Why Manufacturing Growth Affects Everyone
According to studies compiled by Markit Economics, U.S. manufacturing is down for the months of August and September. The recent news of Brexit and the fact that China has reached a slump in their economy is causing slower manufacturing and spending around the world. The U.S. is only at a two percent growth rate for the year.
Minimum wage earnings are down for Americans compared with where they were about fifteen years ago, and the hiring trends by companies have also slowed. If Americans can’t spend, the economy can’t grow.
Economists have estimated that the average age that it takes to double the standard of living for the average American is now up to about seventy years. This inability to change one’s circumstances within a short amount of time has led to the baby boomers not having enough to retire on, so a lot of them go back to work. However, due to their age, they are usually stuck in dead end jobs that pay very little.
Young people who would ordinarily be graduating college, then landing that first job, buying that first home, and starting their family, are now moving back into their parents’ basements in droves. If they are lucky enough to land a great job, they are not getting great offers that the grads of twenty years ago did. In addition, the Federal Reserve is starting to increase interest rates, which makes it harder to purchase homes and automobiles.
There are several things in development here in the U.S. that are also causing our economy to be sluggish in growth. It doesn’t help that the unrest and attacks overseas have caused Americans to think twice or pause for longer periods of time before booking long awaited vacations to foreign countries. So the travel and tourism industries are suffering. In turn, those countries that might ordinarily have great products or services to export, may be suffering from a lack of workers and facilities because of war and civil unrest.
It also doesn’t help that we are all waiting on the results of the Presidential Election. The fiscal policies, public investment and structural reform that the new President will put into place will greatly affect our economy and cause ripple effects around the world.
The U.S. manufacturing companies are watching all of this unfold around them. With the advancement of the ease of deliveries, many Americans are using their purchasing power to order from overseas companies who are marketing cheap products and sometimes lesser quality to Americans who want to get the most for their dollar.
This in turn affects local suppliers who have slowed in their production times because the orders are not coming in. Many of them prefer to make items in bulk quantities, so they are hesitant to fire up the assembly lines and employ workers who many not have much to work on. The U.S. manufacturers are also hesitant to have a lot of inventory laying around, especially those who work in food services, because they know there is a shelf life to their product. They don’t want to have it still sitting in their warehouse when it’s close to expiration.
The U.S. dollar is strong right now too, and even though some countries are catering to Americans, others can’t afford to. This lessens the global demand for U.S. goods and services. However, it is estimated that nearly half of all U.S exports go to countries that we have free trade agreements with. Also, when the U.S. plants do fire up their assembly lines, it is estimated that they use about thirty percent of the nation’s energy supply in order to run their operation. So, that is good for the energy industry.
No one knows what the answer is to get the world economy moving again. Several theories have been tried and discarded. The only thing that seems to make sense is for industry leaders to invest in better training for their employees, study the competition abroad, increase funding for STEM related fields, and find ways to make great products at affordable prices.
Top Ten Commercial Real Estate Trends
2016 is showing great promise in both updating commercial real estate trends, and adding new ones. The following are things to watch for this year:
1. Overseas Investment into U.S. Commercial Real Estate
The U.S. property market is among the most stable and transparent in the world. With growth slowing in Europe and China, foreign investors are flocking to back U.S. projects. According to the Commercial Real Estate Development Association, $91.1 billion was spent by overseas investors on U.S. transactions in 2015. That accounts for 17 percent of all deals. Most of the investors are from Canada. Since that country is lacking in dense populations and has limited resource investment, their citizens’ view the U.S. as a lucrative way to leverage their buying power.
2. Global Urbanization and Its Reverse
Millennials and Baby Boomers have something in common. They both want to seek out living space in metro areas. As they move away from the suburbs, they are looking for affordable units to rent or purchase. In addition, they need to find places to buy their groceries, get some exercise, and shop for household items and apparel.
Generation X and Millennials with children, however, are either staying in or moving to the suburbs. Promises of more house for the money, large green lawns and local parks and playgrounds are drawing them out. Once they relocate to the suburbs, they also need to get groceries, find places to exercise, and shop for household items and apparel.
Commercial real estate has an edge in both urban and suburban areas as builders try to meet the demands of bringing grocery stores, parks, gyms, recreation sites, and houses of worship, coffee shops, bookstores, and more to the market.
3. New Commercial Construction will be More Limited
Building new multi-family dwellings is diminishing. However, the need for senior and student housing is increasing. As these demographics look for affordable housing, they are considering new options such as the tiny house movement. In addition, cities are taking old abandoned big box stores and malls and are re-purposing them for uses that better fit this day and age. Gyms, recreation facilities, and even government offices now sit where old eyesores used to reside. The city leaders realize that often it’s much more cost-effective to remodel an existing structure, rather than invest in new construction.
4. Tearing Down Parking Lots and Garages
As metro consumers get used to using mass transit, more and more of them are ditching their autos and relying on goods and services that can be obtained through delivery or by walking directly to the retailers. They seek communities that are made up of mixed use dwellings, such as having a retailer on the bottom floor, and housing on the top floors. In addition, green space has become very important for city dwellers. They want a place to play with their kids, walk the dog, bicycle and roller skate. Since land space is limited, parking lots and garages are often torn down in order to make room for more buildings.
