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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

ECONOMIC UPDATE: Industrial Building Values

Q1-2020 Industrial Economic Update

ECONOMIC UPDATE
Is This 2008 All Over Again?
Industrial Building Values

Even in the best economies, owners are curious about the value of their building. In times of economic uncertainty, this question takes on even more significance. For many business owners, this recession may be forcing them to ask the tough questions related to building values. The short answer is that buildings are not worth what they were 60-days ago. Beyond that, future predictions require a well-informed analysis.

First, a bit of history. The 2008 Great Recession eliminated most of the demand for industrial space, both for lease and for sale; however, the supply of available buildings did not change significantly. This supply and demand imbalance created a significant drop in building sale prices that was at times up to 33%. Contrasted with today’s environment, the low supply of available buildings has pushed prices to unheard of levels. In fact, some high-quality owner-user buildings were selling for $100 per square foot or more, an all-time high in the Twin Cities. The current crisis will certainly reduce demand for buildings, which is already becoming obvious through terminated purchase agreements, fewer showings, fewer offers, and reduced offer prices.

Naturally, values must come down, but will they drop precipitously like they did in 2008? Probably not. And here are a few reasons why:

#1: Some industrial companies are thriving which will preserve some demand for industrial buildings
For example, clothing manufacturers are now making masks, plastic extruders are now making partitions for retail stores, medical manufactures are now making face shields, and the list goes on. This is different than 2008. During that crisis, it was hard to find any thriving industrial business that still wanted to buy real estate.

#2: Banks are still lending and interest rates for owner-users are exceptionally low

For example, the SBA 504 rate is currently 2% over the 5-year Treasury bill, which is under 1%. Bank interest rates are also 1-2% lower than before the crises. This lower cost of capital will help those who are thriving to borrow money for real estate.

#3: There is pent up demand

Many companies have been searching for the right building to buy for years. Because supply has been so low, these companies have lost out in multiple-offer situations and because many buildings traded immediately when hitting the public market. Many of these would-be buyers are still healthy and able to jump on the right opportunity when it appears.

So, back to the original question, what is the value of your industrial building today? Recent reductions in list prices and re-trading of existing deals indicates that values have declined by 10%-20%. A more accurate analysis is to look at values over time. Down 10%-20% today; however, if the drop-off in economic activity continues, values could continue to fall. A resurgence of Covid-19 could create the dreaded “W” recession, and another dip in economic activity and value. If the economy is opened for business soon and can get back to a more normal level of activity, values may stabilize and begin to rise as we all get back to work.

Stay tuned for more analysis as events unfold over the next few months.
Minnesota COVID-19 Resources for Businesses

United States Federal Government Response to COVID-19

Contact Paramount.
Call John Young
(952) 854-5067
jyoung@paramountre.com

ECONOMIC UPDATE: Is This 2008 All Over Again?

Q1-2020 Industrial Economic Update

ECONOMIC UPDATE
Is This 2008 All Over Again?

Is this 2008 all over again?  The answer is “maybe”, but “probably not”. Let’s go back in time.  The 2008 Great Recession started with cash being drained from the monetary system.  This was due to a massive failure of collateralized debt obligations held by the largest banks and over-building in the housing sector.  This created a liquidity trap where Federal Reserve monetary policy was ineffective.  Interest interest rates were already low and consumers were holding cash.  There have been three notable liquidity traps in recent history: post-depression 1930’s America; Japan’s mid-1990’s recession; and most of the world after the 2008 great recession.
Although we have not had the customary two quarters of negative GDP, most economists are saying we are now in a recession.  However, this one did not begin with the same cash drain as the 2008 crises, but is it creating the same liquidity trap?  Not exactly.
This recession started with sharply reduced demand due to social distancing/quarantining and subsequent job losses.  It did not start with cash being drained from the worldwide banking system.  To date, almost 10 million Americans have filed for unemployment and, according to Goldman Sachs, the U.S could lose 37% of its GDP, the largest hit to GDP in history.

