Industrial real estate market boasts one of its strongest years
By Liz Wolf
While industrial real estate might not be considered the most glamorous property type, it outperformed many other sectors in 2015. In fact, it boasted its strongest year in a decade.
With deals like Amazon’s $220 million, 820,000-square-foot distribution facility in Shakopee, Milestone AV Technology’s 240,000-square-foot build-to-suit in Shakopee and catalog retailer Bluestem Brands Inc. moving its headquarters into the 345,000-square foot, former Supervalu headquarters in Eden Prairie—the industrial market is making headlines.
The Twin Cities industrial market reported record levels of absorption and new construction in 2015. The market’s vacancy rate at year-end dropped to 9.4% -- the lowest in a decade—and it absorbed 3.7 million square feet, according to Cushman & Wakefield/NorthMarq’s (CWN) year-end Compass Report.
What’s driving demand?
“It’s the economy,” says Chris Garcia, principal of St. Louis Park-based CGC Commercial. As the economy improves, companies are showing confidence by expanding and signing longer leases.
“When you look at all of the deals, there’s not one sector that’s really leading us; it’s the overall economy,” Garcia says. “I have engineering clients growing. Manufacturing clients are growing. Pure distribution guys are growing. It seems that everyone is taking on more space.”
According to CWN’s report, the Twin Cities labor market continued tightening as unemployment marked a 15-year low and was trending significantly below the national rate. It also reported that the market added more than 30,000 jobs last year.
Developers are taking notice
The strong demand is certainly not going unnoticed by developers.
Colliers International Minneapolis-St. Paul reports 3.9 million square feet of new industrial space was added to the market in 2015; 55 percent was speculative space and 45 percent was build-to-suit. (Colliers reports an 8.1% vacancy rate and 2.96 million square feet of absorption in 2015).
Colliers also reports there’s 2.23 million square feet of additional industrial space under construction, including e-commerce giant Amazon’s 820,000-square-foot distribution facility in Shakopee—the biggest deal of 2015. E-commerce deals are driving significant demand.
“They’re a growing firm in the Twin Cities,” says Jon Yanta, executive director, brokerage services at Cushman & Wakefield/NorthMarq, who was one of the brokers representing Amazon in the deal. He said Amazon also has another smaller facility in Shakopee and one in Midway.
Amazon’s massive distribution center is expected to open this summer and employ at least 1,000 workers.
Other build-to-suit projects going strong
Duke Realty is developing a 135,000-square-foot headquarters/showroom building in Plymouth for furniture dealer Intereum Inc. Duke will break ground this summer with completion set for winter, says Josh Budish, Duke's vice president of leasing and development in Minneapolis.
Duke has been very active locally including doing build-to-suits for furniture retailers Blu Dot and Room & Board within the last year. The developer is also underway on Milestone AV Technology’s build-to-suit in Shakopee.
“2015 was a banner year for industrial,” Budish says. “And we’re close, but not yet finalized on a build-to-suit on our last site in Otsego at Gateway North.”
Other noteworthy build-to-suits in the market in 2015 include Fedex’s Distribution Center in Rogers and Wurth Adams’ facility in Brooklyn Park, among others. And build-to-suit activity doesn’t appear to be slowing. CWN anticipates more than 1 million square feet of new build-to-suit space “taking shape in 2016.”
Speculative development also continues. According to Garcia, there are at least four spec buildings currently underway totaling around 700,000 square feet.
Northwest is hot submarket, but is it becoming overbuilt?
The Northwest submarket, in particular, is seeing a number of new deliveries and buildings under construction. According to Garcia’s research, he tracked approximately 3.1 million square feet of new industrial space delivered in 2015, and 2.5 million square feet was in the Northwest submarket.
“And developers there remain bullish,” Garcia says. He says Liberty Property Trust closed on enough land to deliver another 2 million square feet of space in the Dayton area, and Scannell Properties purchased enough land to build 2 million square feet in Brooklyn Park.
He says if the Northwest submarket is not already overbuilt, it will be in the next few years if development continues.
Where are rates?
Record levels of new construction continued to push asking rates, reported CWN.
Garcia believes it will be interesting to see what happens to rates. He says they’re currently topping off at $11 per square foot for office space and $5.50 per square foot for warehouse space. He says Opus is “pushing the norm” by marketing a building in Plymouth for a “whopping” $6.50 per square foot for warehouse.
“That’s a high water mark in the market,” he says.
He believes rates, however, will likely level off and start to decrease.
What does 2016 hold?
CWN’s report indicates that the market won’t likely see the same record-breaking levels of activity in 2016 as in 2015. A shortage of good new building sites and a lower supply will mean less absorption in 2016. CWN is projecting 1.25 to 1.5 million square feet of absorption in the first half of the year.
Also, Yanta believes the market is at the peak of this expansion cycle.
“There’s still a lot of velocity,” but he says you never know how long cycles will last. “Cycles can last four, five, 10 years,” he says. I think it started in 2010-11 and started going hard in 2013-14 and really peaked in 2015 for us at least. The question is can it go another two or three years after that?
“It depends what happens with the election, what happens with ISIS, world economies, but if something doesn’t happen dramatically, I still think there will be another couple years of good deal-making going on,” he adds. “You just have to be selective on some of the areas you go to and the product type. A lot of companies will do just fine.”
Posted at: 11:48 am on March 1st, 2016