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Commercial Real Estate

Q1 2021 Office Market Update

Q1-2021 Office Market Update - Post Heading Image

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.
Corporate Culture
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:

benching
typical work stations
conference areas
collaborative areas
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.
Rate Comparison
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

Q1-2021 Industrial Market Update - Post Heading Image

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

HOT TOPICS IN COMMERCIAL LENDING

Commercial Lending Image

HOT TOPICS IN COMMERCIAL LENDING
Julie Novak, Senior VP at BankCherokee, and John Young, VP Paramount Real Estate, recently talked about many of the hot topics in commercial lending. See below to read more about how banks are working with clients during Covid, the future of interest rates, underwriting standards and more.
Interview:
John: “Tell us about yourself and BankCherokee.”
Julie: “I’m Julie Novak and I am a Senior Vice President with BankCherokee. I’ve been here going on eight years and I’ve always worked in community banking by choice. I just really feel strongly about community banks and being able to develop relationships and work closely in those communities where we live and work. Bank Cherokee is a 100-year-old family-owned, woman-led banking institution and is the oldest family-owned bank in the metro area. Our President and CEO, Heidi Gesell, has led the bank since 1996. Our goal is to help small and mid-range businesses with all their banking needs. We’re a preferred SBA lender, and we do a lot of commercial and industrial lending as well as real estate lending”
John “How many locations do you have?”
Julie: “We have currently four locations around the metro area.”
John: “How has the last year affected your clients?”
Julie: “I have been in banking for a long time, and in 2020 with the pandemic and PPP loans, it has never been a more challenging or rewarding time to be a banker. If you’re a liquor store, then it has been like Christmas every day, but a lot of other businesses have not been nearly as fortunate. Despite all of the challenges of the last year, we see a lot of opportunity ahead and I think business owners, who are entrepreneurs by nature, they’re always going to be optimistic and very resourceful. Technology is playing a huge role in business success and we see our clients investing in technology to make them more efficient. Certain aspects of business operations will not go back to the way they were and that’s okay. I really think businesses have learned to pivot and some changes they’ve had to make will probably end up being a permanent change going forward.
John: “There is a lot of talk about interest rates increasing, what do you think?”
Julie: “We’re of the opinion based on what we see that rates will continue ticking up bit by bit, and I think that that’s going to be the trend. They have been so low for so long that I think there will be incremental increases over time. But there is still wide-open opportunity to take advantage of low interest rates to purchase that building, buy that equipment, hire employees – there really is a long runway for more investment in businesses. We are very bullish on the future for business”
John: “Do you see a return to double digit interest rates?”
Julie: “Not anytime soon, that’s for sure. With all the indicators that we are seeing, no.”
John: “Given the changes over the last year, have your underwriting standards changed for approving loans?”
Julie: “Yes and no. We really want to look at what a company’s Covid business plan is, and I don’t mean having hand sanitizers in the lobby. We want to know ‘how have you weathered 2020 and how are you planning to weather 2021 and beyond?’ Big questions we want to explore are: are there changes in your staffing, are there changes in your clients as you may not have the same ones as in 2019/2020, how has your supply chain been affected, and any other changes to the operation over the last year. At the same time, we know that the last year has affected every business in a different way. So, we want to understand what you have already done, what you are planning to do, and then we work with each customer and support them through this.”
John: “So, if a business is thinking about buying a building, what specific steps should they take to prepare for that process? Do you have some recommendations on specific things they should do start to do?”
Julie: “Yes, absolutely, they have options because you don’t have to come up necessarily these days with a 25% down payment. An SBA 504 loan may be an excellent option which requires only 10% down. My advice is to have them call their professional contacts. Get a good broker who can help you with the transaction, get a good accountant, you want to get somebody that’s really going to help you get your numbers pulled together. We will want both historical numbers and projections. You certainly need an attorney at some point too so knowing those key people can really help any business put it together.”
John: “What changes have you seen in appraisals in the last year through Covid?
Julie: “An appraiser once told me, it’s an art not a science, which leaves the door open as to interpretation of the property value.  We have seen appraisers getting more comfortable with where things are currently at, turnaround times have been good, and I think appraised values of commercial property are coming back to levels it had been pre-pandemic.
John: “With the rise of the internet there has been a rise of online banking. You can get a loan on the internet very quickly, why has that become so attractive?”
Julie: “It’s perceived as an easy way to get money, and it is, until you want to unwind it and that is where the challenges begin. Sure, you may get the money you need, but it is a higher interest rate, shorter loan term, online lenders won’t usually work with you if there is an unexpected challenge, and you don’t have the support and service that you will receive at a bank.
John: “What’s the timeline typically for getting a loan approved to buy a building?”
Julie: “If the borrower has everything in place and if we have the documentation ready to go, we can approve and close a loan in three to four weeks. We will need to wait for the appraisal and environmental to be completed also. So, our process internally can be relatively quick, but some of these other variables take more time. Appraisals have been taking three to four weeks and environmental testing can sometimes take even longer. We are doing our work at the bank behind the scenes while all of the other external work is happening so we are ready to close as soon as possible.
John: “What are you seeing with environmental issues these days?”
Julie: “Vapor intrusion has been the hot button the last couple of years, and I think it will continue to be. The good news is that sellers have been providing an escrow from sales proceeds to help buyers pay for vapor mitigation systems. We have become accustomed to working with environmental issues because it is quite prevalent in commercial and industrial properties.
John: “Is there anything else you would like to add?”
Julie: “BankCherokee is a local community bank and we have all the tools that large banks have. That’s a beautiful thing to be smaller, more nimble, AND have all of the right tools for businesses. We are able to think outside the box and are not beholden to somebody in another state, but instead have all of our decisions made right here in St. Paul.

