Minnesota Solar Energy Incentives
With more sun in our Minnesota day, it seems fitting that property owners are looking into the costs and benefits of turning to solar energy for providing their properties with power. In the last few years solar energy has seen considerable growth in Minnesota. By 2023, the state has a goal to have 10% of it’s power sourced through solar energy (1). Consequently, the important question is; what incentives are available to property owners to install solar panels?
Most notably, tax credits and rebates are one incentive that has been created for property owners who are establishing a solar energy panel system. Certainly, these benefits are an effort to grow the use of solar energy. Tax credits and rebates are available on the federal, state, and municipal level. The most notable of these is the Investment Tax Credit (ITC). This is a federal tax credit that applies to property owners installing a new solar energy system. It allows for the deduction of up to 26% of the installation cost from their taxes through the year 2022 (2). This, as well as the potential reduction in operating expenses of a property, adds up to making solar energy much more affordable for many owners.
Notably, the decreasing use of fossil fuels and the growing renewable energy industry is emphasized by this recent announcement; The U.S. renewable energy consumption surpassed coal consumption for the first time in 130 years (3). Accordingly, renewable energy such as solar will continue to grow in its efficiency as well as its affordability. Ultimately, to become a viable option for owners to increase the value of their property, attract new tenants, and reduce operating expenses.
To see what benefits are offered for new solar energy systems in Minnesota, go to: https://programs.dsireusa.org/system/program/mn/solar
Written By: Jack Buttenhoff
Minnesota Solar Energy Incentives
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
Unlocking the Value of Owner-Occupied Real Estate
Many companies prefer to own real estate that is critical to their business operations. Some privately held companies choose to have the owner of the business purchase the real estate used for their business and lease it back to their company for tax reasons and asset diversification. Often, they have owned this real estate for many years. Thus, it most likely has appreciated in value. Net leased real estate assets with long term leases in place are in high demand today, as investors look for reliable cash flow, tax shelter and a hedge against future inflation. Now may be the time to consider unlocking some of the capital that is tied up in real estate to take advantage of this sellers’ market.
We were recently asked to advise a client that was preparing to sell one of their businesses. They also wanted to sell the real estate that the business occupied. Our job was to figure out how to maximize these sale proceeds. Should they include the real estate in the business sale or sell it as a separate asset?
The buyer of the business was a strong publicly traded company. They were willing to enter into a ten-year lease for the property with options to extend beyond that. Paramount advised our client on what the real estate would be valued at with a long-term net lease in place as well as to what market rent should be and other important lease terms. In turn, our client was able to compare this valuation to what the business buyer was willing to pay for the real estate. We determined that our client would maximize his return by separating the business sale from the real estate sale. Ultimately, our client entered into a long-term net lease with the entity that purchased the business. Shortly after closing on the sale of the business, Paramount listed the net leased real estate For Sale. We quickly sold the property for over asking price.
Does a Sale Leaseback Make Sense for Your Business?
If your company is occupying real estate that it owns but you want to unlock some of the value in the real estate to reinvest back into the business or use for other purposes, today is a great time to consider entering into a sale leaseback. You can structure a long-term lease for the property under terms that fit your business requirements, and then free up your equity through an investment sale transaction. With today’s low interest rates, cap rates on good investment real estate are the lowest we have experienced in decades. This translates into a higher sale price. Most businesses can deploy the cash received from the sale of their real estate back into their business. Thus, making a higher return on this capital then they would have leaving it invested in their corporate real estate.
Please feel free to reach out to a Paramount real estate professional to see if a sale leaseback makes sense for you.
Written by: Fred Hedberg, SIOR
WHERE DID ALL OF THE WORKERS GO?
Where did all the workers go? Some people point to March 12th, 2020 as the date that American society recognized the then-unknown virus from China as potentially dangerous. On that date, the NCAA cancelled their annual “March Madness” tournament. This was effective in communicating the seriousness of the situation to the general public. In the following weeks and months, the global economy saw historic unemployment, government-mandated stay-at-home orders, and a level of financial panic not seen in over a decade. The labor market may never again return to its pre-Covid equilibrium, forcing society to adapt to the “New Economy”. According to the Saint Louis Federal Reserve (FRED), national seasonally-adjusted unemployment reached its cyclical peak in April at 14.8%.
As medical professionals began to put a plan into action, the world slowly adapted. With people falling back into a routine that resembled the American brand of consumerism, certain segments of the economy began reopening, and some even expanding. Unemployment has steadily fallen from its April peak to 6.3% in January 2021; still well above the February 2020 level of 3.5% (FRED). In the Institute for Supply Management’s January 2021 Manufacturing report, Timothy R. Fiore, CPSM, C.P.M notes:
“The January Manufacturing PMI® registered 58.7 percent, down 1.8 percentage points from the seasonally adjusted December reading of 60.5 percent. This figure indicates expansion in the overall economy for the eighth month in a row after contraction in March, April, and May.”
