IS IT 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, which, 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

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

Written by: MNCAR/Redi Comps
Economic Overview
According to the Bureau of Labor Statistics (BLS), the unemployment rate for 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
 

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

Written By: MNCAR/Redi Comps
Economic Overview
According to the Bureau of Labor Statistics (BLS), the unemployment rate for the 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
 

Commercial Real Estate Tip | September 2019

Q & A
Commercial Real Estate Questions Tenants often Ask Regarding Their Occupancy
Written by Bob Johnston | Vice President Sales & Leasing

QUESTION #1:  What if the Landlord is not finished building out my space by the time I want to move in?
ANSWER: If the Landlord is actually responsible for the completed work, much depends on how the lease is written and the commencement date defined. For example, a commencement date can be tied to the substantial completion of the space, so the lease will not commence until the Landlord completes the work. Sometimes, the date is even contingent upon occupancy and the commencement of business in the space. On the other hand, there might be a specific commencement date defined.  If the Landlord is late, the lease language will generally state that there is no culpability on the Landlord’s part, but the commencement date becomes the date on which the space is completed and the initial term extended from that date. In short, these issues are negotiable and dependent on each tenant’s situation.

QUESTION #2:  Toward the end of each calendar year, the Landlord sends us a note informing us of the new Common Area Maintenance (CAM) & Real Estate Tax estimate for the following year. However, we never get a breakdown of the actual expenses. Is that available?
ANSWER:  Most landlords will provide that information if requested. It always helps to have language in the lease that allows for a tenant’s review of the costs; and with larger tenants, audit rights are always helpful.

QUESTION #3:  What do I need to do to get the tenant improvement allowance provided by the Landlord?
ANSWER: Typically, for smaller tenants with smaller budgets, all that is required is a formal letter requesting Landlord reimbursement of the allowance and proof of completion accompanied by all subcontractor lien waivers. For larger jobs, sometimes a title company gets involved and administers “construction draws” and monitors the construction progress.

QUESTION #4:  Do I need to hire a disinterested third party architect to confirm the size of my space?
ANSWER: Typically not.  This can be warranted in certain circumstances. Individual spaces/bays are already pre-measured by the building’s architect and floor plans are drawn based on those measurements. Therefore, the space computation is generally accurate. RU factors can vary by building, and are often much higher in smaller buildings.  It helps to check the accuracy of the actual useable space and clarify the respective RU factor to calculate the rentable area (the number that determines the annual rent).

Get answers to all your commercial real estate questions.

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Commercial Real Estate Tip | May 2019

Successful Commercial Leasing=Understanding Your Rent
by Bob Johnston | Vice President Sales & Leasing

THE TERMINOLOGY OF RENT

Most commercial leases today are “net leases”, meaning that the tenant pays a “base rent” which is “net rent”, or separate from, the operating costs and real estate taxes for the property. The operating costs are then passed on to the tenant as a separate cost, equaling a total rent cost and what many then refer to as “gross rent.”
Even this varies, however, from property to property. For example, often times in retail and industrial properties, tenants pay for their use of electricity and gas as well as janitorial services. In addition, sometimes the tenant, at its expense, must contract for local trash pick-up. These separately contracted costs are not part of the ordinary operating expenses. On the other hand, office leases typically are “full service” leases. In other words, there are generally no extra charges, other than perhaps charges for extraordinary use of services such as air conditioning or cleaning, etc.
It is critical that a tenant understand the complete picture and know what the total rent will be. In addition, it is also critical that the tenant understand what expenses make up operating costs and what costs are reasonable and legitimate. It is obviously to the landlord’s advantage to get the tenant to pay as much of the total operating budget as possible. This is even more critical in mixed-use projects where landlords tend to shift maintenance costs for the residences to the office component. Thus, the office tenant contribution is actually more than what it should be. I once audited the landlord of a very large mixed-use project in Chicago and found over $100,000 wrongfully allocated to the tenant even though the lease prohibited their doing so.

