Industrial Market Fundamentals Bend But Don't Break in 2008
By Byan Van Hoof & Aileen Halligan, CB Richard Ellis
A global recession has arrived. The world's largest economies have begun to contract and the global real estate market is soon to follow. By contrast, the Minneapolis/St. Paul industrial market remains stable proving it can withstand what other major markets cannot in terms of the core industrial market fundamentals; absorption, vacancy, and rental rates.
According to the Minneapolis office of CB Richard Ellis, the 2008 absorption (demand) will indeed be positive with more tenants moving in than out. As of third quarter 2008 there was approximately 896,000 square feet of positive absorption. Even though this number is well below the five year average of 2,965,000 square feet per year, the important point here is that we continue to post positive absorption.
Most of the projected problems on the horizon for commercial real estate are due to a lack of demand, but the supply side of the equation also seems to be helping with the overall market stability here in the Twin Cities. Developers have learned from the last downturn to limit speculative projects in this environment. As a result, the number of new construction projects completed in 2008 in the Minneapolis/St. Paul market is around 1.2 million square feet, which is down 34% from just five years ago. This lack of new product infusion has helped keep the vacancy rate well within the five year average of 6.37%. The third quarter numbers have actually decreased to 5.7% of the 322 million square foot industrial base. This decrease is not typical in most other US industrial markets where some vacancy rates are well over 11%.
In addition to lower vacancy rates, local industrial rental rates have not seemed to be affected by the national economy. Deals are being done near asking rates. Many times tenants only have a small number of building options, as well as a few new construction options. While rental rates have remained largely stable, particularly for newer buildings, we are starting to see additional concessions for tenants. Landlords must focus on tenant retention and shorter lease term renewals to keep their occupancy numbers at a constant.
In the months to come we will continue to see a deterioration in the global industrial market fundamentals due to the global recession. Thus far the Minneapolis/St. Paul industrial market has demonstrated its stability due to the underlying positive market principles. According to the Torto Wheaton Research Industrial Outlook, total employment in the Minneapolis area will grow by 0.7% per year in the next five years aiding economic expansion. Due to decreased vacancy, stable rents, moderate absorption, and projected moderate job growth, the Minneapolis/St. Paul industrial market is well positioned for a strong market recovery in 2010-2011.
Posted at: 9:05 am on December 30th, 2008