 Market Continues Gaining Momentum
With continuing positive absorption, decreasing vacancies, growing tenants and rates edging upward, the Twin Cities industrial market continued its momentum in favor of the landlord. The market experienced total absorption of 1.67 million square feet. This activity helped decrease the overall vacancy to 11.5%—the lowest since 2000. Another 1.6 million square feet of absorption is expected by year end, which will further reduce the vacancy.
The Northwest boasted the lowest vacancy at 9.1% and absorbed 322,027 sq. ft. The Southwest reported 9.7% vacancy and absorbed 356,099 sq. ft. The Southeast reported 10.9% vacancy and absorbed 422,557 sq. ft. The Northeast reported vacancy of 14.8% and absorbed 570,119 sq. ft.
Bulk Is Dynamic
Bulk warehouse/distribution facilities are in high demand. They led absorption with 857,721 sq. ft., pushing vacancy down to 13.4%—the tightest since 1999. In the Southwest, bulk options are extremely limited. It is likely that a new building will be started in Shakopee. In the Southeast, tight market conditions are prompting Dart Transit to develop a 230,000-sq.-ft. speculative building in Eagan.
In contrast, the Northeast saw a large spike in vacancy. One reason is massive, single-user buildings—like the BAE Systems facility in Fridley and Federated Department Stores’ former Minneapolis distribution center—being converted into multi-tenant facilities. Conversions are occurring because the land market is tight, and developers are turning to older, single-user buildings to reconfigure and lease them.
The Northwest will have plenty of bulk as subleases totaling 900,000 sq. ft. will be returned to the market, including Archway Marketing, Wickes and Bixby Energy Systems’ spaces, but the market is tight and much of the space is very functional. Two developers broke ground on speculative bulk space in the Northwest, which will compete with the subleases and their lower rates.
Office/warehouse reported 10.1% vacancy. Most of absorption occurred in the Northeast. The tightest office/warehouse submarket was the Northwest at 8.3%. Office/warehouse space is suffering in some cases from downsizing manufacturers moving production overseas.
Office/showroom reported 11.2% vacancy, with most absorption occurring in the Southeast. The biggest showroom deal there was Internet Broadcast Systems leaving the office market and consolidating at St. Paul’s River Bend Business Center.
Rates Edging Upward
Rental rates have been relatively flat since 2000 but are starting to trend upward on average 10-15%, and concessions are diminishing across all submarkets. Quoted rental rates average $4.57 (warehouse) and $8.18 (office). Higher rents are needed to justify the rising cost of construction. New construction will continue to push existing rates. Also, as the market tightens, landlords are pushing longer-term leases.
Tenants Feeling Less Sticker Shock
Six months ago, the market experienced a “pause” in deals as users took more time to evaluate the market before making space decisions, primarily because of the higher rates of new product. Sticker shock was caused by a 25% increase in development costs for new construction. Today, some growing tenants are coming to grips with the lack of existing options and higher pricing and are expanding into new space. They’re more willing to pay new construction rates to get the efficient space they need rather than splitting operations into multiple facilities.
Spec Underway in All Submarkets
Tightening conditions, increasing rates and more confidence among users are spurring speculative development. Across the metro, 906,814 sq. ft. of space is under construction, led by the Southwest with 346,000 sq. ft. Developers have pending plans for another 3.82 million square feet and will move forward as they gain further confidence that the market will support the increased rents necessary for successful development.
Redevelopment Opportunities
Functionally obsolete but well-located properties are being redeveloped for other uses, a trend driven by the lack of sites within the I-494 loop and demand for prime retail, apartment and office infill sites. The former Supervalu distribution site in Hopkins is an example. Opus Northwest scraped it and is developing the Excelsior Crossings office campus, which Cargill will anchor. Also, watch for redevelopment of the Highcrest Park site in Roseville and 3M’s East Side St. Paul campus.
The Outlook
Another 1.6 million square feet could be absorbed this year. As the market continues to tighten, landlords will push rates, especially in well-located, quality product. Rental rates in the next 12 months could edge upward on average 10-15% with little or no concessions. Landlords will press for longer-term deals. The gap between new construction rates and existing product rates will continue narrowing. While there are pending plans for 3.82 million square feet of speculative projects, many developers are waiting for some pre-leasing before proceeding.
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