Minnesota Solar Energy Incentives

Minnesota Solar Energy Incentives Image

Minnesota Solar Energy Incentives
With more sun in our Minnesota day, it seems fitting that property owners are looking into the costs and benefits of turning to solar energy for providing their properties with power.  In the last few years solar energy has seen considerable growth in Minnesota.  By 2023, the state has a goal to have 10% of it’s power sourced through solar energy (1).  Consequently, the important question is; what incentives are available to property owners to install solar panels?
Government Incentives
Most notably, tax credits and rebates are one incentive that has been created for property owners who are establishing a solar energy panel system.  Certainly, these benefits are an effort to grow the use of solar energy.  Tax credits and rebates are available on the federal, state, and municipal level.  The most notable of these is the Investment Tax Credit (ITC).  This is a federal tax credit that applies to property owners installing a new solar energy system.  It allows for the deduction of up to 26% of the installation cost from their taxes through the year 2022 (2).  This, as well as the potential reduction in operating expenses of a property, adds up to making solar energy much more affordable for many owners.
Notably, the decreasing use of fossil fuels and the growing renewable energy industry is emphasized by this recent announcement;  The U.S. renewable energy consumption surpassed coal consumption for the first time in 130 years (3).  Accordingly, renewable energy such as solar will continue to grow in its efficiency as well as its affordability.  Ultimately, to become a viable option for owners to increase the value of their property, attract new tenants, and reduce operating expenses.
To see what benefits are offered for new solar energy systems in Minnesota, go to: https://programs.dsireusa.org/system/program/mn/solar
Written By: Jack Buttenhoff
Sources
(1) https://www.eia.gov/state/analysis.php?sid=MN
(2) https://www.seia.org/initiatives/solar-investment-tax-credit-itc
(3) https://www.eia.gov/todayinenergy/detail.php?id=43895

Unlocking the Value of Owner-Occupied Real Estate

Unlocking the Value of Owner-Occupied Real Estate

Unlocking the Value of Owner-Occupied Real Estate
Many companies prefer to own real estate that is critical to their business operations.  Some privately held companies choose to have the owner of the business purchase the real estate used for their business and lease it back to their company for tax reasons and asset diversification.  Often, they have owned this real estate for many years.  Thus, it most likely has appreciated in value.  Net leased real estate assets with long term leases in place are in high demand today, as investors look for reliable cash flow, tax shelter and a hedge against future inflation.  Now may be the time to consider unlocking some of the capital that is tied up in real estate to take advantage of this sellers’ market.
Client Example
We were recently asked to advise a client that was preparing to sell one of their businesses.  They also wanted to sell the real estate that the business occupied.  Our job was to figure out how to maximize these sale proceeds.  Should they include the real estate in the business sale or sell it as a separate asset?
The buyer of the business was a strong publicly traded company.  They were willing to enter into a ten-year lease for the property with options to extend beyond that.  Paramount advised our client on what the real estate would be valued at with a long-term net lease in place as well as to what market rent should be and other important lease terms.  In turn, our client was able to compare this valuation to what the business buyer was willing to pay for the real estate.  We determined that our client would maximize his return by separating the business sale from the real estate sale.  Ultimately, our client entered into a long-term net lease with the entity that purchased the business.  Shortly after closing on the sale of the business, Paramount listed the net leased real estate For Sale.  We quickly sold the property for over asking price.
Does a Sale Leaseback Make Sense for Your Business?
If your company is occupying real estate that it owns but you want to unlock some of the value in the real estate to reinvest back into the business or use for other purposes, today is a great time to consider entering into a sale leaseback.  You can structure a long-term lease for the property under terms that fit your business requirements, and then free up your equity through an investment sale transaction.  With today’s low interest rates, cap rates on good investment real estate are the lowest we have experienced in decades.  This translates into a higher sale price.  Most businesses can deploy the cash received from the sale of their real estate back into their business. Thus, making a higher return on this capital then they would have leaving it invested in their corporate real estate.
Please feel free to reach out to a Paramount real estate professional to see if a sale leaseback makes sense for you.
Written by: Fred Hedberg, SIOR

