Q1 2021 Office Market Update
The office market continues to struggle reflecting the negative impact of the pandemic on overall leasing activity and occupancy levels. Even with loosening restrictions, working from home is expected to continue for many. As leases expire, the market anticipates that businesses will dial down their footprint and flexible office spaces will become the norm.
A major change is happening in the way many corporations are providing space to their employees, a variety of furniture options provide flexibility to work as needed, many not being assigned a specific space to an individual. Rather, depending on the type of work required on any given day, staff can choose from a variety of options that may include:
typical work stations
small “focus” rooms
or many other furniture based solutions. Combined with a continued work from home option, employees will have options. Employers have witnessed good levels of productivity during this work from home experience and that option will likely continue. The question many have, is how do we create and drive a desired corporate culture when much of the staff is not physically present on a daily basis. How to train and develop new hires remains a hot topic.
Unemployment increased slightly in February 2021 from January 2021 by .01% to 4.4%. The Year over Year increase of 1.3% was not surprising taking into account government restrictions on travel/hospitality and entertainment.
The overall office market experienced (963,593) square feet of negative absorption (space given back ending Q1 with a total market vacancy rate of 13.8%. Focusing on multi-tenant properties only, the overall vacancy rate was 18.2%, more than 5 points up from year end 2020. St Paul CBD, Northeast and Southwest submarkets were nearly equal in leasing activity for the quarter at 180,000 SF each. Overall quoted gross rental rates are averaging $25.02/PSF.
Total sales volume for Q1 was nearly 4 million square feet. With investors snapping up property quickly. Low interest rates keep interest levels high but low inventory continues to limit options.
Commute times are increasing as roads start to resemble pre pandemic levels. It is not clear when mass transit usage will return as the risk of exposure continues and mask requirements vary. Many are venturing out and at least for now, it seems that many are ready to put the last year behind them and look for ways to feel some sense of normalcy.
Written by: Nancy Powell, Vice President | Office Sales and Leasing
Q1 2021 INDUSTRIAL MARKET UPDATE
It’s no secret to anyone that COVID-19 had a significant impact on commercial real estate in 2020. It will continue to influence this asset class well into 2021. The impact was both good and bad, depending on what segment of the market one looks at. Clearly the retail and office markets suffered significantly with negative absorption, lack of activity and increasing vacancy rates. Industrial real estate, on the other hand experienced a 60-90 day pause. Then came roaring back during the end of the Q3 and all of the Q4. Q1 2021 continues the robust market activity from Q4 with no ending in sight.
Q1 2021 experienced net absorption of 1.26 million square feet and was led by high-bay warehouse distribution space which totaled net absorption alone of 825,591 square feet. Office warehouse was a distance second with 337,333 square feet of net absorption. Flex/R&D, as usual was the weakest segment of the industrial market with net absorption of 101,911 square feet. The aggregate market vacancy rate at the end of Q1 was a low 4.5%. In comparison, Q1 2020 net absorption was a weak 223,024 square feet however the vacancy rate was only 4.7%. While 2020 ended on a strong note with 1.40 million square feet of net absorption the previous three quarters of 2020 totaled an additional 1.20 million square feet. That was the result of a weak Q1 (223,024 SF) and thereafter the pause caused by Covid-19 (198,000 SF Q2-2020 and 780,000 SF Q3-2020).
Two observations from the past year:
Even with Covid-19, the industrial market has demonstrated remarkable stability. 2021 appears to be well-positioned for another stellar year of activity and corresponding statistics given the low vacancy rates, strong net absorption (1.00 million more square feet more than Q1 2020.)
Sales activity and corresponding values have increased throughout the year. Low interest rates, a lack of available quality product and many well qualified buyers (users) have produced high industrial values. These values are approaching $100.00 psf on well located, functional properties.
Demand for goods and services will likely continue to increase during the balance of 2021. As long as unemployment rates continue to decline and consumer confidence remains or increases, consumption will drive the recovery. The positive economic impact of mass vaccinations combined with the stimulus checks (disposable income) and higher savings rates should provide strong economic growth. Therefore, more demand for industrial space. Last Mile Home delivery (home delivery of internet ordered goods) has been one of the largest beneficiaries of changing consumer habits. It is likely to remain, if not increase significantly in the future. Urban locations will see new demand for distribution space AND users/occupiers will be willing to pay the high net rates required for well-located warehouse/distribution space.
Q1 2021 Industrial Market Update
Written By: Phil Simonet, Principal
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.
Sources: http://signal.portoptimizer.com/ https://www.portoflosangeles.org/business/supply-chain/port-optimizer%e2%84%a2 https://www.supplychaindive.com/news/rail-intermodal-winter-weather-disrupts-western-fedex-ups-snow-ice/595119/
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.
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.
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
UNDERUTILIZED OFFICE SPACES
The office market holds on while companies extend work from home options into 2021. While the expectation stays the same that amenities will continue to drive demand, those amenities have gone nearly unused during Q2 2020. It is anticipated that in upcoming months, those underutilized spaces will help alleviate some congestion as workers return and a relief valve is needed for the more heavily occupied tenant spaces. For now, every other chair is literally turned on end. Parking ramps and common area cafés remain empty and there isn’t a waiting line in the elevator lobby. Certainly, leased office spaces are currently underutilized. Because of this, a reduction in operating costs due to lower utility and cleaning costs could be forthcoming.
