Twin Cities industrial market is on the rebound
By Liz Wolf
Signs indicate that the once-sluggish Twin Cities industrial real estate market is making some gains and is on its way back up.
Vacancy rates continue falling; large blocks of modern, functional space are becoming scarce; build-to-suit and select speculative development is returning; asking rental rates are holding steady; and free rent and other concessions – which were freely handed out during the downturn– are disappearing for prime space.
Recently released industry market reports show positive activity. The vacancy rate in fourth-quarter 2012 fell to 12.8 percent, a 3.3 percent drop from 2011 and a notable decrease from 16.4 percent in 2010, reported Bloomington-based Cushman & Wakefield/NorthMarq, which tracks multi-tenant industrial buildings. This is the lowest vacancy rate since 2008, and absorption totaled 2.5 million square feet in 2012.
While the pendulum has not completely swung in favor of industrial landlords, local experts say it’s moving in that direction.
“I wouldn’t say it has completely swung to the landlords yet, but it’s definitely leaning that way as we continue to gobble up space and vacancies start to drop,” says Kris Smeltzer, senior director of brokerage services at Cushman & Wakefield/NorthMarq. “Landlords are becoming more confident in the space they have left and are not willing to give the concessions that we saw even six months ago, especially for blocks larger than 50,000 square feet that are good, high-clear functional space. If you look market-wide, there’s such a lack of that good, clean space available, so those guys are able to start pushing rents and term.”
For example, Smeltzer says if a tenant is looking in the Southwest submarket for 100,000 square feet of functional, 24-foot clear or higher space, it really doesn’t exist. And at least five companies are searching for 100,000 square feet or more in that submarket.
Not all space is created equal
Users want efficient, high-clear, state-of-the-art, well-located buildings to meet their business’ needs, which is resulting in a tightening of prime space. However, this “flight to quality” means that older, more obsolete warehouses with clear ceiling heights lower than 24 feet aren’t experiencing the same activity.
“There’s a good, positive story to tell here, but on the other side of the fence, there’s still some inventory out there that needs to be absorbed,” says Tom Lelich, first vice president for the Twin Cities office of the CBRE Group. “A lot of that’s smaller increments of space, and perhaps, it doesn’t have some of the features that people really want. On this type of space, aggressive rates, incentives and commissions are at an all-time high.”
CBRE reports that the vacancy rate for Twin Cities industrial properties fell to 6 percent, and it continues trending downward. CBRE tracks buildings with multiple industrial tenants as well as single tenants. The overall vacancy rate is 8.56 percent when sublease space is included.
CBRE reported 325,083 square feet of positive absorption in fourth-quarter. “This is the 10th consecutive quarter of positive net absorption,” Lelich says. “The trend is obviously positive and it seems to be getting stronger. CBRE tracks active users on a monthly basis. According to our records, there are about 109 companies with space requirements that total about 7 million square feet, so it looks like there’s some good momentum out there… It’s probably pent-up demand. It was down pretty far; values dropped dramatically and we experienced negative absorption for at least a couple of years, but we’ve been slowly crawling back… Anybody that has newer, functional, Class A industrial space is going to get the most action.”
Lack of prime space drives demand for development
The limited supply of bigger blocks of newer, functional space is leading to build-to-suit and speculative development in select markets, because companies can’t find existing options to meet their space requirements.
Several build-to-suits are under construction or scheduled to break ground in the Southwest submarket, including SanMar, Trystar and Imagine Print Solutions. In the Northwest submarket, Decimet Sales is underway and FedEx Corp. announced plans for a 276,400-square-foot sorting and distribution facility in Maple Grove.
“We have four or five groups looking at build-to-suit proposals,” Smeltzer says. “They may end up staying put, but a couple of years ago we didn’t have anybody looking at build-to-suit options because there were so many existing facilities available.”
Spec is also back
Three speculative projects were developed in the Southeast submarket -- BridgePoint Business Park, River Bend Business Center and Apple Valley Business Campus -- and two in the Northwest -- Liberty Industrial Park at Diamond Lake and France Avenue Business Park. All are seeing good leaasig activity.
In 2011, CBRE reported there was only 60,000 square feet of speculative industrial construction. In 2012, that jumped to 443,000 square feet and several spec projects could move forward in 2013. For example, Trammel Crow has plans for 185,000-square-foot spec industrial building in Roseville. Industrial Equities plans to break ground in spring on a 68,000-square-foot spec industrial building in St. Paul’s Midway. Also Smeltzer says United Properties is looking at developing a 120,000-square-foot, 32-foot clear spec building in Burnsville.
Redeveloping outdated buildings
Meanwhile, some functionally obsolete warehouse properties that are struggling could be redeveloped or repositioned. Minneapolis-based Hillcrest Development acquires old industrial and manufacturing buildings that don’t meet today’s manufacturing standards and redevelops them. “We bring them back to life,” says Charlie Nestor, Hillcrest’s development and leasing manager. Nestor is now seeing larger industrial users seeking space.
“The market, which had been very soft five or six years ago, has really strengthened and users have gotten larger,” he says. “A few years ago, we were getting a 2,000-square-foot industrial user and now we’re getting 10,000- to 20,000-square foot users.”
Hillcrest recently redeveloped 1515 Central Ave. NE in Minneapolis. The building sat vacant for four years. Hillcrest reconfigured the layout of the building, put in windows and a new parking lot, and within five months, the building was 85 percent occupied.
Why more activity now?
Nestor says many companies that have weathered the storm are now actively looking forward. Those that survived, he says, probably have some presence or a lead in their marketplace and are looking to extend their ability to be the leader or grow.
“So they’re taking down more space,” he says. “They’re not going crazy; they’re not going from 5,000 to 100,000 square feet, but they’re taking bigger bites of property.”
Smeltzer agrees. “Some companies are gaining confidence to move forward on the real estate transactions that are necessary to expand their business,” he says. “A lot of companies were on hold the last two to three years, and some are finally saying, ‘We’re ready to make a move. We feel comfortable where the market is heading, let’s finally take that step.’”
He says many of his clients were taking short-term space in a couple of different locations and just making due. “In the mid-part of 2012 and into 2013, the big thing that changed was that some are saying, ‘We gotta do something.”
However, they’re very cautious and analyzing everything more closely.
“The mindset in general has changed after we went through the 2009-2010,” Smeltzer says. “Everybody’s more cautious when it comes to making big decisions about real estate or any big business transaction. But they’re cautiously making decisions out of necessity. They’ve tried to get by with what they have, but it gets to a point where they’re either going to grow their business or can’t grow because they don’t have the facilities to take on more business.”
While the market continues improving and select companies are expanding, many are waiting to make real estate decisions due to U.S. and European political uncertainty.
“People are still very analytical and it’s taking time to get deals done,” Lelich says. “We’re seeing an increase in activity… but maybe 2013 will be a breakout year.”
Posted at: 3:25 pm on February 27th, 2013