5. Increasing Stress on Retailers
The average consumer is having to pay more these days to use their credit card, and merchant processing fees are higher too. Reports suggest that on-line sales have triumphed over in-person sales, especially around Thanksgiving weekend. In order to combat this trend, retailers will have to create virtual shopping that combines with physical shopping. Major retailers are already being threatened by discount stores that carry quality, off-brand merchandise. Almost monthly, we hear about large companies such as Macy’s, K-Mart, and JC Penney that are closing stores. However, it seems that chain restaurants are expanding. Commercial real estate experts need to move quickly to fill those properties that have been abandoned.
6. Rising Interest Rates
If the Federal Reserve continues to raise the interest rates, the market will become more stable. However, it will also rule out the small business person who has dreamed of opening a small brick and mortar store. According to the Small Business Administration, small business owners own or lease between 30 and 50 percent of all commercial real estate space in the U.S. However, if these entrepreneurs and franchises can’t afford the rent, these properties will remain vacant.
7. Drop in Energy Prices
The price of oil has dropped several times this year. This draws consumers out of their homes, and encourages them to travel. Hotels, restaurants, attractions and city tourism benefit because they are hosting more guests. As for running businesses, consumers are seeing more profit in part, because their heating and air conditioning bills are dropping. This gives additional buying power, and they tend to want to go out to enjoy their surroundings more. This affects commercial real estate experts because they need to be sensitive to those establishments that are ready to add on to their existing properties.
8. Changes in Office Landscape
Americans are seeing change come to their workplace. Several companies support telecommuting. Others support desk-sharing. It seems that the bigger companies such as AT&T are doing away with the cubicles of yesterday, and are instead embracing a collaborative work space environment. Huddle rooms, quad shaped desk rounds that hold 4-5 workers, and a lack of dividing walls and walkways have become the norm. Commercial developers are watching this new trend, and need to be quick to respond with proposals for interior remodeling.
9. The Introduction of LEED
Along with the new trends in the workplace environment, companies are embracing “going green.” They are installing energy efficient thermostats, and water savings devices that will cut down on their carbon footprint. They are also trying to continue to go paperless and rely on a digital environment.
LEED stands for Leadership in Energy and Environmental Design. It uses 3rd party verification to verify that a building is “green.” In addition, companies are installing green space inside of buildings, and planting vegetation. Commercial real estate companies need to understand this trend and be ready to respond with sub-contractors that are knowledgeable in these fields.
10. The Advancement of the Internet of Things
Pretty soon, getting to the office, turning on the lights and heating up the coffee maker will be things of the past. With the internet of things, more and more “smart buildings” are being created. Special wiring will interface with digital technology to make the life of the consumer even easier. A worker will be able to turn on the lights in the office, start the coffee maker, and pan the security cameras from the comfort of his home. If he does decide to go into the office, he can remote in to his kid’s daycare, start the oven or the crock-pot at his home, and start his car, all from the touch of button.
As commercial real estate companies continue to study this trend, they need to be able to respond by having sub-contractors who are well versed in creating apps that allow building managers to remotely control the building resources and respond to requests to restock or send janitorial services on demand.
The world and its resources are changing around us every day. We, as commercial real estate industry professionals, along with our partners, are developing plans to meet and stay ahead of these trends and demands. We aspire to be the new leaders on the information superhighway and community advancements of tomorrow.
Gaughan Completes Phase Two of City Center Commons
Gaughan Companies announces the completion of its latest development project called City Center Commons, located along highway 61 on the south side of Forest Lake. The new commercial buildings provide a clean, modern look and feel to the community.
The building will occupy several tenants including Keller Williams in one building, along with Thrifty White and Maplewood Oral Surgery in the second building. There is one additional space available for custom build-out which has the potential for a new franchise restaurant.
“We’re adding residential rooftops to the Minneapolis suburbs again and demand for more commercial and retail space is imminent based on the region’s population growth,” said Patrick Gaughan, in reference to the return of growth in the economy after a post-recession lull.
Gaughan Construction continues to embrace the growth of the economy and the future of the company.
To Own or To Sell: Commercial Real Estate Pros and Cons
Commercial real estate can be an excellent investment opportunity.
Typically, commercial properties offer more financial reward than residential properties. However in some scenarios, the risks can outnumber the rewards. Understanding the commercial real estate pros and cons is important for any investor no matter if the property was acquired by a sale or inherited. Having the ability to understand the investment and having the knowledge to make a decision if ownership or sale is the best option is crucial.
Commercial properties may refer to retail buildings, office buildings, warehouses, industrial buildings, apartment buildings and mixed use buildings. Mixed use properties feature both residential and commercial tenants in the same building.
Armed with the different types of properties available, let’s take a brief look at some of the pros and cons of owning commercial properties.