WHAT SHOULD NOT BE INCLUDED IN RENT?
Here are some suggestions as to what to eliminate from the landlord’s menu. The list is obviously not exhaustive, but rather illustrative of some of the costs landlords attempt to pass on to tenants:

Leasing commissions, space planning expenses with architects/interior designers, or even attorney costs associated with a lease negotiation or existing tenant dispute
Costs associated with the construction of tenant improvements, either with new tenant relocations or existing tenant renovations and remodeling
Costs associated with the entity of landlord, particularly as it relates to partnership/ownership issues or the selling or refinancing the property
Many large landlords have affiliates or interests in affiliate companies, so it is important to ensure that the contracted vendor costs are no more than what an unrelated third party vendor might charge
Be careful about the expenses for salaries, benefits, etc. that go into “management fees.” Executive salaries, or any allocation of those salaries, should not be part of the operating costs for the building
Capital improvements are not, by accounting standards, expense items, although landlords can routinely pass on the amortized cost of the improvement as an operating expense
Make certain that in a retail environment, the tenant’s pro-rata share of operating expenses is calculated over the entire leasable area of the property rather than only on the space currently leased and occupied.

Proper due diligence and understanding of the components of a building’s operating budget are critical to a tenant’s successful occupancy, financial stability and long-term enjoyment of the space.

For the best in commercial real estate
service and solutions.

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Press Release | Powell Represents OffiCenters in Lease Renewal at North Loop

MINNEAPOLIS, MN.  Nancy Powell, Vice President at Paramount recently assisted our long-term client, OffiCenters in a lease renewal at their North Loop location in Minneapolis.  Lori, the founder and CEO of the locally held co-working and executive office sharing solutions corporation, is not daunted by the influx of co-working competitors, in fact she says bring it on!  For 35 years they have brought office sharing solutions to Minneapolis and St. Paul.
With 5 locations, OffiCenters offers nearly 100,000 square feet of office space solutions.  They focus on the needs of their customer, OffiCenters is not afraid to relocate to find the right space solution.  In fact in the past few years, Nancy has assisted them in relocating three of their centers.

Ownership Cycle of a Commercial Property

WEST BLOOMINGTON BUSINESS CENTER
6300 W Old Shakopee Rd, Bloomington, MN
Written by: Fred Hedberg

In 1997, Fred Hedberg, Principal of Paramount Real Estate Corporation was asked by a past client to determine the value and marketability of some excess land that was remaining after building a mini-storage facility on a site in Bloomington, Minnesota.  Fred provided a valuation and marketing plan for the land.  He also suggested that his client might want to consider developing an office-showroom or industrial building on the site.  The market for that type of product was very strong at that time. Fred suggested to his client that if this was of interest, he would like to co-develop and own the building with his client.

Forming a Partnership-The prospect of continuing to own the land and to not pay capital gains tax on a sale was appealing to Fred’s client.  It was beneficial having the opportunity to partner with a seasoned real estate professional who had a good understanding of the market and what kinds of buildings and spaces tenants were looking for at that time.  They agreed to move forward on a new development together.  They  began to work with an architect and contractor to lay out a building on the site that would meet current market demands for space and to meet the test of time.
Developing the Property-After a review of financial projections prepared by Fred, a partnership was formed to move forward with the project.  Construction drawings were completed, city approvals and financing was secured.  Krause Anderson was selected to act as the general contractor for the new 80,714 SF project called West Bloomington Business Center.
Completing the Project-Paramount Real Estate Corporation was hired to lease and manage the building for the partnership.  The shell building was completed in 1998 and it was fully leased and built out by the end of 1999. The building attracted well-known local and national tenants that leased the majority of the building as office space.In 1999 the building was recognized by NAIOP as a recipient of their Awards of Excellence for the Light Industrial-High Finish category. The building has performed well though the various real estate cycles that followed and has stood the test of time as different tenants with uses other than office have found it to be a desirable building and location for their businesses.
Selling the Building-After 20 years of ownership, Fred and his partner decided that it would be in their best interests to sell the building during the current business cycle for estate planning purposes and to maximize their return on the investment.  Fred found a local investor that was in need of a 1031 exchange property. West Bloomington Business Center fulfilled his exchange requirement and his desire to own a well performing, high quality asset.  The property was sold in August 2018 and the new owner hired Paramount Real Estate Corporation to continue to lease and manage the building.
Paramount Continues to Lease and Manage Property-Fred and his leasing and property management team are excited to be able to continue to work on this project in the future.   See detailed information about the space currently available at West Bloomington Business Center.

