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
HISTORY OF THE PROPERTY
6450 Carlson Drive is a 42,760 multi-tenant office-warehouse building located off Highway 62 and Interstate 494. The Eden Prairie industrial building situated on 3.97 acres, was built in 1986. When a long term tenant vacated the majority of the building, Paramount was engaged to market the property. Initially they marketed it as a 36,885 square foot vacancy For Lease.
PARAMOUNT’S CLIENT & THE DEAL
Bloomington-based Paramount Real Estate Corporation brokers, Jeffrey Swanson, Associate and Fred Hedberg, President represented the seller in this transaction. FHM Partners, the sellers, consist of a local managing partner and two out of state passive owners.
“This Eden Prairie industrial building was on the market For Lease. We were in the midst of negotiating a 10-year lease for the building’s vacant space. This is when a user/buyer made an unsolicited offer to purchase the building. Paramount advised FHM Partners on the pros and cons of each opportunity. The partners decided that it was in their best interest to sell. The transaction moved forward quickly with only a slight delay due to a change in financing that pushed the closing out 10 extra days,” commented Jeff Swanson.
THE NEW OWNER
BLCKGLD, LLC, a Minnesota owned LLC, is the entity that recently purchased this office-warehouse building at 6450 Carlson Drive. With their upcoming expansion, a company with common ownership to BLCKGLD, LLC plans to remodel and occupy the entire building.
In conclusion, Paramount congratulates the West Team for closing on this deal!
According to the Bureau of Labor Statistics (BLS), the unemployment rate for the Mpls-St Paul metropolitan statistical area (MSA) decreased 30 basis points. This is 3.1% for February 2020 which is down from 3.4% for February 2019. The unemployment rate for the US was 3.5% in February 2020 down from 3.8% last year. State of Minnesota unemployment rate was 3.1%. The Mpls-St Paul MSA saw an increase in job growth but a decrease in industrial jobs in manufacturing dropping 400 during the same period.
The Mpls-St Paul industrial market consists of 258 msf in eight counties across the metro and posted over 223,000 sf of positive absorption for Q1 2020 while 184,000 sf positive absorption for multi-tenant properties. The overall vacancy rate for the market stands at 4.7% and multi-tenant vacancy was 7.4% for Q1 2020. The average asking lease low rate was $5.81 and high rate was $9.35 NNN for Mpls- St Paul. To date, there are 23 construction projects throughout the market totaling just under 3.7 msf and 5 properties were delivered this quarter with 575,902 sf.
At the close of Q1 2020, the market experienced over 2.2 msf of leasing activity in 194 transactions with AbelConn leasing the largest space of 110,329 sf in the Northwest market. The Southeast market vacancy rate being the tightest at 4.1% for all properties while the Northwest market topped at 6%. The Northeast market had four of the top five property spots in absorption with Bluvera leasing 93,000 sf, Hajoca leasing 75,845 sf and Lindenmeyr Munrow leasing 60,102 sf. The Northwest market experienced the largest vacancy of Honeywell with 250,000 sf. The Southwest market held the next two spots with Sams Club vacating 180,000 sf and Quad Graphics/ American Color vacating 160,000 sf.
Total Inventory: 258,482,636 sf
Total # of Bldgs: 3,004
Asking Rate Low: $5.81 NNN
Asking Rate High: $9.35 NNN
Under Construction: 3,728,557 sf
Congratulations to Ebisso Uka, owner of Rift Valley Transportation for his purchase of the building at 45 Empire Drive, St. Paul, MN. Rift Valley provides transportation to children who have no other way to attend school. The 33,000 square foot building will be used for storage and maintenance of vehicles used in the transport of children to and from school.
The building was formerly the home of Sitma USA, an Italian based manufacturer of integrated mail processing equipment. It was built and added to in 1991 and 1997, respectively. The 27,000 square foot warehouse will house up to 80 vehicles and the 6,000 square foot office will be the hub of the 200-person Rift Valley company.
This was a complicated transaction. It required Phase II environmental and vapor testing, a Class N license from the City of St. Paul, in-depth building due diligence, construction bidding, and financing approval. John Young and Joe Schultz guided this purchase through its many hurdles with a very short due diligence period. Both John and Joe extend a hearty “Congratulations!” to Mr. Uka and his company.
John and Joe continue to work for Mr. Uka in the lease or sale of his current building at 1033 Thomas Avenue, St. Paul. This 14,000 square foot building is near Lexington and University Avenues and is a great location for another small business growing in St. Paul.
Written by John Young, CCIM | Vice President
TCN Worldwide Named in Lipsey’s Top 25 Commercial Real Estate Brands for 2020
We are proud to announce that once again TCN Worldwide has been named in the Top 25 of Lipsey’s Brand Survey. Each year the Lipsey Company performs a survey to establish the most recognizable names inside of the Commercial Real Estate Industry and this year TCN Worldwide increased its brand recognition moving up two spots. Thank you to all who voted, and especially our TCN members!
Learn more about Lipsey’s Top Brand Survey here: https://lipseyco.com/top-commercial-real-estate-companies/
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Minneapolis Building Sells to Development Firms
The former Java Jacks & Studio 2 Building in Minneapolis sells to development firms. It will become a new neighborhood hang out with the addition of a yet-to-be-named restaurant. John Young, Vice President Brokerage Services sold the building to a partnership between United Properties and Westwood Hills (a development company). Plans are in the works for a new restaurant, which should be open in late Summer or early Fall. The property garnered several offers and a lot of interest by the adjoining neighborhood. It has been a favorite in the area for a couple decades and now it will have another great community asset, coming soon.
High-End Amenities Make Employees More Productive
More and more industrial spaces are becoming “the place” to work. The amenities offered in newer industrial buildings rival those of modern office buildings. Natural light, shower facilities, work-out rooms, beautifully landscaped grounds are becoming more common in warehouse buildings. Dan Rafter’s RE Journal post discusses industrial companies need to be more competitive in the labor force. They do this by considering not only location but higher-end amenities that make warehouse employees happier and more productive.
READ MORE: High-end amenities no longer just for office buildings — Industrial Spaces Offer Perks Too
By Dan Rafter, RE Journal.com, October 6, 2016