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Phil Simonet

INDUSTRIAL MARKET UPDATE: YEAR END 2020

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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.
Conclusion
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

LEASE VS. OWN

Lease vs. Own

LEASE VS. OWN
Many business owners dream of owning their own industrial or office building rather than lease space and pay rent to a third party landlord.
One should consider both the costs and benefits of commercial property ownership to understand if it’s the right financial and operational move for the individual owner (what ever form of ownership it may be) and the company occupying all or part of the property.
Potential Benefits of Ownership:

Better control of building operating expenses
Potential property value appreciation creating more personal wealth
Principal reduction on the loan via rent payments from the tenant
Tax benefits such as depreciation
An excellent marketing tool (the bldg.) demonstrating the success of an organization
May be less expensive than leasing space in today’s market

Potential Costs and Risks of Ownership:

Generally less flexibility to expand or contract space size
Requires equity up front: 10%-25% down payment
Responsible for ALL building maintenance (roofs, parking lot, HVAC, etc.)
Could lose value during a market downturn
A default on the loan may result in foreclosure by the lender

If you are interested in a more thorough review and recommendation on Own vs Lease feel free to call Paramount Real Estate Corporation.  We have decades of experience leasing, acquiring and disposing of commercial real estate properties.
Written By: Phil Simonet, Principal | Paramount Real Estate Corp | TCN Worldwide