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Industry Trends

THE ECONOMIC OUTLOOK FOR CRE INVESTMENTS

THE ECONOMIC OUTLOOK FOR CRE INVESTMENTS WITH DR. MARK DOTZOUR

DESCRIPTION:
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 Image

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
(651) 225-1105
flanneryconstruction.com
 Written By: John Young, CCIM | Vice President

ADOPTION OF NEW TECHNOLOGY

Adoption of New Technology

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
Source: Bizminor

Q3 2020 INDUSTRIAL MARKET UPDATE

Q3 2020 Industrial Market Update

Q3 2020 INDUSTRIAL MARKET UPDATE
Economic Overview
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.
Market Overview
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.
Market Highlights
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.
Methodology
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)

Q3 2020: OFFICE MARKET UPDATE

Q3 2020: OFFICE MARKET UPDATE
         
Economic Overview
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.  As well as a decrease in office job growth in professional, financial and information dropping 21,300 during the same period.
Market Overview
The Mpls-St Paul office market, consisting of over 128 msf of space in seven counties across the metro topping 95,000 sf negative absorption for Q3 2020.  The vacancy rate for the market stands at 12.5% for all properties.  Multi-tenant properties posted 16.4% vacancy with over 64,000 sf negative absorption.  The average asking lease rate for Mpls-St Paul came in at $25.02 psf FSG.  During Q3 2020 there were 9 construction projects throughout the market totaling just over 1.3 msf.
Market Highlights
During the Q3 2020 the market experienced over 1.1 msf of leasing activity in 251 transactions. Class A properties vacancy rate dropped for all properties this quarter to 10.3% compared to 8.8%.  It also dropped to 15% for multi-tenant properties compared to 12.7% Q2 2020.  For multi-tenant properties the Northwest market posted the lowest vacancy rate at 10.6%, Mpls CBD vacancy was 18.7%, St Paul CBD was 18.4% and suburban markets was 14.6%.  Southwest market posted the most positive absorption of 137,000 sf with The Nerdery leasing 60,000 sf and new delivery of Bridgewater Corp.  The West market posted the largest negative absorption of 125,000 sf for all property types led by Dominium space available for lease with 53,000 sf.
Methodology
The Mpls-St Paul market consists of single and multi-tenant office 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 and Washington counties.  The tracked set does not include medical or government properties.  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 FSG terms with Net type leases grossed up.
View Full Report: Q3 2020 MNCAR Office Market Report
Source: Minnesota Association of Realtors (MNCAR)

INVENTORY STORAGE? Proceed with caution.

INVENTORY STORAGE? Proceed with caution.
Since 2017, days of inventory have increased for manufacturing firms nationwide, which means inventory storage has also increased.  Days of Inventory in 2019 hit 59, up from 53 in 2018, and 51 in 2017.  Mathematically, a decrease in the cost of sales could be causing this.  COGS have actually increased slightly from 75.80% of revenue in 2017 to 75.98% in 2019.  This indicates that firms have an increasing amount of inventory.  Assuming this is not an over-production issue, firms are not selling as much as years prior.
This could be interpreted as a sign of economic slowdown, even before the Covid-19 storm made landfall.  The increase in inventory may lead some businesses to think that they need additional space, which they may have a legitimate need for, but if the underlying reason is because of a weaker economic environment, the right course of action for the business to take might not be committing to a new long-term lease.  Companies that absolutely need to move product offsite may want to explore third-party warehousing as an option.  It is not as cost-effective as leasing traditional warehouse space on a per square foot basis, but allows the end-user the flexibility to change on a month-to-month time horizon.
The global health crisis has further complicated the situation.  Some manufacturers now cannot keep enough stock to satisfy their customer’s needs.  This may temporarily reduce the need for additional storage, even though it would be financially feasible.  As with most circumstances, each should be evaluated on a case-by-case basis.
Source: Bizminer.com
Written by: Joseph Schultz, East Team Associate