If you would like real estate investment advice,
please contact:
www.paramountre.com
(952) 854-8290

CoWorking Phenomenon

CoWorking Phenomenon
by a Twin Cities Industry Professional

The CoWorking industry has taken the world by storm. In 2005, there were only 3 verified CoWorking spaces in the entire world. And as of 2017, that number had skyrocketed to a staggering 15,000 and that number is slated to double by the end of 2018. These figures are a testament to the rise in digital workplaces and remote working.
I just came back from our Global Workspace Association conference in Austin, Texas and came away with a few interesting facts:
In July and August 2018, 306 new CoWorking centers were opened worldwide.  169 being in the United States.  The number of new CoWorking locations are estimated to grow to almost 1,000 in the U.S. by the end of 2018.  At the end of 2017, 44% of coworkers were female.  By the end of 2018 that number will grow to almost 50% of coworkers being female.  By the end of 2019, there will be approximately 1 million people coworking.
But CoWorking is not just for small businesses anymore.  Global companies are using flexible space solutions as alternatives to taking or building their own workspaces. They are turning to large CoWorking companies like WeWork to house entire divisions of a company for special projects or teams, and in some cases entire divisions of a company.  Studies providing workspace is expensive and can tie up capital.  CoWorking can reduce their liabilities and long-term commitments by using flex space providers to house their workforce.  Instead of CoWorking communities growing by one or two people at a time, large companies will place 40 or 50 people in a workspace and as many as hundreds of people at one time or over a short period of time.
These facts tell us that the workspace has changed dramatically.   Particularly since trends in entrepreneurship and the evolution of the home based business has changed not only how work is done but also where work is done.  In addition, technology has played a large part in the ability for workers to use the Internet to work anywhere they choose. CoWorking supports businesses by offering flexible workspace solutions, short term space commitments and the economies of sharing facilities and staff.  In short, flex space and CoWorking works!  Not just for small businesses but for every business.
“Life is short.  Work someplace awesome!”
My background as a CoWorking service business started in 1981.  I have seen the workspace evolve and change dramatically.  In our early days, we looked for usually “one guy” to take a permanent private office.  The offices looked very similar in that they had a basic desk, credenza, chair and a couple of side chairs.  That format worked for years. And then technology took the lead.  Computers and the internet allowed people to communicate at a different level.  Email changed correspondence norms and encouraged less paper and mail costs.  The pace of workspace became lightning fast, no more worrying about the fax machine or document delivery.  Our target clients are road warriors who carry their office wherever they go whether it is home, auto, hotel or designated workspace.
Technology changed the definition of work.  Today almost 90% of businesses created are home based.  And home can be an excellent place to work:  the dress code rocks, the commute is non-existent, and the economics for a small business make sense.  But many people found home is not ideal for those who find distractions a challenge.  The number one complaint of businesses that work from home is isolation.  There is just no interaction with like-minded professionals or coworkers hanging out at the coffee station or the water cooler.  That is where CoWorking hits a home run.
At OffiCenters we have conquered the isolation of entrepreneurial workers.  Our workspaces push beyond four walls and include over 1,200 members in our community.  We offer not just the space to work but options on collaboration and business challenges.  We have networking groups, educational seminars, community outreach and charitable events, and mostly opportunities to meet the five generations of members in our workspaces.  In my over 30-year career in workspace as a service, it has never been so exciting.
A recent survey of OffiCenters’ members (August 2018) showed 100% found our spaces conquered their isolation problems.  81% of members have made critical professional bounds within our community.  83% feel that joining a CoWorking community makes them more productive.  78% say they have increased their bottom line since joining OffiCenter. These are powerful numbers and we are proud to influence our community to success.   We really emphasize working within our own community and for members to buy from one another whenever possible.
Over the last 8 years we have completely remodeled our workspaces to include not just single private offices but more meeting and conference room choices, team spaces, collaborative workspaces and 60 seat open areas in all of our locations.  Our CoWorking spaces have a coffee shop type of environment only with a more professional feel and a lot better Wi-Fi connections.
OffiCenters has 7 locations in the Twin Cities area, which include:  Bloomington, Edina, Minnetonka, St. Louis Park, Woodbury and the Minneapolis North Loop.
If you or anyone you know would like to try CoWorking,
please call us at (612) 349-2700 for a free day pass.

