Moving Beyond the Deal. Why it Matters.
Throughout our many years of leasing office and industrial space, we have learned how important it is to pay attention to the details. One of our recent clients was on a short time frame to move into new office space. We were close to finalizing the terms of the lease. The architect finished the space plan and construction specification. Everything seemed to be on track, right? Wrong. The construction specification called for expensive changes to the ceiling grid that would have resulted in lower quality space. This is one of the many turning points that cause delays and cost overruns when leasing new office space.
At this point in the process, who will take the initiative to review the space plan, construction specification, and match both to the existing conditions in the new office? We will. And we will coordinate the architect, contractor, and building management to make sure the plan is right before its too late. This role is sometimes filled by a project manager. However, in smaller lease transactions there may not be a need, or desire on behalf of the client, to hire a separate project manager to review the details of the buildout and keep it on track.
When leasing new space, be sure that your real estate professional is tracking the details. This will ensure that your project will stay on schedule and on budget. It does matter.
Written By: John Young, CCIM
Moving Beyond the Deal. Why it Matters.
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 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
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
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)
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
EDEN PRAIRIE INDUSTRIAL BUILDING SOLD
Paramount Real Estate Corp | TCN Worldwide is very pleased to announce the Sale of 6450 Carlson Drive | Eden Prairie, MN
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!
MNCAR: Q1-2020 Industrial Market Report
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
TWIN CITIES MARKET SNAPSHOT
The Minneapolis-St. Paul Real Commercial Estate Market continues to perform admirably with office and industrial sectors demonstrating excellent performance throughout 2019. The Markets characteristics remain upbeat and include positive net absorption of vacant space, moderate to low vacancy rates and measured new speculative development. Economic conditions remain favorable however, recent statics raise concern for the continued overall economic growth in Minnesota and the USA. While inflation continues to remain low at about 2% (annualized), unemployment has increased from 2.5% to 2.9%. Median income for Minnesota households as stagnated year over year at $70,300. Both still much better numbers than the national averages of 3.4% unemployment and median household income of $63,179 respectively. The 15 month trade war with China combined with all of the uncertainty in Washington DC (impeachment and gridlock) and slowing business investment-down 1% on an annualized rate last quarter create potential headwinds to sustained future economic growth.
Industrial has been the best performing asset class of real estate since the Great Recession in 2009. Vacancy rates are at an all-time low (4.9%) in a Twin City universe of 248 million square feet and have decreases by 1% since the beginning of 2019.
Net Absorption of available space stands at 2.73 million square feet through the third quarter of this year. With bulk (high-bay) warehouse experiencing 1.74 million square feet of net absorption. Driving the net absorption has been e-commerce related companies localizing the distribution of almost everything now available on the internet.
To date there are 27 industrial projects under construction totaling 3.6 million square feet. 1.9 million square feet has already been delivered to the market.
Collectively, what all this most likely indicates is a continuation, at least through 2020, of relatively good conditions and performance for the industrial market. The two current deterring factors, other than an economic slowdown, are the cost of tenant improvements and finding and hiring employees.
The office market continues its long standing recovery albeit some sub markets are stronger than others. The overall office vacancy rate for all Twin Cities office properties is 11.8%, which is down .8% from January 2019, however within multi-tenant properties the vacancy rate is 15.4%. The northeast office market has the lowest vacancy rate at 8.6% and St. Paul CBD has the highest vacancy rate approaching 20%. Class A multi-tenant office space has the lowest vacancy rate at 12.5%. Class B Office space is at 17.7% and Class C is 13.8%.
Net absorption Year to Date is 363,871 square feet. Actual absorption Year to Date is 504,247 square feet, however sublease space create 128,052 square feet of negative absorption.
The office market performance has instilled enough confidence in a local developer to spec a 361,104 square foot office building in the West End mixed use development named 10 West End. Net rental rates are projected to start at $25.50/sf.
One new office market characteristic that has been gaining momentum is the demand for building amenities. Many office buildings have completed or are planning to complete updates to building common areas, add amenities such as work out areas, coffee bars, common area meeting spaces, food service, and concierge services among other things. Many of today’s sophisticated tenants want space that is fun and functional. They want space that will retain and attract top talent in the current tight labor market.
John Young, CCIM’s transaction with Warner’s Stellian made TCN Worldwide’s Top Industrial Deals (Q2-2018)
Read more: 2018 Qtr2 Commercial Focus
Warner’s Stellian purchased an 80,000 SF industrial building located at 2601 Broadway Street NE, Minneapolis.
TCN Worldwide, a consortium of independent commercial real estate firms, provides complete integrated real estate solutions locally and internationally. With approximately $58.6 billion in annual transactions, TCN Worldwide ranks as one of the largest service providers in the industry. An extensive range of real estate services coupled with a personal commitment to exceed client expectations. This allows TCN Worldwide to be a leader within the commercial real estate industry. Made up of over 5,000 commercial real estate professionals allows them to serve more than 200 primary and secondary markets worldwide.
JOSEPH SCHULTZ JOINS PARAMOUNT REAL ESTATE CORP | TCN WORLDWIDE AS LEASING AND SALES ASSOCIATE
MINNEAPOLIS, MN. Paramount Real Estate Corp, Bloomington, MN is pleased to announce the addition of Joseph Schultz to the industrial sales and leasing team. He will be working with Philip Simonet and John Young, CCIM. Focusing his efforts on agency leasing, new business development and buyer/tenant representation in the southeast and northeast Twin Cities submarkets.
Joseph was born and raised a Minnesotan. He graduated from Saint Thomas Academy and attended college at Gustavus Adolphus College. Therefore, he earned a Bachelor’s degree in Economics with a focus in Economic Analysis. He comes to Paramount with real estate experience while previously working as an intern at Cushman & Wakefield before joining Paramount.
In his spare time, Joseph enjoys watching sports, particularly the Minnesota Vikings, and spending time with family and friends.