While unemployment rates have dropped, employers have been seeking additional workers. For reference, the Bureau of Labor Statistics stated that in January of 2020, seasonally-adjusted total non-farm, private payrolls expanded by 255,000 jobs. In November, 359,000 jobs went unfilled. December gave back a significant portion of November’s gain, but the three month average change remained positive at 239,000 jobs. Moving ahead to February of 2021, non-farm payrolls expanded by 379,000. Inflation fell to 6.2% the same period.
What does this mean?
The data indicated that employers are adding jobs at a faster rate than unemployment is decreasing. One hypothesis explaining this is that frictional unemployment will increase as an economy adapts to using new technology. Essentially, existing worker skills are mismatched with current employer needs. Workers with outdated skills may not be able to find comparable jobs and be forced to unemployment or less-specialized work. Another hypothesis is that low-skilled workers that have been temporarily unemployed have an incentive to stay unemployed, so long that the government extends benefits.
The aim of this article is not to challenge unemployment insurance or to suggest structural changes to the economy. It is to point out the state of the labor market in its current condition.
Breaking the Chain
As government-imposed shut-downs have helped accelerate the long-coming ecommerce boom, certain restrictions have made online shopping wait-times longer. These same restrictions have similarly affected business-to-business transactions, and the era of the global supply chain more generally.
The Cost of Restrictions
As consumers and businesses accelerate their purchasing to meet demand, the Port of Los Angeles is less equipped to handle the increase in volume. As of February 23rd, the Port of LA is seeing a year-over-year increase in import volume of 294.94% (The Signal – LA). Volume reached 169,602 Twenty-Foot Equivalent Units (TEUs) the week of February 21st. It is expected to reach 174,500 TEUs by the week of March 7th.
California state and municipal restrictions on the amount of workers in a given area at any one time have increased the amount of time it takes for a ship to be unloaded, its contents delivered to a warehouse, and subsequently sorted and reorganized for further distribution. Ships are forced to anchor at harbor as crews wait their turn to unload; incurring further costs and lengthening delays. According to the same report, eighteen container vessels were at anchor, with an average time at anchor of 7.8 days. There are fifteen additional ships expected to anchor between February 23rd and 27th.
Many of the goods that come into the country on the west coast go on to various hubs around the nation for the next leg of distribution. Dallas/Fort Worth is one of these major hubs. The recent inclement weather in this area has further complicated supply chains and distribution flow. Last week, Union Pacific shut down all intermodal gates impacted by the weather (SupplyChainDive). BNSF issued a notification to customers indicating extended delays throughout Texas and the Gulf region. Power outages left more than four million residents and thousands of businesses in the dark; grinding one of America’s most important logistic centers to a halt.
The uncooperative weather was unfortunate, but is not a sustainable problem for the logistics industry. On the other side, the global supply chain is delicate even under the best conditions, let alone when government imposes labor restrictions. The fragility of supply chains is an issue for business owners and strategists to solve for decades to come.
LDI Land Sale in Brooklyn Park
A new speculative industrial building is planned for Brooklyn Park and the Paramount Real Estate Corp team of Fred Hedberg, John Young, and Joe Schultz sold the land to get the project started. The Paramount team has provided real estate services to Liberty Diversified International (LDI) for over a decade. This includes leasing several of LDI’s industrial buildings and, most recently, selling the excess land in Brooklyn Park. The site is a 5.5-acre parcel at 9501 Louisiana Avenue (southeast corner of Highways 169 and 610) and the developer plans to build a 75,000 square foot state-of-the-art industrial building called Highview 610 Business Center.
Endeavor Development, founded by Josh Budish, is the developer. Groundbreaking for the property is planned for this Spring. The Paramount team is also handling leasing for Highview 610 and is marketing the building for fall 2021 occupancy. The property has have great visibility to Highway 610, will be 28’ clear height, have plenty of vehicle parking, and a spacious truck court. The building will be divisible to 15,000 square feet.
For more information about investment sales contact us at:
PARAMOUNT REAL ESTATE CORP | TCN WORLDWIDE
1650 W 82nd Street, Suite 725 | Bloomington, MN 55431
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
OFFICE MARKET UPDATE: YEAR END 2020
Most everyone will agree that 2020 was an exhausting year. Challenges brought on by the pandemic, social unrest and a polarized political environment kept the mood just below tolerable. Working from home and state mandates have left streets empty, restaurants closed and frustratingly vaccinations are just not happening as expected. Not surprisingly, state unemployment numbers rose. Reaching 3.9% up from 2.7% at year-end 2019 and business pushed decision making out to the future.
