The most active commercial real estate category in the Twin Cities metro area over the last several years, in terms of leasing activity and new construction sales, has been industrial product. New construction has been trending toward office warehouse and bulk buildings with higher clear heights, as tenants are implementing new racking systems and growing upward to optimize their space.
On the surface, this trend may sound like it will leave behind the lower-clear height flex and office showroom buildings. However, owners of flex and office showroom buildings in Minneapolis-St. Paul are finding new interest by providing creative amenities and repositioning assets that are attracting entirely new tenant prospect types and reinventing what an office showroom building can become.
Paul Bickford, Colliers International
The ability to target a wider potential prospect pool including office users, retailers and non-traditional industrial users is reliant on proper vacancy preparation to be able to show the space as a true blank slate. Through white-boxing the space, owners show that the space has high ceilings with an industrial feel, an aesthetic that many office users are interested in, but at a significantly lower price point versus many office buildings. Another benefit of the office showroom product is that there is typically ample parking at the site, often directly in front of the building.
Local examples
Earlier this year, Marvin Windows and Doors refurbished roughly 20,000 square feet of industrial space to fit the company’s culture in Eagan. The interior is bright and accented with sliding glass office doors and more space orientated for team collaboration, including free-standing meeting rooms that look like small houses. The unique space and build-out allows Marvin to show off its window and door products as a type of informal showroom for visitors, while also creating a modern, open aesthetic for employees.
In Plymouth, Energy Management Collaborative (EMC) migrated less than a mile south from its previous location into the remodeled Vicksburg Business Center, which had previously been vacant for several years. The owners decided to add more windows and properly white-box the space, creating a ceiling grid and building up the sprinkler systems.
Soon after these improvements were finished, EMC signed a lease for 42,000 square feet. With the completed tenant improvements, EMC found a new home with a lively atmosphere and open environment that fit the company’s needs at industrial rental rates.
Another example of this strategic repositioning is Baker Tech in Minnetonka. New ownership of the single-story campus, which dates back to the 1980s, has landed eight new tenants following renovation, white-boxing and rebranding. New amenities such as taprooms and food trucks continue to build energy and activity at the business park. All of these improvements do cost money, but the success of these projects has shown that investment in differentiators and properly preparing industrial vacancies increases the chances of landing new tenants.
Tenants outside the norm
Non-traditional users are also influenced by the activity seen around the industrial market and are noting the functionality they receive from flex spaces, many times also looking to reinvent themselves. Examples here include users from the growing pet industries to indoor entertainment to companies who want to house larger showrooms for products they sell. Often, opportunities for non-traditional users tend to be highest in first-ring suburbs within the interstate beltway of I-494 and I-694, where close location to the urban core becomes another strong selling point.
For example, many pet-centric users have taken up occupancy in these beltways. Can Do Canines, which helps train service dogs for people with disabilities, took 22,000 square feet in New Hope. Mission Animal Hospital, a non-profit charitable animal hospital that provides vet care for those in need, leased 12,000 square feet in Eden Prairie. Adogo, the swanky pet hotel that offers 365-day hospitality for pets, has multiple locations across the metro with convenient access off commuter thoroughfares. These non-traditional users are finding that reinvented industrial spaces provide the kind of space and flexibility they need.
Redefining what makes an industrial asset, such as white-boxing and adding amenities characteristic of office buildings, can help industrial landlords draw from a larger pool of tenants and improve the leasing velocity and rental rates in flex and showroom buildings. This recent swing of significant improvements to outdated buildings is a trend that can continue to be a boom for investors, by offering unique space at competitive pricing within an environment of rising construction costs and rental rates.
— By Paul Bickford, Senior Vice President, Colliers International. This article originally appeared in the September 2018 issue of Heartland Real Estate Business magazine.