MID-YEAR 2020 INDUSTRIAL MARKET UPDATE

Industrial Market Update

MID-YEAR 2020 INDUSTRIAL MARKET UPDATE

Net Absorption & Vacancy Rates
Statistically, Q2 2020 is showing the effects of COVID-19 on industrial leasing activity and the industrial market.  Net absorption of vacant space during Q2 2020 was only 107,345 SF compared to 829,298 SF for Q2 2019.  YTD net absorption for 2020 totals 330,369 SF compared to 1,587,669 SF in 2019. 
The difference in the net absorption numbers (SF) between 2019 and 2020 is significant.  However, the industrial market remains healthy as demonstrated by the overall industrial vacancy rate of 5.0% through the Q2 2019 and 4.8% through Q2 2020. More specifically, YTD industrial vacancy rates reflect the continued sound condition of the market by product type: 

What is Influencing this Market Condition?
Two characteristics of the current market have significantly influenced the ongoing strong conditions of the industrial market: 1) Vacancy rates were at historical lows prior to the introduction of COVID-19 and, 2) Delivery of new industrial product to the market year-over-year has moderated.  YTD Q2 2019 deliveries of new industrial product totaled 1,853,203 SF.  While Q2 2020 new deliveries of industrial product totaled only 906,571 SF.  The combination of less new development coming on line and limited negative absorption has enabled vacancy rates to remain low.  Therefore, the overall market is in a state of good health. 
Different Opinions
Current expectations between landlords and tenants do seem to significantly differ.  Tenants believe the industrial market has weakened and landlords are still very bullish on the market.  A major reason for this difference in perception of the market has been the media’s reporting on the commercial real estate market.  Retail and office space have been significantly impacted by COVID-19, so far in 2020.  COVID-19 has had a very limited impact on new industrial lease terms and conditions, at least through Q2 2020.  Limited net free rent, and tenant improvement packages, combined with strong net rates seems to be the story of the day for most industrial properties.  The one exception to these healthy characteristics is office/flex/showroom product.  Office/flex/showroom product still requires net free rent and significant improvement dollars generally to consume a new lease. 
Hottest Industrial Market Segment
One of the brightest spots in the industrial market is User/Owner building sales.  The limited supply of functional industrial properties currently available For Sale, combined with the low interest rate environment for debt, has pushed User/Owner building values to all time highs.  Specifically, well-located properties receive multiple offers in many instances. 
What is to Come
Finally, finding a vaccine that will make the current pandemic a thing of the past will remove much of the uncertainty existing today in the economy and the commercial/industrial real estate market.  If the pandemic continues on into next year, the statistics and resulting story being told may be much different than it is today. 
Written by: Phil Simonet, Principal

IS IT THE “AMAZON EFFECT”???

The Amazon Effect

The Twin Cities industrial real estate market is HOT!
Is it the “Amazon Effect”?

Amazon’s 24-hour delivery promise requires them to lease multiple, dispersed, and well-located distribution centers. This, in turn, is driving up building values and rents all over the country.  Case in point, two recent owner/user building sales. First, a 31,000 square foot building in Mendota Heights sold for $86.69 per square foot, and second, a 63,000 square foot building sold for $88.91 per square foot. Just a few short years ago, these would have been sold for $70.00-$75.00 per square foot. Winning the lottery would be great, but it seems like owning a 10,000 to 60,000 square foot industrial building anywhere in the Twin Cities (especially in the 494/694 loop) is the next best thing.
Funny thing happens when building values go up…rents go up, too. Multi-tenant landlords throughout the City are pushing up rates by $0.25-$0.45 per square foot and, for renewals, they are not accepting rents below the last lease rate in effect for the lease.
All of these factors are now fueling a resurgence of sale/lease backs. Recently, two sale/lease back transactions had sale prices 20% over the normal market price with seller’s signing ten-year leases. This put cash in the seller’s pocket to fuel business growth and provided much needed investments to Opportunity Zone or 1031 exchange investors. “Amazon Effect” or not, building values are climbing with no end in sight…for now.
~Written by John Young, CCIM | Vice President

