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

OFFICE 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 2017 to 2.0% 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 office job growth, professional, financial and information growing by 6,600 during the same period.
Market Overview
The Mpls-St.Paul office market, consisting of over 95 msf of space in seven counties across the metro posting an availability rate of 16.5% for Q4 2018.  The vacancy rate for the market stands at 14.6% to close out 2018.  The average asking lease rate for Mpls-St. Paul came in at $24.29 psf FSG. To date, there are over 12 construction projects throughout the market, totaling just over 2.2 msf.
Market Highlights
At the close of Q4 2018, the market experiences over 1.3 msf of leasing activity and the vacancy rate finished the year at 14.6% in total. Class A properties ended the year at 11.8% with the Mpls CBD Core market posting the lowest rate at 9.7% for class A properties. The top five lease transactions accounted for over 342,788 sf throughout Mpls-St. Paul with the largest leased space for Tactile Systems Technology leasing 100,000 sf in the West market.
READ ENTIRE REPORT: Q4 2018 – Office Market Trends
Written By: MNCAR/Redi Comps

FOR LEASE – LONE OAK BUSINESS CENTER II


FOR LEASE
LONE OAK BUSINESS CENTER II
1060 Lone Oak Road | Eagan, MN

Property Highlights:

Two (2) office/ warehouse spaces located in Eagan are available For Lease immediately

Option #1: 3,410 SF office + 9,133 SF warehouse = 12,543 SF total
Option #2: 7,605 SF office + 10,256 SF warehouse = 17,861 SF total

Located just off Lone Oak Road and Neil Armstrong Road, with easy access to I-35E, I-494 and Hwy 55
Close proximity to downtown Saint Paul and MSP International Airport
Docks & drive-in doors available

Option #1: four (4) docks; one (1) drive-in door
Option #2: two (2) docks; one (1) drive-in door

16’ clear height

CONTACT:

Phil Simonet | (952) 854-8381 | psimonet@paramountre.com
John Young, CCIM | (952) 854-5067 | jyoung@paramountre.com

Why Corporate America is Leaving the Suburbs | The New York Times

Companies are leaving the suburbs for downtown.
Corporate America is changing.  Companies like General Electric and McDonalds are joining a long list of companies that are leaving the suburbs and returning to the city.  Cities provide tax incentives and young people want to live and work in the city.  The structure of companies is changing as well.  The executive offices may be in the city, but various other departments of the company may be in different other states or other countries.    States compete for companies to locate there by offering tax incentives.
Where you work matters.
Employees want to work in an energetic, vibrant and diverse atmosphere. Motorola Solutions executives will be locating 1,100 employees in downtown Chicago.  The response to job postings for positions located downtown are much higher than those located in suburban areas.
Advance communication tools are making it easier for headquarters and other corporate functions to be in separate locations.  Corporations also encourage employees to use public transit because corporations with downtown locations have eliminated parking lots and security gates.
Other corporations attempt to have an urban atmosphere in a suburban location to be avoid the cost of moving.
READ MORE: Why Corporate America Is Leaving the Suburbs for the City
By NELSON D. SCHWARTZ  AUG. 1, 2016

The Ideal Office Floor Plan, According to Science | Bloomberg

The open office plan is here to stay.
Where you sit matters.  According to Harvard Business School, in an open floor plan the idea is for co-workers to sit very close to one another.  What changes, however, is who sits next to whom.
Research conducted at one technology company shows, the denser an area is with productive people, the better nearby worker’s productivity, effectiveness, and quality of work.  The study measured proximity and productivity of 2,000 workers.   The converse is also true for “toxic” workers causing disruptions.  People rub off on each other, for good and for bad.  The open office floor plan  started as a way to for employees to share creativity and productivity.  Both Google and Pixar specifically have successful work places because of a collaborative office space.
Optimize Open Office Efficiency.
Employees tend to dislike open office floor plans claiming it is disruptive, distracting and stressful.  The thought is that workers with different strengths should be grouped together, mixing high-productivity employees with lower-quality work with slower people generating high-quality work.
READ MORE:  The Ideal Office Floor Plan, According to Science
By: Rebecca Greenfield – August 1, 2016

The Future of Work: How office design is changing | HR Dive

In the article The Future of Work: How office design is changing, times have changed, Jonathan Webb, vice president of workplace strategy at KI, told HR Dive. As millennials and younger workers enter the workforce straight from college, more workers are demanding different work environments that allow and encourage the flexibility and movability that they had during university.
But employees of all ages are also seeking offices that encourage health and wellbeing — and that means saying goodbye to cramped spaces, windowless walls and sitting for eight hours straight.
What defines the office of the future? We spoke to the experts to find out.  Read more.