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MID-YEAR 2020 INDUSTRIAL MARKET UPDATE

Industrial Market Update

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. 
Different Opinions
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

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

Q1-2020 Industrial Market Vacancy Rate

MNCAR: Q1-2020 Industrial Market Report
Economic Overview

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.

Market Overview

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.

Market Highlights

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.
Market Recap

Total Inventory: 258,482,636 sf
Total # of Bldgs: 3,004
Absorption: 223,024
Vacancy: 4.7%
Asking Rate Low: $5.81 NNN
Asking Rate High: $9.35 NNN
Under Construction: 3,728,557 sf

READ ENTIRE: Q1-2020 INDUSTRIAL MARKET REPORT
Written by: MNCAR/Redi Comps

MNCAR Industrial Market Trends | Q2 2019 | Minneapolis-St. Paul

Written by: MNCAR/Redi Comps
Economic Overview
According to the Bureau of Labor Statistics (BLS), the unemployment rate for the Mpls-St. Paul metropolitan statistical area (MSA) increased 40 basis points from 2.7% for May 2019 from 2.3% for May 2018.  The unemployment rate for the U.S. was at 3.6% in May 2019, down from 3.8% Y-o-Y for the US.  The Mpls-St. Paul MSA saw an increase in industrial job growth in manufacturing increasing 1,200 during the same period.
Market Overview
The Mpls-St.Paul industrial market consisting of 244M SF in eight counties across the metro posted over 829,000 SF of positive absorption for Q2 201\98.  The overall vacancy rate for the market stands at 5.0% and multi-tenant vacancy was 8.0% for Q2 2019.  The average asking lease low rate was $5.67 and high rate was $9.22 NNN for Mpls-St. Paul.  To date, there are 12 construction projects throughout the market totaling over 2.4M SF and 1.8M SF was delivered year to date.
Market Highlights
At the close of Q2 2019, the market experiences over 1.6M SF of leasing activity.  The vacancy rate finished the year at 5.0% in total with the Southeast and West markets being the tightest at 4.0% for all properties.  Illume held the top spot in absorption with 277,000 SF in the Northwest market.  The Northwest market is showing the highest vacancy rate at 6.1% for all properties while Northeast is highest for multi-tenant properties at 9.4%.
READ ENTIRE REPORT: Q2-19_Mpls-St_Paul_Industrial_Market_Report
 

Commercial Real Estate Tip | September 2019

Q & A
Commercial Real Estate Questions Tenants often Ask Regarding Their Occupancy
Written by Bob Johnston | Vice President Sales & Leasing

QUESTION #1:  What if the Landlord is not finished building out my space by the time I want to move in?
ANSWER: If the Landlord is actually responsible for the completed work, much depends on how the lease is written and the commencement date defined. For example, a commencement date can be tied to the substantial completion of the space, so the lease will not commence until the Landlord completes the work. Sometimes, the date is even contingent upon occupancy and the commencement of business in the space. On the other hand, there might be a specific commencement date defined.  If the Landlord is late, the lease language will generally state that there is no culpability on the Landlord’s part, but the commencement date becomes the date on which the space is completed and the initial term extended from that date. In short, these issues are negotiable and dependent on each tenant’s situation.

QUESTION #2:  Toward the end of each calendar year, the Landlord sends us a note informing us of the new Common Area Maintenance (CAM) & Real Estate Tax estimate for the following year. However, we never get a breakdown of the actual expenses. Is that available?
ANSWER:  Most landlords will provide that information if requested. It always helps to have language in the lease that allows for a tenant’s review of the costs; and with larger tenants, audit rights are always helpful.

QUESTION #3:  What do I need to do to get the tenant improvement allowance provided by the Landlord?
ANSWER: Typically, for smaller tenants with smaller budgets, all that is required is a formal letter requesting Landlord reimbursement of the allowance and proof of completion accompanied by all subcontractor lien waivers. For larger jobs, sometimes a title company gets involved and administers “construction draws” and monitors the construction progress.

QUESTION #4:  Do I need to hire a disinterested third party architect to confirm the size of my space?
ANSWER: Typically not.  This can be warranted in certain circumstances. Individual spaces/bays are already pre-measured by the building’s architect and floor plans are drawn based on those measurements. Therefore, the space computation is generally accurate. RU factors can vary by building, and are often much higher in smaller buildings.  It helps to check the accuracy of the actual useable space and clarify the respective RU factor to calculate the rentable area (the number that determines the annual rent).

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Commercial Real Estate Tip | May 2019

Successful Commercial Leasing=Understanding Your Rent
by Bob Johnston | Vice President Sales & Leasing

THE TERMINOLOGY OF RENT

Most commercial leases today are “net leases”, meaning that the tenant pays a “base rent” which is “net rent”, or separate from, the operating costs and real estate taxes for the property. The operating costs are then passed on to the tenant as a separate cost, equaling a total rent cost and what many then refer to as “gross rent.”
Even this varies, however, from property to property. For example, often times in retail and industrial properties, tenants pay for their use of electricity and gas as well as janitorial services. In addition, sometimes the tenant, at its expense, must contract for local trash pick-up. These separately contracted costs are not part of the ordinary operating expenses. On the other hand, office leases typically are “full service” leases. In other words, there are generally no extra charges, other than perhaps charges for extraordinary use of services such as air conditioning or cleaning, etc.
It is critical that a tenant understand the complete picture and know what the total rent will be. In addition, it is also critical that the tenant understand what expenses make up operating costs and what costs are reasonable and legitimate. It is obviously to the landlord’s advantage to get the tenant to pay as much of the total operating budget as possible. This is even more critical in mixed-use projects where landlords tend to shift maintenance costs for the residences to the office component. Thus, the office tenant contribution is actually more than what it should be. I once audited the landlord of a very large mixed-use project in Chicago and found over $100,000 wrongfully allocated to the tenant even though the lease prohibited their doing so.