TAX TIPS

Tax Tips

TAX TIPS
Tax Tips for Owners:

Real estate can be one of the most effective ways of mitigating high tax burdens.  Depreciation and Section 1031 exchanges are two major ways that this can be accomplished.  Depreciation is the reduction of the book value of an asset over time.  Annual depreciation reduces net income, and can create “paper losses” while still producing positive cash flow.  The Internal Revenue Code Section 1031 (commonly referred to as a 1031 Exchange) allows the taxpayer to defer paying capital gains tax under certain circumstances.  The original asset is “exchanged” for a like-kind asset within a pre-determined time period.  This may allow a property owner to reap the benefits of owning a more expensive property (higher rental income) without having to pay capital gains tax on the sale of the first property.
If you see a substantial increase in your property taxes, consider protesting the increase with the city.  If you are considering protesting your property taxes, give your broker a call to explore the best strategy to approach.  It may be as simple as getting an appraisal but there may be additional steps necessary for a successful outcome.

Tax Tips for Tenants:

If your lease doesn’t allow for you to appeal the property taxes yourself, contact your landlord and see if they are considering a tax appeal.  Some leases allow you to file an appeal on your own if you occupy 100% of the building.  There are a number of professionals in the area that specialize in this type of work.  Be sure to choose an advisor that you are comfortable working with to accomplish your goal.

For more information,
reach out to one of our experienced professionals at:
(952) 854-8290
www.paramountre.com

WHERE DID ALL OF THE WORKERS GO?

Where did all the workers go?

WHERE DID ALL OF THE WORKERS GO?
Where did all the workers go?  Some people point to March 12th, 2020 as the date that American society recognized the then-unknown virus from China as potentially dangerous.  On that date, the NCAA cancelled their annual “March Madness” tournament.  This was effective in communicating the seriousness of the situation to the general public.  In the following weeks and months, the global economy saw historic unemployment, government-mandated stay-at-home orders, and a level of financial panic not seen in over a decade.  The labor market may never again return to its pre-Covid equilibrium, forcing society to adapt to the “New Economy”.  According to the Saint Louis Federal Reserve (FRED), national seasonally-adjusted unemployment reached its cyclical peak in April at 14.8%.
Expanding
As medical professionals began to put a plan into action, the world slowly adapted.  With people falling back into a  routine that resembled the American brand of consumerism, certain segments of the economy began reopening, and some even expanding.  Unemployment has steadily fallen from its April peak to 6.3% in January 2021; still well above the February 2020 level of 3.5% (FRED).  In the Institute for Supply Management’s January 2021 Manufacturing report, Timothy R. Fiore, CPSM, C.P.M notes:
“The January Manufacturing PMI® registered 58.7 percent, down 1.8 percentage points from the seasonally adjusted December reading of 60.5 percent.  This figure indicates expansion in the overall economy for the eighth month in a row after contraction in March, April, and May.”
While unemployment rates have dropped, employers have been seeking additional workers.  For reference, the Bureau of Labor Statistics stated that in January of 2020, seasonally-adjusted total non-farm, private payrolls expanded by 255,000 jobs.  In November, 359,000 jobs went unfilled.  December gave back a significant portion of November’s gain, but the three month average change remained positive at 239,000 jobs.  Moving ahead to February of 2021, non-farm payrolls expanded by 379,000.  Inflation fell to 6.2% the same period.
What does this mean?
The data indicated that employers are adding jobs at a faster rate than unemployment is decreasing.  One hypothesis explaining this is that frictional unemployment will increase as an economy adapts to using new technology.  Essentially, existing worker skills are mismatched with current employer needs.  Workers with outdated skills may not be able to find comparable jobs and be forced to unemployment or less-specialized work.   Another hypothesis is that low-skilled workers that have been temporarily unemployed have an incentive to stay unemployed, so long that the government extends benefits.
The aim of this article is not to challenge unemployment insurance or to suggest structural changes to the economy.  It is to point out the state of the labor market in its current condition.
Sources:
https://fred.stlouisfed.org/series/UNRATE
https://www.bls.gov/news.release/empsit.b.htm
https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/pmi/january/

