By Joe Mahoney, Opus Development Co.
Despite a confluence of major events in 2020 that shook our world — the pandemic, social unrest, historically high rates of unemployment — the industrial real estate market in the Twin Cities fared very well.
While positive net absorption was limited in the second quarter of 2020, the rate accelerated to 1.1 million square feet during the fourth quarter and ended the year at 3.2 million square feet, according to CBRE Minneapolis-St. Paul.
Joe Mahoney, Opus Development Co.
Active users also increased. In the beginning of 2020, there were 6.4 million square feet of users. At the end of the third quarter, that number had increased to 10 million, and by the end of the year, there were close to 12 million square feet of users, almost doubling over the course of the year. We see user demand continuing to trend up and accelerate this year.
To support growth plans, users are looking for highly functional manufacturing, warehousing and distribution facilities. Many businesses are increasing efficiency and productivity by consolidating several obsolete buildings into one new highly functional, build-to-suit space. COVID-19 supply chain disruption has prompted some businesses to increase their footprint for storing more inventory and reducing reliance on material supply flow.
Stable, growing
Generally, this market is restrained and does not over-build demand. Over the past five years, net absorption for industrial buildings has been equal to or greater than new supply.
Looking at a more stable 2021, the industrial sector in the Twin Cities is very healthy and poised for additional growth, especially in certain submarkets. While only three speculative projects kicked off in 2020, we are tracking for as many as 25 new projects starting construction in 2021.
In the Twin Cities, the northwest and north central submarkets have the most absorption and continue to see a large share of demand. In addition to having available land that’s well-located to the employment base and greater Minnesota, they offer amenities that can help attract and retain employees, like the Shoppes at Arbor Lakes in Maple Grove. The entertainment and open-air shopping destination with boutiques, rich landscaping, fine restaurants and casual eateries is a draw for employers and developers.
For example, Opus and Inland Development Partners co-developed the nearby Arbor Lakes Corporate Center. The 204,120-square-foot, speculative industrial building offers the higher-finished space that’s attractive to tenants who want prime office, lab or tech space in the heart of amenity-rich Maple Grove.
Evolving specs, amenities
At this time, warehousing and distribution make up the majority of current active user demand in the Twin Cities, according to CBRE. Most of this activity is being driven by e-commerce and supply chain distribution. We are also seeing a notable increase in activity for manufacturing operations.
For speculative industrial projects, site and submarket characteristics dictate potential users and their expected requirements for building dimensions, specifications and amenities.
In this market, most speculative projects are in the 100,000- to 200,000-square-foot range. Projects that exceed that size are typically build-to-suits. We still have many speculative projects with 28-foot clear heights, and on a more limited basis, 24-foot clear for smaller, 80- to 100,000-square-foot projects. Larger speculative projects (1 million-plus square feet) with 32-foot or greater clear heights and the maximum amount of dock doors are more common in distribution markets like the Chicago and Indianapolis areas.
Despite cold winters in the Twin Cities, outdoor amenities will continue to be important to tenants and owners for attracting and retaining employees. They can be as simple as patios with a few picnic benches or as elaborate as lounge areas with oversized garage doors that open to outdoor spaces with patio heaters.
For example, Opus developed Dodd Road Business Center in Eagan that delivered in 2020, and the first area to lease was the endcap with the patio, even though it was not the endcap on the prominent corner. The focus on fitness and wellness is here to stay, so accessibility to walking trails will remain an important amenity. Opus recently delivered a build-to-suit project for Cherne Industries in Shakopee that features a well-appointed fitness facility, access to trails and an outdoor amenity area.
While separating visitors from staff for added security has been trending in this market for years, the pandemic has magnified the concept. For example, bathrooms accessible to visitors in the front and near the dock doors for truck drivers and delivery personnel are being added.
Looking ahead
We see several trends in the coming years for industrial real estate in the Twin Cities. Infill sites will continue to be of high interest to both developers and users. Businesses work hard to retain their employees and moving from an existing urban location can cause employees to leave. A good portion of current inventory in urban infill markets is antiquated space with cleanup required. New projects at these infill sites will be well received by new and existing users.
Over the last year, this market has experienced considerable consolidation of ownership due to several large portfolio acquisitions. For existing tenants who are coming to the end of their lease terms, this is pushing renewal rates up. In some cases, renewal rates, which are typically based on the market rate, are more than new-construction lease rates. This will continue to fuel more growth for speculative industrial projects in the Twin Cities.
Joe Mahoney is senior manager with Opus Development Co. LLC. This article originally appeared in the March 2021 issue of Heartland Real Estate Business magazine.