to new technology to create value. From 2018 to 2019 sales per employee in the manufacturing sector increased by over $200,000, which is a 12% increase. There are many new technologies that are driving this increase. One important advance is a sales-ready website. These websites are lead generations machines that are responsive and can be viewed on any device. They also enable direct contact with end customers who are becoming more involved in product design and delivery much earlier in the process.
In today’s marketplace, more detailed content and more online interaction between the customer and the manufacturer is the norm, and not the exception. Experts agree that employees in both large and small firms who have access to the latest technology will continue to outpace their relatively less sophisticated colleagues.
Written By: John Young, CCIM | Vice President
Q3 2020 INDUSTRIAL MARKET UPDATE
According to the Bureau of Labor Statistics (BLS), the unemployment rate for the Mpls-St Paul metropolitan statistical area (MSA) increased 500 basis points to 7.9% for August 2020 from 2.9% for August 2019. The unemployment rate for the US was 8.4% in August 2020 up from 3.7% last year. State of Minnesota unemployment rate was 7.4%. The Mpls-St Paul MSA saw a decrease in job growth. Also a decrease in industrial job growth in manufacturing dropping 11,200 during the same period.
The Mpls-St Paul industrial market consists of 261 msf in eight counties across the metro and posted over 682,000 sf of positive absorption for Q3 2020 while multi-tenant properties posted 152,000 sf positive absorption. The overall vacancy rate for the market stands at 4.9% and multi-tenant vacancy increased to 8.0% for Q3 2020. The average asking lease low rate was $5.97 and high rate was $9.57 NNN for Mpls-St Paul. To date, there are 19 construction projects throughout the market totaling 2.5 msf and 17 properties were delivered year-to-date with 2.1 msf.
At the close of Q3 2020, the market experienced over 2.5 msf of leasing activity in 180 transactions. ShopJimmy was the largest space leasing 413,000 sf in the Southeast market. The Southeast and Northeast markets vacancy rate being the tightest at 3.9% and 3.8% for all properties while the Southwest market topped at 6.6%. The Northeast market had two of the top five property spots in absorption with Target buying 399,000 sf and Tomas Commercial buying 140,000 sf property. The Northeast market experienced the largest vacancy of Modern Tool with 180,000 sf. Sixty three properties sold with over 2 msf for $124.8 million.
The Mpls-St Paul market consists of single and multi-tenant industrial buildings 20,000 sf or larger or part of a complex larger than 20,000 sf. The geographic area includes Anoka, Carver, Dakota, Hennepin, Ramsey, Scott, Washington and Wright counties. The tracked set does not include selfstorage facilities and non-conforming property types such as grain elevators or fuel storage facilities. All tracked properties are existing. Statistically, net absorption will be calculated based on occupancy change during the current quarter. Asking lease rates are based on an average asking rate and noted on a NNN basis.
Reach out to one of our Industrial Agents with questions:
Fred Hedberg, CCIM, SIOR, Principal
Phil Simonet, Principal
John Young, CCIM, Vice President
Joseph Schultz, Associate
Jack Buttenhoff, Associate
View Full Report: Q3 2020 MNCAR Industrial Market Report
Source: Minnesota Association of Realtors (MNCAR)