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ECONOMIC UPDATE: Industrial Building Values

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?

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 and 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