POSITIVE ABSORPTION & LOW INVENTORY
The above narrative however, is not reflective in the Q2 data as businesses, bound by leases, utilize PPP programs to keep productivity up. Unemployment surged in May 2020 to 10.4% from 2.6% in May 2019. Even with that bad news, the overall office market experienced 664,000 square feet of positive absorption ending Q2 with a total market vacancy rate of 12%. Focusing on multi-tenant properties only, the overall vacancy rate hovers at 15.7%, 0.3% up from year end 2019. The clear winner continues to be the Northwest submarket with an overall multi-tenant vacancy rate of 9.5% with overall quoted gross rental rates averaging $21.95/SF. The Northwest market is a sharp contrast to the 20% vacancy rate experienced in St Paul CBD. These two markets show quoted gross rates that are nearly equal at $21.98/SF.
Total sales volume for Q2 surpassed 1.3 million square feet. Low interest rates continue to drive sales but inventory is low and investors have few options readily available.
Returning to the office remains unknown to many employees. Much rides on finding a vaccine. Mass transit and social distancing don’t mix well and parking lots have disappeared in the downtowns. Winter is calling, so keep wearing your mask and together we will ride this out.
Written by: Nancy Powell, Vice President
According to the Bureau of Labor Statistics (BLS), the unemployment rate for the Mpls-St Paul metropolitan statistical area (MSA) decreased 30 basis points to 3.1% for February 2020 from 3.4% for February 2019. The unemployment rate for the US was 3.5% in February 2020 down from 3.8% last year. State of Minnesota unemployment rate was 3.1%. The Mpls-St Paul MSA saw an increase in job growth but a decrease in office job growth in professional, financial and information dropping 1,200 during the same period.
The Mpls-St Paul office market, consisting of over 125 msf of space in seven counties across the metro topping 133,000 sf negative absorption for Q1 2020. The vacancy rate for the market stands at 12.0% for all properties. Multi- tenant properties posted 15.6% vacancy with over 48,800 sf positive absorption. The average asking lease rate for Mpls-St Paul came in at $24.59 psf FSG. During Q1 2020 there were 22 construction projects throughout the market totaling just shy of 2.9.
During the Q1 2020 the market experienced over 1.2 msf of leasing activity in 283 transactions. Class A properties vacancy rate started the year at 9.0% for all properties and 13.1% for multi-tenant properties. For multi-tenant properties the Northwest market posted the lowest vacancy rate at 9.7%, Mpls CBD vacancy was 16.2%, St Paul CBD was 20.5% and suburban markets was 14.4%. Mpls CBD Core market posted the most positive absorption of 141,000 sf with Merrill Corp lease of 78,000 sf topping the list. Southwest market posted the largest negative absorption of 182,000 sf for all property types primarily due to Comcast vacating 108,000 sf and Cliqstudios vacating 104,000 sf in a single tenant properties.
Employment: up 1,969,253
Area Unemployment: down 3.1
U.S. Unemployment: down 3.5
Office Jobs: down 516,60
Total Inventory: 126,158,494 sf
Asking Rate: $24.59
New Construction: 2,895,944 sf
According to the Bureau of Labor Statistics (BLS), the unemployment rate for the Mpls-St Paul metropolitan statistical area (MSA) decreased 30 basis points. This is 3.1% for February 2020 which is down from 3.4% for February 2019. The unemployment rate for the US was 3.5% in February 2020 down from 3.8% last year. State of Minnesota unemployment rate was 3.1%. The Mpls-St Paul MSA saw an increase in job growth but a decrease in industrial jobs in manufacturing dropping 400 during the same period.
The Mpls-St Paul industrial market consists of 258 msf in eight counties across the metro and posted over 223,000 sf of positive absorption for Q1 2020 while 184,000 sf positive absorption for multi-tenant properties. The overall vacancy rate for the market stands at 4.7% and multi-tenant vacancy was 7.4% for Q1 2020. The average asking lease low rate was $5.81 and high rate was $9.35 NNN for Mpls- St Paul. To date, there are 23 construction projects throughout the market totaling just under 3.7 msf and 5 properties were delivered this quarter with 575,902 sf.
At the close of Q1 2020, the market experienced over 2.2 msf of leasing activity in 194 transactions with AbelConn leasing the largest space of 110,329 sf in the Northwest market. The Southeast market vacancy rate being the tightest at 4.1% for all properties while the Northwest market topped at 6%. The Northeast market had four of the top five property spots in absorption with Bluvera leasing 93,000 sf, Hajoca leasing 75,845 sf and Lindenmeyr Munrow leasing 60,102 sf. The Northwest market experienced the largest vacancy of Honeywell with 250,000 sf. The Southwest market held the next two spots with Sams Club vacating 180,000 sf and Quad Graphics/ American Color vacating 160,000 sf.
Total Inventory: 258,482,636 sf
Total # of Bldgs: 3,004
Asking Rate Low: $5.81 NNN
Asking Rate High: $9.35 NNN
Under Construction: 3,728,557 sf