WHAT SHOULD NOT BE INCLUDED IN RENT?
Here are some suggestions as to what to eliminate from the landlord’s menu. The list is obviously not exhaustive, but rather illustrative of some of the costs landlords attempt to pass on to tenants:

Leasing commissions, space planning expenses with architects/interior designers, or even attorney costs associated with a lease negotiation or existing tenant dispute
Costs associated with the construction of tenant improvements, either with new tenant relocations or existing tenant renovations and remodeling
Costs associated with the entity of landlord, particularly as it relates to partnership/ownership issues or the selling or refinancing the property
Many large landlords have affiliates or interests in affiliate companies, so it is important to ensure that the contracted vendor costs are no more than what an unrelated third party vendor might charge
Be careful about the expenses for salaries, benefits, etc. that go into “management fees.” Executive salaries, or any allocation of those salaries, should not be part of the operating costs for the building
Capital improvements are not, by accounting standards, expense items, although landlords can routinely pass on the amortized cost of the improvement as an operating expense
Make certain that in a retail environment, the tenant’s pro-rata share of operating expenses is calculated over the entire leasable area of the property rather than only on the space currently leased and occupied.

Proper due diligence and understanding of the components of a building’s operating budget are critical to a tenant’s successful occupancy, financial stability and long-term enjoyment of the space.

For the best in commercial real estate
service and solutions.

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MNCAR Industrial Market Trends – Minneapolis-St. Paul (2018-Q4)

INDUSTRIAL MARKET TRENDS | Q4 2018 | Mpls-St. Paul

Economic Overview
According to the Bureau of Labor Statistics (BLS), the unemployment rate for the Mpls-St. Paul metropolitan statistical area (MSA) decreased 50 basis points from 2.5% in November 2018. The unemployment rate for the U.S. was at 3.8% in October 2018, up from 2.8% for the State of Minnesota.  The Mpls-St. Paul MSA saw an increase in industrial growth in manufacturing growing by 6,900 during the same period.
Market Overview
The Mpls-St.Paul industrial market, consisting of 119 msf of space in either counties across the metro posted an availability rate of 11.4% for Q4 2018.  The vacancy rate for the market stands at 8.2% to close out 2018.  The average asking lease low rate was $5.82 and high rate was $9.00 NNN for Mpls-St. Paul.  To date, there are 17 construction projects throughout the market, totaling just over 209 msf.
Market Highlights
At the close of Q4 2018, the market experiences over 1.9 msf of leasing activity and the vacancy rate finished the year at 8.2% in total with the Southeast market posting the lowest rate at 7.0%.  The top five lease transactions accounted for over 490,797 sf throughout Mpls-St. Paul with the largest leased space for Asmodee North America leasing 130,000 sf.  Northeast warehouse distribution increased to 15.7% vacancy from 11.3% due to new deliveries totaling 468,188 sf.
READ ENTIRE REPORT: Q4 2018 – Industrial Market Trends
Written by: MNCAR/Redi Comps

Five Trends That Will Shape the Industrial Sector in 2016 | NAIOP Development Magazine

Changes in the ownership, investment, retail, fulfillment center and supply chain landscapes will have big impacts on industrial real estate.
ALL EYES ARE ON the Industrial sector for a variety of reasons. Retailers and other warehouse occupiers are growing their distribution center footprints across the U.S., and e-commerce continues to stake its claim on the fulfillment and “last mile” landscape. The sector will also continue to see growing interest from foreign investors, and the Panama Canal expansion set to open in spring 2016 will help reshape supply chains and industrial development. Below are five themes to watch for in 2016:
More change in the ownership landscape. Thanks to a series of large-scale portfolio deals over the last few years, the overall ownership landscape for industrial and distribution properties in the U.S. is experiencing a significant shift toward institutionalization. That means that more Class A industrial and distribution center real estate will sit in the hands of increasingly fewer owners.
The evolution of the U.S. industrial segment toward institutionalization has been driven by a plethora of global forces.  It has particularly benefited from the mounting number of investors that are allocating increased amounts of capital toward investment in alternative assets like commercial real estate (CRE), as the U.S. industrial segment offers wider spreads over risk-free investments than other CRE segments. With an estimated $60 billion in completed and forecasted sales for 2015, current deployed capital is seeking the low-risk, higher return opportunity with which institutional investors have become increasingly comfortable in the industrial segment.
Read more–Five Trends That Will Shape the Industrial Sector in 2016.
By:  Aaron Ahlburn