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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.

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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