Contact Paramount for a Building Valuation,
Lease Review or Market Update
(952) 854-8290

Industrial Market Trends – MNCAR | Q2 2019 | Minneapolis-St. Paul

Industrial Market Trends – MNCAR | Q2 2019 | Minneapolis-St. Paul
Economic Overview
According to the Bureau of Labor Statistics (BLS), the unemployment rate for industrial market in the Mpls-St. Paul metropolitan statistical area (MSA) increased 40 basis points from 2.7% for May 2019 from 2.3% for May 2018.  The unemployment rate for the U.S. was at 3.6% in May 2019, down from 3.8% Y-o-Y for the US.  The Mpls-St. Paul MSA saw an increase in industrial job growth in manufacturing increasing 1,200 during the same period.
Market Overview
The Mpls-St.Paul industrial market consisting of 244M SF in eight counties across the metro posted over 829,000 SF of positive absorption for Q2 201\98.  The overall vacancy rate for the market stands at 5.0% and multi-tenant vacancy was 8.0% for Q2 2019.  The average asking lease low rate was $5.67 and high rate was $9.22 NNN for Mpls-St. Paul.  To date, there are 12 construction projects throughout the market totaling over 2.4M SF and 1.8M SF was delivered year to date.
Market Highlights
At the close of Q2 2019, the market experiences over 1.6M SF of leasing activity.  The vacancy rate finished the year at 5.0% in total with the Southeast and West markets being the tightest at 4.0% for all properties.  Illume held the top spot in absorption with 277,000 SF in the Northwest market.  The Northwest market is showing the highest vacancy rate at 6.1% for all properties while Northeast is highest for multi-tenant properties at 9.4%.
READ ENTIRE REPORT: Q2-19_Mpls-St_Paul_Industrial_Market_Report
Written by: MNCAR/Redi Comps
 

Office Market Trends – MNCAR | Q2-2019 | Minneapolis-St. Paul

Office Market Trends – MNCAR | Q2-2019 | Minneapolis-St. Paul
Economic Overview
According to the Bureau of Labor Statistics (BLS), the unemployment rate for the office market in Mpls-St. Paul metropolitan statistical area (MSA) increased 40 basis points from 2.7% in May 2019 to 2.3% in May 2018. The unemployment rate for the U.S. was at 3.6% in May 2019, down from 3.8% for the Y-o-Y for the US.  The Mpls-St. Paul MSA saw a decrease in office job growth, professional, financial and information increased by 1,200 during the same period.

Market Overview
The Mpls-St.Paul office market, consisting of over 127M SF of space in seven counties across the metro posting 131,600 SF positive absorption for Q2 2019.  The vacancy rate for the market stands at 11.3% for all properties for Q2 2019.  Total year-to-date absorption is 256,750 SF.  Multi-tenant properties posted 14.9% with 175,000 SF positive absorption .  The average asking lease rate for Mpls-St. Paul came in at $24.30 PSF FSG. To date, there are 15 construction projects throughout the market totaling over 2.7M SF.
Market Highlights
During the second quarter 2019 the market experienced over 1.1M SF of leasing activity and the vacancy rate finished the quarter at 11.3% in total. Class A properties ended the year at 8.6% for all properties and 12.7% for multi-tenant properties.  The West market posted the lowest vacancy rate at 11.3% for multi-tenant properties.  For the second quarter the West Market carried the market with the most positive absorption of 63,000 SF.  St Paul CBD posted the largest negative absorption of 90,000 SF.
READ ENTIRE REPORT: Q2_19_Mpls-St_Paul_Office_Market_Report
Written By: MNCAR/Redi Comps