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%.
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 Workers with outdated skills may not be able to find comparable jobs and be forced to unemployment or less-specialized work.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.
WHERE DID ALL OF THE WORKERS GO?
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
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
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
FORMER KABUKI RESTAURANT SITE SOLD IN EDEN PRAIRIE
Site Location: 6534 Flying Cloud Drive | Eden Prairie, MN
Paramount Real Estate Corp listed the former Kabuki Restaurant site for sale in the fall of 2018. The 2.5 acre site provides easy access to Crosstown 62 and Hwy 169. It is located between Shady Oak Road, on the West, and Valley View Road, on the South.
Finding the Right Fit…
Due to its location, interest was high and the site tours were frequent. Interested users proposed many different uses. These included a dog daycare, pickle-ball courts, various types of restaurants and retail, a daycare, a brewery, storage facilities and office space. Many also wanted to use the site for outdoor storage, but current zoning does not allow this. In addition, the City was changing the zoning from Highway Commercial to Industrial Tech Flex. That alone prohibited many of the uses proposed. The Seller actually agreed to two separate purchase agreements. The agreements were then subsequently voided because the city discouraged both users’ proposed plans.
Challenges to Overcome…
The sales process was an interesting one. The building was in poor condition with the HVAC, roof, electrical, plumbing and restrooms needing updating. The seller held an online auction to clear out much of the remaining kitchen equipment and assorted restaurant accessories. Unfortunately what followed the auction was a bit devastating; vandalism and unsold stolen equipment. As if that wasn’t enough, the former Kabuki site had household junk dumped and abandoned on four different occasions.
A Closed Transaction…
In December 2019, we finalized yet another purchase agreement for the former Kabuki Restaurant site. The Coronavirus did have an effect as well, delaying the normal due diligence process and typical closing. The result… business closings and financial issues. Amending and extending the purchase agreement three times also didn’t speed anything up. The sale did ultimately close in June 2020.
It was a long sales process! Thankfully the Sellers as well as their legal counsel, were patient and willing to work toward a final agreement. We commend them for their willingness to work through the many problems and issues that occurred throughout the process. That being said, all parties are relieved that the property finally closed.
Written By: Bob Johnston | Vice President
PARAMOUNT HAS MOVED.
We hope that this message finds you and your family healthy and adjusting to the new normal of social distancing and working from home. After a week of uncertainty about whether or not the move to our new headquarters could be completed on schedule, particularly with a stay-at-home order in place, all of our vendors came together and we moved into our new space at Southpoint Office Center on March 31, 2020.
Southpoint Office Center
1650 W 82nd St, Ste 725 | Bloomington, MN 55431
(All of our other contact information remains the same.)
Stop in and check out our new digs!
WE ARE HERE TO HELP YOU.
We are looking forward to the day when the entire Paramount Team can come back together to work in our new office space. In the meantime, we are working remotely and continuing to provide sound real estate advice. We also provide seamless service to help our clients navigate in this rapidly changing business environment.
No one can predict for certain what the world will look like after COVID-19 is brought under control. Paramount has endured through many challenging times during the past 24 years and we are committed to be here for you in the future. Stay healthy, think positive and please let us know if we can be of any assistance to you.
Paramount Real Estate Corp | TCN Worldwide
Fred Hedberg, CCIM, SIOR | Principal