Increasing User Demand Spurs New Round of Industrial Development in Twin Cities

by Danielle Everson

Jason Meyer,	 Cushman & Wakefield |  NorthMarq Industrial Brokerage Group

Jason Meyer,
Cushman & Wakefield |
NorthMarq Industrial Brokerage Group

Buoyed by a healthy economy, the Twin Cities industrial market has experienced strong demand for functional, 24- to 32-foot clear height space, with more companies expanding during the first three quarters of the year, according to Cushman & Wakefield | NorthMarq.

The market posted nearly 1.3 million square feet of absorption in the first three quarters of 2014, a solid number. The overall vacancy rate for multi-tenant properties 20,000 square feet and above stood at 10.1 percent at the end of the third quarter, down from a high of 16.4 percent in 2010.

The bulk/warehouse segment has posted the most leasing activity with 451,097 square feet of net absorption year-to-date, including 140,514 square feet in the third quarter, and a tight 9.2 percent vacancy rate.
Office/warehouse absorption totaled 476,032 square feet year-to-date through the third quarter, and 391,676 square feet in the third quarter alone, lowering the vacancy rate in that segment to 9.6 percent.

Office/showroom absorption totaled 359,687 square feet during the first three quarters of 2014, lowering the vacancy rate in that segment to 12.8 percent, the lowest since 2006 when it stood at 11.7 percent.
The Northeast submarket posted 222,267 square feet of net absorption in the third quarter. Meanwhile, the Northwest submarket has recorded 489,538 square feet of positive absorption year-to-date.

Noteworthy Leases
Signed deals during the first nine months of 2014 included Pro-Con’s 120,000-square-foot lease in New Hope; Bay Islands Coffee Co.’s 92,000-square-foot sublease in Plymouth; Process Display’s 112,000-square-foot lease in New Hope; and TCF Bank’s 108,000-square-foot lease in Plymouth.

The largest deal was home furnishing retailer Room & Board’s lease of 485,000 square feet in Otsego, which is not included in multi-tenant absorption figures. The Northwest submarket also has a strong office/showroom market driven by medical technology firms including SterilMed’s 40,000-square-foot lease in Plymouth and Vention Medical’s 32,000-square-foot lease in Brooklyn Park. Tactx Medical agreed to a 100,000-square-foot office/warehouse space in Plymouth.

After recording negative absorption in the second quarter, the Southeast submarket rebounded with nearly 154,000 square feet of positive absorption in the third quarter. The Southeast submarket has a large disparity, posting the lowest bulk vacancy rate
market-wide (8.3 percent) and the highest showroom vacancy (16.1 percent). The Northeast submarket is “simmering” with deals. However, it is nearing full capacity and the lack of functional space is constraining activity.

The Southwest submarket’s activity focused in Shakopee, including TE Connectivity moving into its build-to-suit, Shutterfly’s build-to-suit under construction, and Cameron’s Coffee expansion. Bayer leased 136,000 square feet of space in Shakopee, and Cokem also leased 119,000 square feet of space in Shakopee.

Southwest showroom space remains stagnant, mirroring the Class B office market, which is struggling. Class B office space often competes with flex/single-level showroom properties.

Development Heats Up
The lack of larger blocks of functional space (primarily bulk/warehouse), has led developers to start build-to-suit and speculative developments. Eleven projects totaling nearly 2 million square feet are underway — eight spec projects totaling 1.3 million square feet and three build-to-suits totaling 525,000 square feet. It’s the most construction since the late 1990s.

While there is strong demand for user-occupied buildings, the inventory of available quality product is low. List prices on quality buildings have risen to near pre-recession levels. Sales activity was tepid in the Southeast with only two major sales closing but at healthy prices: Northfield Van Lines acquired a building in Eagan and Nachman International purchased a building in Rosemount for $73 per square foot. In the Northwest, sales activity was slow, but prices reached pre-recession values. Gamet Manufacturing acquired a building in Brooklyn Park and Houck Machine purchased a building in Plymouth.

Tale of Two Markets
The market remains bifurcated. Landlords of functional, modern space are gaining some pricing power and concessions have diminished. For less-functional properties, however, lower rates and concessions remain.
In some cases, the higher asking rates for new construction may help landlords of existing product push rates slightly. In the Northeast submarket, the asking warehouse rates of $4.85 to $5.50 per square foot for new construction have set new highs for industrial space and have the effect of pulling quoted rates higher, especially for the newer functional product.

The industrial market is seeing robust investor demand and an influx of new capital. While investors continue to favor traditional core product — well-located, low-finish distribution space — demand is increasing for higher-finish “flex” properties as well.

The best bulk industrial assets are trading at cap rates in the low 6 percent range. The market could potentially see a deal in the sub-6 percent cap rate range in six to 12 months.

We expect the industrial sector to remain strong with as much as 700,000 square feet of absorption in the second half of 2014. Pricing power should continue for landlords of new construction and niche opportunities like showroom space in the Northwest submarket and quality office/warehouse spaces of at least 20,000 square feet in the Northeast.

With nearly 1.3 million square feet of positive absorption year-to-date, the Twin Cities expects to end 2014 strong, led by new construction. With nearly 2 million square feet currently under construction, developers will continue to chase demand for newer, more efficient buildings with clear heights of 24 to 32 feet well into 2015.

— By Jason Meyer, executive director of brokerage services,Cushman & Wakefield | NorthMarq Industrial Brokerage Group. This article first appeared in the December 2014 issue of Heartland Real Estate Business magazine.

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