Breaking the Chain

Breaking the Chain

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.
Weather Disruptions
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/

LDI Land Sale in Brooklyn Park

LDI Land Sale in Brooklyn Park
A new speculative industrial building is planned for Brooklyn Park and the Paramount Real Estate Corp team of Fred Hedberg, John Young, and Joe Schultz sold the land to get the project started.  The Paramount team has provided real estate services to Liberty Diversified International (LDI) for over a decade. This includes leasing several of LDI’s industrial buildings and, most recently, selling the excess land in Brooklyn Park.  The site is a 5.5-acre parcel at 9501 Louisiana Avenue (southeast corner of Highways 169 and 610) and the developer plans to build a 75,000 square foot state-of-the-art industrial building called Highview 610 Business Center.
Endeavor Development, founded by Josh Budish, is the developer.  Groundbreaking for the property is planned for this Spring.  The Paramount team is also handling leasing for Highview 610 and is marketing the building for fall 2021 occupancy.  The property has have great visibility to Highway 610, will be 28’ clear height, have plenty of vehicle parking, and a spacious truck court.  The building will be divisible to 15,000 square feet.
For more information about investment sales contact us at:
PARAMOUNT REAL ESTATE CORP | TCN WORLDWIDE
952.854.8290
www.paramountre.com
1650 W 82nd Street, Suite 725 | Bloomington, MN 55431

Paramount Represents Seller in Plymouth Investment Sales Transaction

Paramount Represents Seller in Plymouth Investment Sales Transaction

Fred Hedberg, Principal of Paramount Real Estate Corp was engaged in November 2020 by SJH Real Estate, a long-time client, to sell a NNN leased property it owned in Plymouth Minnesota.  The owner of SJH Real Estate had recently concluded the sale of part of his business to SiteOne Landscape Supply LLC.  SiteOne Landscape Supply LLC is owned by a publicly traded company that provides wholesale goods for green industry professionals.  SiteOne has a market cap of $6 billion with over 500 facilities throughout the United States and Canada.  As part of the purchase, SiteOne entered into a 10-year NNN lease with two-5 year options to extend for the property that was used to operate the business unit it had purchased.  During negotiations, Fred advised SJH on the best way to structure the lease.  He also advised on ways to maximize the value of the real estate and make it saleable in the future.
The Investment
The property, located at 1205 Nathan Lane in Plymouth consists of 8.15 acres and a 17,580 square foot showroom/warehouse building.  The property’s zoning allows for outside storage.  Finding a property with zoning that allows for outside storage within the I-494/I-694 loop of this size is very rare and in high demand.  The zoning, financial strength of the tenant, and the long term lease made this property very attractive to investors.
Paramount Real Estate Corp/TCN Worldwide started marketing the property For Sale on November 12, 2020.  Fred contacted several local investment groups he thought might have an interest in this property.  He received eight offers within two weeks, the majority of which were at full asking price or above.
Selecting a Buyer
The top five buyers were asked to submit their best and final offers.  Three of the five buyers were at the same price or very close to the same price.  The seller decided it would be in his best interest to close on a sale by December 31, 2020.  Paramount advised the top three buyers to make one more final offer.  They were also asked to provide evidence they could close by December 31.  Upon careful review of the final offers and discussions with each of the buyers, one was selected.
Fred and the Seller selected a buyer they felt would have the best ability to close on the sale by year end.  Both parties signed the purchase agreement on December 8, 2020 with a short due diligence period.  All parties worked together to get an appraisal and environmental study completed in less than three weeks.  Christmas even fell within that three weeks.  The sale closed on December 30, 2020 and the property sold for $500,000 over asking price.
With a time from listing to close of less than seven weeks including holidays, this was an extremely fast transaction.  As the real estate world gets more complex, most transactions are taking longer.  This sale is an example of how complex real estate transactions can still be completed in a short time frame if all parties work together towards a common goal.  It also demonstrates the strength of the Twin Cities investment sales market and investors’ appetite for good real estate with strong credit tenants and long-term net leases.
Written by:  Fred Hedberg, Principal | Paramount Real Estate Corp | TCN Worldwide