Pros
Income potential. Commercial properties generally have an annual return off the purchase price between 6% and 12%. Residential properties usually have a return averaging between 1% to 4%.
Tenant Relationship. Business owners generally take pride in their businesses and it is in their best interest to be successful and keep their business viable. A commercial property is also operated as a business, thus giving the landlord and tenant a common goal. The business-business customer relationship helps foster interactions that are professional and courteous.
Public Image. Retail tenants have a vested interest in maintaining their store and storefront, because this affects their image as well as the landlord’s. For this reason, commercial tenants and property owner interests are aligned, which helps the owner maintain the quality of the property, and ultimately, the value of their investment.
Standard Business Hours of Operation. Businesses that typically operate in a commercial setting are open during normal weekday business hours of 8am-5pm. This allows for the commercial property owner to not have late night issues or deal with tenants after hours. Typical calls are for true emergencies or a monitoring service on the building.
More objective price evaluations. Financial information is easier to acquire for commercial properties so that an evaluation of the property price is based on the current owner’s income statement. The seller should be using an experienced broker so the asking price is set where an investor can earn the area’s prevailing cap rate for the commercial property type they are looking at (retail, office, industrial, etc.).
Triple Net Leases. There are variations to triple net leases, but the general concept is that the property owner does not have to pay any expenses on the property. The lessee handles all property expenses directly, including real estate taxes. The only expense the investor handles is the mortgage payment.
More flexibility in lease terms. Fewer consumer protection laws govern commercial leases, unlike the dozens of state laws, such as security deposit limits and termination rules that cover residential real estate.
Cons
Time commitment. Owning a commercial building with numerous tenants or even just 2-3 tenants, there is more to manage than one would with a residential property investment. Ownership can’t be an absentee landlord and maximize the return on the investment. With commercial properties, there are multiple leases, annual Common Area Maintenance (CAM) adjustments, day to day maintenance issues, as well as potential safety concerns with customers and the general public accessing the property.
Property Management and Hiring Vendors. Some commercial property owners try a self-managed approach, but a more ideal situation is hiring a property management company as the best scenario for both the investor and their tenants. Licensed vendors to handle problems and issues at the building is a smart investment as well. This is an added cost which doesn’t seem ideal but these expenses can be budgeted into the building’s expenses and is well worth the cost. Property management companies can charge between 5-10% of rent revenues for their services, which include lease administration. Once a property is purchased, the investor will need to decide if they will be handling the leasing responsibilities or hiring out a broker to handle those responsibilities. If hiring a broker, be sure to budget in paying out commissions to not only the broker the investor has hired, but if potential tenants are being represented by a broker as well.
Bigger initial investment. Purchasing a commercial property typically requires more up front capital compared to a residential property. Once an investor has acquired a commercial property, they can expect some large capital expenditures to follow. Everything can be running smooth for a few months and then the roof starts leaking and now there is a $20,000 bill to address the repairs. With more customers there are more spaces to maintain and therefore more costs. For an investor, a top concern is that the increases in revenue outweigh the gains in costs, to support purchasing a commercial property.
More risks. Properties intended for commercial use have more public visitors and therefore have more people on the property each day. The more visitors that visit, the greater the chance that someone can get hurt or do something to damage the property. There are a variety of things that make commercial buildings risky such as snow removal (ice for slip and falls), vandals of all types including graffiti or damage to exteriors or landscape, and a variety of other situations. The building must have the proper insurance that can cover a potential lawsuit or building damage is very important so that there are limited responsibilities and out of pocket costs.
If looking for an investment opportunity, commercial property is a great avenue to pursue as long as one is aware of the pros and cons to make educated decisions.
John Chirhart Moderates Annual Land Development Conference
On Friday May 6, 2016 The Minnesota Real Estate Journal held their 12th Annual Land Development Conference at the Golden Valley Country Club. Gaughan Companies’ John Chirhart was moderator for the Opportunities for Commercial Land Development section with a panel that included Brian Pankratz with CBRE, Tony Barranco from Ryan Companies, and Phil Cattanach of The Opus Group. Topics they covered in their discussion included:
- New Opportunities for development is happening in urban core right now
- What types of projects are in consideration for land development
- What are the challenges with land development vs. redevelopment
- Who is active in the market place and what is their risk tolerance and expected returns
- When or will there be a next big wave of land development or is it a thing of the past
Attendees were treated to a wide variety of topics moderated by industry professionals. Other topics in the Land Development Conference included Land Plan Optimization, “Hot” Legal Topics in Land Development, How to Effectively Work With Municipalities, and the Residential Home Builders Roundtable.
John Chirhart started his career in commercial real estate back in 2000 and has been with Gaughan Companies since 2009. During his time with Gaughan Companies, John has been involved in numerous land transactions including recently helping a client sell 157 acres in Lino Lakes to home builder Lennar. John, along with his business partner Lou Suski, have sold hundreds of acres of land in the past couple years and are currently listings hundreds of acres more for current clients throughout the metro and rural areas. If you own any land that you are interested in selling contact the Gaughan Companies Brokerage Department today at 651-464-5700 or contact them HERE.