What is the main difference between 2008 and now?  The $2.0 trillion fiscal stimulus bill is more than twice the size of the stimulus bill in 2009.  It is focused on both businesses and consumers including a $1,200 direct payment for most Americans.  In other words, there is far more fiscal stimulus pouring into the economy meant to save businesses and maintain some amount of consumer demand.
 
How bad will it get? Let’s think about a few important questions:

QUESTION #1: When will this current economic downturn end?
Answer: If the epidemiological models are correct, sometime in June or July we may get back to our near normal routines.

QUESTION #2: How much injury will be done to businesses and consumers?

Answer: It depends on how much cash businesses or consumers started with. If businesses and consumers have enough cash to pay rent, mortgages, and basic needs, then maybe there will be pent up demand and we can take off quickly. On the other hand, if working capital, credit cards, and other loans are already maxed out and cash is low, then a period of months (6-12 months????) may be necessary for the economy to come out of this recession.

QUESTION #3: Will the Fed, U.S. House and Senate be effective in combating this recession?

Answer: Yes, so far. They are bringing out the big guns with both fiscal stimulus and monetary policy.

QUESTION #4: Will there be an inflation hangover from all this borrowing?
Answer: Many economists are saying, “no”. Primarily because the U.S. is borrowing money at a negative real interest rate, and technology and innovation have kept inflation low since 2008, a trend that will probably continue. For example, we are all working from home now and most businesses will learn, just like 2008, that they can do more with fewer people and smaller real estate footprints. These factors, among others, should keep the inflation-making prices and wages mix under control.
One thing is certain, we all need to buckle up for a rough few months and cross our fingers that businesses and consumers are ready to spring into action very soon.
Minnesota COVID-19 Resources for Businesses

United States Federal Government Response to COVID-19

Contact Paramount.
Call John Young
(952) 854-5067
jyoung@paramountre.com

Commercial real estate crowdfunding is here to stay, say the industry’s pioneers | RE Journal

AJ Chivetta doesn’t hesitate: Crowdfunding is changing the way people can invest in commercial real estate. And because of this, the number of people investing in commercial real estate through crowdfunding will only grow in the coming years, he said.
Chivetta should know. He’s a founder and chief executive officer of Selequity, a St. Louis-based company that helps investors place their dollars in commercial real estate properties across the country. He’s seen up-close just how eager consumers are to invest in commercial real estate properties that were formerly out of their reach.
“Crowdfunding solves problems for both sides of the commercial real estate transaction,” Chivetta said. “Investors are looking for opportunities to invest in real estate. They are looking for the kind of yields that real estate has long afforded people, especially in low-interest-rate environments. Real estate owners and operators are always looking for new investors and capital.
“With crowdfunding, more investors can gain access to commercial real estate, and owners can attract capital from a greater number of people,” Chivetta said.
Continue reading Commercial real estate crowdfunding is here to stay, say the industry’s pioneers.
Written by Dan Rafter, REJournal.com.

Fed Rate Decision Welcome News for CRE Borrowers | NREI

The Fed decided to maintain the current level of interest rates at 0.25 to 0.50 percent, following the two-day discussion of economic outlook both globally and in the United States. The Fed also reiterated that the federal funds rate should increase “gradually,” proving those in the commercial real estate industry who expected four interest rate hikes this year wrong. 
According to Fed Chair Janet Yellen, “The median projection for the federal funds rate rises only gradually, to 9/10th of a percent late this year, and 1.9 percent next year. As the factors restraining economic growth are projected to fade further over time, the median rate rises to 3.0 percent by the end of 2018, close to its longer run normal level. Compared with projections made in December, the median path is about one-half percentage point lower this year and next.  The median longer run normal federal funds rate has been revised down as well.”   Continue reading Fed Rate Decision Welcome News for CRE Borrowers.
Written by Diana Bell.