This Week’s Economic Update, May 13, 2024

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Hopefully you had a wonderful Mothers Day celebration yesterday.  I want to give a shout out to all the mom’s who have sacrificed so much for all of us.  My mom rarely had a hot meal, but she always made sure our meals were ready to eat before she ate.  When my room was a total disaster and I had little time due to school and work to clean it, she sacrificed and picked it up.  The likely reason was to get the dirty clothes in the wash, otherwise I would have had nothing to wear.  Thanks again Mom, your sacrifices did not go un-noticed nor un-appreciated.

The commercial real estate market that was written about last week continues to show signs of further decline.  One market in particular is in deep, deep trouble.  The urban core of St. Paul Minnesota is facing what could be an existential crisis.  In January properties owned by the State Teachers Retirement System of Ohio lost virtually all of the tenants in four commercial properties along Grand Ave that they owned.  Grand Ave was an upscale destination for retail and enjoyable night life experiences for many years.  After the unrest of 2020 and COVID, the area lost a lot of interest.  The four properties now sit empty.  Tenants in other buildings along Grand are also considering closing as traffic has fallen off dramatically.  Crime in the area has pretty much stopped the night life that was once crucial to drawing people in.

A near death blow to downtown St. Paul was released last week.  Madison Equities dumped 10 commercial and multifamily residential properties in the downtown core on the market all at once.  The buildings, including the First Bank Building, account for over 1.8 million square feet of space.  Sadly, the current occupancy of most of the buildings listed is under 50%.  It gets worse.  USBank announced it will be moving out of downtown, keeping only a small bank branch.  That drains multiple floors of the current building they are in.  Friday, TDKA Engineering announced it will be moving out of downtown St.Paul also.  With USBank pulling 75 employees out and now another 300 with TDKA, the ripple effect for eateries, retail and other tenants that remain, will be significant. 

These real estate moves do not just impact the building owners, it bleeds down into the local banks that are holding loans on other local real estate.  Valuations do not fall in isolation, they fall in concert.  This means that local banks are facing some very tough times ahead.  St. Paul is not the only urban center that is suffering.  Time to check on the vacancy rates around your market, it is an early indicator of problems in your portfolio.

In the past two months there has been a massive shift in eating out.  Lower income consumers are being much more selective in menu choices.  They have also curtailed the number of times they eat out.  McDonald’s and other fast food outlets are seeing a marked decline in sales.  Recently, this has begun to hit sit down restaurants.  Reports also indicate that tipping is way down as prices of the food increase.  My own personal experience indicates that places are empty or near empty most of the day.  The only time there is a waiting list is when the eatery is understaffed and purposefully not seating certain sections. 

Another indication of tough times in food service, watch the media advertising.  Chilis and Applebees have some enticing deals running right now, super savings that drop prices back to pre-pandemic levels, just to get you in.  McDonalds is currently offering deals across the nation on double cheeseburgers if the local MLB team scores two runs in an inning.  There are many others that are also putting incredible offers out there to get a declining level of dollars in their front doors. 

This is likely just the beginning.  It could be a very tough Summer for a number of industries.

Have a great week

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