Lori Spiess, Founder of OffiCenters
Lori Spiess is the Founder of OffiCenters and has provided workspace solutions to the Twin Cities since 1981.  She is an innovator; leader and motivator who help businesses do their best work. She was the first woman President of the Global Workspace Association (GWA).  Her company won Most Innovative Workspace 2014 and she made Minnesota Real Power 50 list in 2015.  Spiess, a recent cancer survivor, has a new motto: Life is short.  Work someplace awesome! 
You can view her location at https://officenters.com/.

 

MNCAR Retail Market Trends – Minneapolis-St. Paul (2018-Q4)

RETAIL MARKET TRENDS | Q4 2018 | Mpls-St. Paul
Economic Overview
According to the Bureau of Labor Statistics (BLS), the unemployment rate for the Mpls-St. Paul metropolitan statistical area (MSA) decreased 50 basis points from 2.5% in November 2017 to 2.0% in November 2018. The unemployment rate for the U.S. was at 3.8% in October 2018, up from 2.8% for the State of Minnesota.  The Mpls-St. Paul MSA saw an increase in retail job growth, leisure and hospitality growing by 3,600 during the same period.
Market Overview
The Mpls-St.Paul retail market, consisting of over 89 msf of space in seven counties across the metro posting an availability rate of 6.6% for Q4 2018.  The vacancy rate for the market stands at 5.9% to close out 2018.  The average asking lease rate for Mpls-St. Paul came in at $18.01 psf NNN. To date, there are over 34 construction projects throughout the market, totaling just over 768,000 sf.
Market Highlights
At the close of Q4 2018, the market experienced over 344,000 sf of leasing activity and the vacancy rate finished the year at 5.9% in total and the Southwest market posting the lowest rate at 4.5%. The top five lease transactions accounted for over 135,000 sf throughout Mpls-St. Paul with the largest leased space for Hobby Lobby leasing 61,000 sf.
READ ENTIRE REPORT: Q4 2018 – Retail Market Trends
Written By: MNCAR/Redi Comps

Is a Sublease Space Right For Your Company?

For firms whose growth is uncertain . . . or . . . perhaps a firm that is opening a new office or starting a business . . . subleasing space can be a sound alternative.  However, just as with any real estate transaction, caution is always in order.

Get to Know The Sublessor:
First, it helps to understand why the original tenant wants to sublease.  Is their business struggling?  Have they lost a number of key employees?  Did they overestimate their future growth?  Or perhaps they are reconfiguring their space into a more collaborative environment and find they don’t need all of the space.  What are their future plans?   When does the prime lease expire?  All of this is key since subtenants must comply with the terms of the prime lease.
Space Planning:
Second, most sublease space is leased in an “as is” condition, meaning that the prime tenant will provide no dollars for any changes to the space.  Therefore, review the language of the lease to see what restrictions might apply to any alterations.  Generally, the prime landlord’s consent and approval is mandatory.  Also, if you plan to make any significant changes, consult the prime landlord.  Changes that actually affect the configuration or general function of the space can cause problems in re-letting the space once you move out.
Have an Real Estate Professional Review the Lease:
Lastly, ensure that the terms of the sublease document are sound and complete and that you, as the subtenant, are protected in the event of some kind of default by the sub-landlord.

If we can offer any advice or assist in any way, please feel free to contact Paramount.  Proper preparation before moving forward is essential to any successful real estate transaction.
For the best in commercial real estate
service and solutions, call Paramount.
(952) 854-8290