Valuation Viewpoint Winter/Spring 2020 Vol. 25 No. 1 State of the Real Estate Market Highlights By Robert Strachota For the past 10 years, many have speculated that we might be building too much, too fast. So far, however, the market continues to absorb new development. Both the U.S. and Minnesota economies remain active, with strong job markets and new projects underway. People in the real estate industry have learned from the economic crisis of a decade ago and are cautious not to repeat those mistakes. There is greater self-discipline, more thoughtful lending, and more scrutiny from banks. Lenders are no longer throwing money around—they want to see credible local backers with financial skin in the game. Unemployment remains low, wages are strong, and construction continues. These are all good signs. It’s hard to drive any distance in this area without seeing cranes on the skyline. Market Trends and Value Indicators Office Buildings – Downtown: 3% Mall Retail: -15% Strip Retail: 1% Industrial: 13% Apartments: 6% Other Indicators New Housing Starts – Midwest: Up U.S. Unemployment: Low Consumer Confidence Index: High There is a sense of balanced discipline in the marketplace unlike what we’ve seen in decades. Even in the apartment sector, which continues to expand rapidly, most participants remain cautious. Values will likely be somewhat static—not declining, but also not enjoying the steady increases of recent years. I anticipate the Twin Cities and regional real estate markets will soften in the next two years. Soften does not mean crash. This will not be like the great real estate recession of 10 years ago. The cash flow numbers must make sense today, not three to five years from now. Market Insights: Apartment Market By H. Ellis Beck Once again, the Twin Cities apartment market had a strong year. New inventory was added and quickly leased up, while rental rates continued to grow. However, signs suggest this extended period of growth may be nearing its end, as employment and rent growth begin to slow. Over the past decade, the Minneapolis–St. Paul market has seen steady demand, with vacancy rates below 5% for nine consecutive years. Development has been concentrated in key areas such as Downtown Minneapolis, near the University of Minnesota, and select suburban hubs near major highways. Capitalization rates have continued to compress as out-of-state buyers enter this tight market, and average prices have risen above $130,000 per unit. More than 10,000 new units are expected in 2020, indicating continued—though cautious—growth. Keep an eye on employment and rental growth; this expansion cannot last forever. Household Debt By Cody Lindman Over the past year, all forms of U.S. household debt have increased, reaching $13.95 trillion as of the third quarter of 2019—up $440 billion from the prior year. Despite this, delinquency rates have remained relatively stable. Mortgage debt accounts for about 68% of all household debt. Student loans total $1.5 trillion, with 10.9% of balances 90 or more days delinquent. People aged 40 to 49 hold the largest share of total debt at 25%. Those aged 30 to 39 carry the most student loan debt, at $490 billion or 32.8% of the total. Older borrowers are increasingly delinquent on student loans, likely prioritizing mortgage and auto debt—where consequences for nonpayment are more immediate—over student debt. Opportunity Zones and Condominiums By Brock Boatman Opportunity Zones The Opportunity Zone program has not ignited as much development as anticipated. Most developers view the tax benefit as a bonus rather than a primary driver of deals. With the second round of IRS guidance released and deadlines for maximum benefit passing, the program has merely enhanced deals that already made sense. Condominiums High-end condominium projects continue in the Twin Cities, such as Eleven on the River and the Four Seasons Residences. However, some projects, like Alia, have been shelved, proving that even in a strong market, success depends on careful timing and pricing. Economic Forecast 2020 By Madeline Strachota Just as baseball statistics help predict a World Series outcome, economic indicators help forecast market trends—but never with complete certainty. One of the most-watched is the U.S. Treasury yield curve. When short-term Treasury yields exceed long-term yields, the curve is said to be inverted, and every U.S. recession since 1950 has followed such an inversion. In August 2019, the curve inverted for the first time since the Great Recession. However, not every inversion is immediately followed by a recession, and the timing varies widely—from 10 to 33 months. The Federal Reserve has taken preemptive action this cycle by lowering rates several times in 2019, unlike in 2007 when cuts came too late. While economic cycles are a near certainty, it’s difficult to draw firm conclusions that the yield curve alone can predict them. Strong employment, solid corporate earnings, and improving trade conditions suggest continued stability—so long as we maintain disciplined investing, borrowing, and spending habits. Market Transaction: Real Estate Buyer: Taconic Capital and Somera Road Inc. Seller: PCCP Property: Land beneath Northstar Center, Minneapolis Sale Price: $20.9 million In November 2019, Taconic Capital and Somera Road purchased 23,725 square feet of land under the Northstar Center for $20.9 million, or $881 per square foot. The purchase consolidates ownership of both land and improvements, eliminating a costly ground lease and improving flexibility for redevelopment. Market Transaction: Business By Gary O’Brien, Hennepin Partners North American M&A activity remained strong through 2019, with more than 8,000 completed deals totaling $1.6 trillion. Median EBITDA multiples rose to 10.4 times, driven by demand for growing, profitable companies—especially in healthcare and technology. Industry Focus: Personal Protective Equipment The Personal Protective Equipment (PPE) industry—covering products such as masks, gloves, helmets, and safety harnesses—is growing steadily. Demand is driven by regulatory requirements and innovation that enhances comfort and usability. Transaction Spotlight Diversified Fall Protection partnered with North Branch Capital through a recapitalization that allowed the owner to de-risk while maintaining a minority stake. About Shenehon Company Shenehon Company is a real estate and business valuation firm serving clients nationwide. We provide innovative solutions for complex valuation issues across both private and public sectors. Services Include Real estate and business valuations Gift and estate planning Tax abatement and condemnation Feasibility and market studies Partnership interests and ESOP valuations Highest and best use analyses Contact 88 South Tenth Street, Suite 400 Minneapolis, MN 55403 612.333.6533 www.shenehon.com Contributors Robert Strachota, President Gary O’Brien, Managing Director, Hennepin Partners H. Ellis Beck, Valuation Analyst Cody Lindman, Senior Valuation Analyst Brock Boatman, Senior Valuation Analyst Madeline Strachota, Senior Valuation Analyst Victoria Mercer, Communications Coordinator Copyright 2020. Valuation Viewpoint is prepared and published by Shenehon Company. Opinions regarding business and real estate valuation issues have been carefully researched and considered by the authors. While we hope you find the information relevant and useful, it is important to consult your own advisors before making business decisions.

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