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
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.
As of April 1, 2020, our new address is:
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 along with 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