Q4 office leasing data does not bring too many surprises as overall absorption for the quarter came in at a negative 203,552 across all property types in all submarkets. The only winner appears to be the Northwest submarket. It experienced 4th quarter positive absorption of nearly 300,000 square feet. Overall vacancy rates have increased by over a full percentage point year over year. They came in at 13% for all properties and 17.2% in multi-tenant properties, nearly 2% over year end 2019.
What about Rental Rates?
While vacancies are up and the market still struggles, rental rates have not changed. Landlords are likely willing to incentivize new deals with free rent and larger allowances but for now aren’t moving off their quoted rental rates. Overall quoted rental rates are averaging $24.81 per square foot gross, slightly higher than 2019.
Total sales volume for Q3 surpassed 1.4 million square feet. Low interest rates continue to drive sales but inventory is low and investors have few options readily available. Working from home continues and the expectation is that employees will start returning to the office late in 2021. In the meantime, landlords are working to make their properties cleaner with bi-polar ionization and touchless doors/elevators/restrooms. Rearranging office layouts to meet 6’ social distancing recommendations is the primary tool being utilized and we all hope vaccination levels ramp up and the local economy starts humming again.
Written By: Nancy Powell, Vice President | Office Sales & Leasing
IOT? WHAT IS IT???
The Internet of Things, or IoT, is a little-known concept becoming increasingly more important in everyone’s daily lives. A technical definition is: cyber-physical systems incorporating internet connectivity with the ability to sense and react to the world in innovative and highly useful ways. In practical terms, you can think of IoT as the fine tuning of efficiency in the supply chain using technology. For example, IoT is the Amazon Echo you use to control the temperature in your home. It’s the smart glasses your warehouse workers wear to guide them in filling customer orders. That’s right. There are glasses worn by humans, that have visual and verbal cues provided by a connected inventory and sales system overlaid on real world pick locations. Think virtual reality glasses, with the actual warehouse racking in full view. Glasses that guide them around the warehouse to pick and fill orders.
Businesses have been searching for ways to acquire more data and use it effectively to reduce costs and increase efficiency. Until recently, the processors needs were too large, costly, and inefficient to scale up. Three new developments changed this:
First, RFID tags – Radio Frequency Identification tags, which are low-power, inexpensive chips that can communicate wirelessly. These allow manufacturers to track inventory location. As well as monitor information such as manufacturing date, expiration date, and warranty periods.
Second, the increasing availability of broadband internet and cellular and wireless networking. These systems provide digital infrastructure for IoT to be more broadly used in manufacturing.
Third, the adoption of IPv6, (internet protocol version 6), which, should provide enough IP addresses for every device the world is ever likely to need.
Now the stage is set to dramatically increase the effectiveness of IoT in at least three distinct areas:
(1) PRODUCTION AND FIELD OPERATIONS
IoT solutions can be used to monitor machine utilization such as run time, operating speed, product output, repair needs, and quality control. The data is gathered in real time then aggregated in the cloud. It is transmitted to shop floor workers’ user interface apps making immediate adjustments. These systems can monitor inventory of raw material on the shop floor and automatically order parts to keep production running.
(2) SUPPLY CHAIN MANAGEMENT
IoT supply chain management solutions monitor the location, status, and condition of every object at any segment of the supply chain (be it an individual inventory item on a warehouse shelf or a truck delivering supplies). For instance, with the traditional supply chain management methods, manufacturers could only retrieve general data such as availability of a part. With IoT in the manufacturing and distribution supply chain it changes everything. Businesses can get information such as the location, condition, shelf life, quality, AND availability of each item.
(3) CONTROL OF OUTSOURCED OPERATIONS
When a business builds or buys a facility in a different city, state, or country, it still needs to maintain quality and production standards. IoT-driven utilization monitoring solutions help industrial companies keep production and distribution on track. They do so by monitoring real-time equipment efficiency metrics without direct access. Smart products located in one city can access and assess real time data in another city. This allows companies to make changes to and keep the distribution process moving effectively and efficiently.
IoT may be the new hot technology buzzword, but there are challenges. Lack of qualified employees who can use it, cost implications, and data privacy concerns are causing businesses to carefully measure the costs and benefits of IoT adoption. In most cases, businesses are taking a step-by-step approach. This ensures they are implementing processes that match company culture and create efficiencies. So, IoT is not yet self-aware, but beware, you will be hearing a lot more about it in the years to come.
Written By: John Young, CCIM