Institutional Capital Targets Minneapolis Industrial Market
By Peter Loehrer, Colliers MSP
Minneapolis has secured its position as the darling market of the Midwest industrial investment community. Minneapolis was the quintessential Midwest city: cautious real estate development, durable rents with stately growth and moderate but unwavering absorption growth year to year.
This, however, is no longer the case. A combination of repeated institutional capital injections, a highly constrained land market and exponential growth in tenants looking for new space has transformed Minneapolis into an institutional and foreign capital target market.
By far the most transformational event in recent history for the Minneapolis industrial market was Link Industrial’s entrance into the market. Beginning in 2018 with the Gramercy acquisition, and continuing in 2019 with the Space Center acquisition — both of which have bits and pieces of the national portfolio located throughout Minneapolis — Link made its first real foray into Minneapolis in May of 2019 with the acquisition of the 2.2 million-square-foot Industrial Equities portfolio.
Link quickly followed this up with pieces of the GLP and Colony Capital acquisitions, as well as the largest real estate purchase in Minneapolis history, the 7.2 million-square-foot CSM Corp. industrial portfolio, and most recently the 2.5 million-square-foot Prologis portfolio.
The Industrial Equities & CSM portfolios combined constituted a critical mass of once-family-owned Class A product that gave Link enough market power to kickstart rent growth, with other large-scale owners following suit. Historically, Minneapolis saw 2 to 2.5 percent rent growth; today that’s 4 to 4.5 percent.
Constrained land market
Historically, the Minneapolis industrial development pipeline has hovered around the 1 percent mark — 1 percent of our total industrial base being under construction at any one time. Compare this to the Midwest average of just under 4 percent, Chicago’s 6 percent and Indianapolis’ 8 percent. Today, however, that number stands a little closer to 2 percent, with the recent wave of development taking advantage of that fact, as well as low cap rates.
The reason Minneapolis has experienced low supply is two-fold: a lack of available dirt to build on (Minneapolis is marbled with lakes and loamy soils), along with low historic rent growth and exit cap rate compression.
Of course, with rent growth doubled and cap rates compressing by the week, development has become increasingly rewarding. Where once they were outlying locations 30 miles from the city center, places like Dayton, Chanhassen and Lakeville are now enjoying a boom of new spec industrial construction that is nearly all pre-leased by completion.
Minneapolis recently saw its first 500,000-square-foot spec industrial project (the largest to date), which was in short-order leapfrogged by CRG’s announcement of a 1 million-square-foot spec building in Dayton. Amazon’s footprint in Minneapolis has broken 3 million square feet, and other e-commerce retailers are rumored to be looking to establish themselves here. Recent supply chain disruption hasn’t missed Minneapolis, and online retail giants are making sure that their delivery times remain low.
Led by large requirements from e-commerce users, Minneapolis user demand has picked up serious momentum. The typical year would see active users in the market looking for a combined 7 or 8 million square feet. This number has ballooned to nearly 13 million square feet — a considerable jump — since the start of COVID-19 and its disruption of the U.S. economy.
What’s drawing investors?
Investors looking to allocate capital to Minneapolis are drawn for a few reasons. Rapidly compressing cap rates, rents growing quicker by the quarter and a supply-constrained environment all contribute to our recent influx of institutional and foreign capital arriving.
As of December 2020, Minneapolis’ low water cap rate for stabilized non-Amazon warehouse sales was 5.15 percent. Less than a year later, cap rates have compressed into the low-4 percent range on a stabilized basis. It seems Minneapolis developers are in a race to see who will build the first true stabilized 3 percent cap industrial project.
Peter Loehrer is a capital markets associate with Colliers MSP investment services group. This article originally appeared in the September 2021 issue of Heartland Real Estate Business magazine.