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
ADOPTION OF NEW TECHNOLOGY
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)
Q3 2020: OFFICE 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. As well as a decrease in office job growth in professional, financial and information dropping 21,300 during the same period.
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.
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.
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)
WHY OPERATING EXPENSES VARY FROM PROPERTY TO PROPERTY?
Have you ever wondered why operating expenses vary from property to property? Energy consumption, service levels and service contracts can vary greatly so it is advisable to secure the details prior to lease execution.
Expenses May Vary
Paramount has been involved in several recent office lease transactions. Many, highlight the need for a close review of the property’s operating budget. Some “full service” leases may include daily cleaning, vacuuming, replacing light bulbs and cleaning your breakroom. And then others may not include these services at all or the services may be on a more limited basis.
Most property owners reserve the right to change rules and regulations and janitorial specs. It’s a good practice for your representative to take the time to request the budget and janitorial specifications. Once you have the detailed information you will be better able to compare properties. After settling on your most desirable property, a close review of the associated lease language is advisable. Although, this may uncover conflicts or missing details that might surprise you during your term. As an example, say your employees prefer to eat lunch in your office suite. As a result, this practice most likely makes it imperative that janitorial specifications would include daily trash service. No one wants to smell that reheated salmon the first time let alone the rest of the week!
Knowing the service level upfront will allow you the opportunity to verify the details are incorporated into the final lease. After all, operating expenses and real estate taxes can be 50% or more of your overall rent and you should only be paying for services you receive.
Need Real Estate Advice. Call Paramount.
TRUSTED. DEDICATED. EXPERIENCED.
Or reach out to one of our Trusted Agents:
Office Agents: Nancy Powell, Vice President | Jeffrey Swanson, Associate
Industrial Agents: Fred Hedberg, CCIM, SIOR, Principal | Phil Simonet, Principal | John Young, CCIM, Vice President | Joseph Schultz, Associate | Jack Buttenhoff, Associate
RELATIONSHIPS BUILT TO LAST
Paramount recently represented the Owner of 1000 West 94th Street in Bloomington. The building is approximately 5,000 square feet, with about one-third of an acre of fenced and paved outdoor storage. The client has worked with the Paramount Team for 20+ years. The relationship began with one transaction in the late 1980s, and has grown substantially since that first transaction. A mutual trust was developed during the first lease negotiation through open communication, honesty, and truly working in the client’s best interests. Over the last 20+ years, many more transactions have reinforced the trust that is the foundation of the relationship.
Too often commercial real estate services are commoditized. Excellent customer service is a lost art that few providers genuinely offer. Business owners generally have multiple projects underway at once. The ability to retain a trusted advisor to handle all real estate related tasks can free up an immense amount of time for busy decision makers. This allows them to focus on running the business. That is not to say that the business owner is uninvolved, on the contrary; constant communication between the client and the advisor is the most efficient way to build trust and create a successful conclusion to a project.
Paramount prides itself on its customer service. The team of Paramount professionals have built a brand with a reputation that Paramount has the knowledge, integrity, expertise, and communication skills to not only satisfy their clients, but go beyond to deliver extraordinary results. Paramount works hard for our clients, large and small, and seeks to obtain relationships built to last.
Written by: Joseph Schultz, East Team Associate
SUBLEASING IN TODAY’S MARKETPLACE
Subleasing in today’s market is commonplace. There are a variety of reasons why firms sublease their excess space. However, for those who intend to sublease, some caution is appropriate.
Make sure to check on the credit and payment history of the firm subleasing the space, particularly if they will pay any part of the gross rent due and payable to the Prime Landlord.
Carefully read and understand the tenant obligations under the Prime Lease. This is often an attached exhibit to the sublease document. The Subtenant’s obligation is to comply with the terms of the Prime Lease.
Make sure to receive the Prime Landlord’s formal approval, in writing. Sometimes this is as simple as a signed consent note on the signature page of the sublease document. On the other hand, the consent form can be several pages. If the Prime Landlord’s consent in the Prime Lease is something other than “reasonable,” make sure to understand what the “other” stipulations are.
If modifications are made to the space, understand the obligations in respect to the lease. Removing modifications may be a requirement upon termination of the sublease.
Make sure the life safety and exiting requirements meet local codes. Often times, a space carved from a larger space does not meet the proper exiting requirements, which may mean extra costs.https://paramountre.com/agent/phil-simonet/
For more information on subleasing space, reach out to our experts:
Phil Simonet, Principal | John Young, CCIM, Vice President | Nancy Powell, Vice President | Jeffrey Swanson, Associate | Joseph Schultz, Associate | Jack Buttenhoff, Associate
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.
Written by: Joseph Schultz, East Team Associate
WHAT IS YOUR RENT TO REVENUE RATIO?
One financial metric that many business owners are unfamiliar with is the industry rent-to-revenue ratio (I-RRR). The math is simple; rent paid divided by total revenue from operations. Naturally, some industries will pay a higher percentage of their revenue in rent; a retail shop will surely pay a different percentage of revenue to rent compared to a small law firm.
So what is your I-RRR? With data collected across the entire nation, manufacturers, on average, paid 1.78% of their total revenue from operations toward rent. In 2017, they paid 1.87%; 2018 they paid 1.77%; and in 2019, they paid 1.69%
The amount of rent a business must pay involves many factors. Location, site access, building quality, and, most importantly, market conditions are all factors. A business in New York City will certainly pay more in rent while a business in rural Minnesota may pay less. The formula is simple, but the underlying factors can be quite complicated. Many companies believe their I-RRR should be much lower during this economic slowdown. However, the dramatic drop in rents that occurred in 2008-2009 has not happened…yet. It is possible that large-scale business closures create urgency on behalf of landlords to make low cost deals, but it is not happening now. Stay tuned for more market information as we near the end of 2021.
Source of Data: Bizminer.com
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.
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
MID-YEAR 2020 OFFICE MARKET UPDATE
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