Has the pendulum swung to favor property owners in the Twin Cities industrial market? Not quite, but strong net absorption for bulk buildings and a recovering economy are creating positive momentum, bringing the market closer to equilibrium.
Challenges remain for manufacturing and low-clear-height properties, but we expect that area of the Twin Cities industrial market to strengthen, too, as overall conditions continue to improve.
In the third quarter, industrial net absorption totaled 669,179 square feet, driving down the vacancy rate to 11.2 percent compared with 11.8 percent in the previous quarter for the 113 million-square-foot market. The Northwest and Southwest submarkets led the way, with 329,774 square feet and 226,230 square feet of net absorption, respectively.
While positive net absorption is a great sign for the Twin Cities industrial market, the statistics really get interesting when broken down for big-box bulk properties, especially modern space built since 1995 with at least 28-foot clear-height ceilings.
Modern bulk industrial properties account for approximately 25 percent of the overall 25 million-square-foot bulk market, but gained more than half of the subsector’s net absorption with 131,175 square feet.
That led to a 2.1 percent drop in third-quarter vacancy from the previous quarter, to 5.7 percent for modern bulk properties. Similarly, modern warehouse space, built since 1995 with 24- to 28-foot clear heights, had a 1.4 percent decline in vacancy — to 8.7 percent — and 163,316 square feet of third-quarter net absorption.
Market Drivers
A few factors contribute to the improved prognosis for the Twin Cities industrial market. First, the region’s stable, diverse economy and concentration of Fortune 500 companies positions the Twin Cities to weather a recession and rebound stronger than many other parts of the U.S.
Further, the Twin Cities is a Midwest and national hub for one of the U.S. economy’s most vibrant sectors, medical R&D and manufacturing, with companies such as Boston Scientific and locally based Medtronic and St. Jude Medical serving as bellwethers for both the sector and the region.
Medical technology will continue to play a leading role in the industrial market’s resurgence locally, as a handful of build-to-suit developments take shape in late 2013 or early 2014.
The Twin Cities’ core of locally based entrepreneurial companies that are active regionally and nationally drives the industrial market as well. Among the most substantial third-quarter leases, locally based companies Delkor Systems leased 113,000 square feet, Archway leased 109,000 square feet and Blanks USA took 60,000 square feet.
A hometown Fortune 500 company, Best Buy, also has grown its distribution in the Twin Cities, with a 155,867-square-foot expansion of its 433,648-square-foot logistics operation in Bloomington.
Best Buy’s warehouse expansion fits into its plans to grow online sales while downsizing and remodeling retail locations.
One key factor in the industrial market’s resurgence locally involves a dearth of pre-recession speculative construction and overbuilding and the absorption of the market’s shadow and sublease space.
We’ve had virtually no new construction in the past four years, and developers are now taking land positions and seeking the necessary approvals for the next wave.
That’s particularly true in the Northwest submarket in Rogers, Minnesota, where Liberty Property Trust acquired 55 acres last year for Liberty Industrial Park at Diamond Lake.
Liberty subsequently flipped 21 acres to medical supplies distributor Medline Industries for a 300,000-square-foot build-to-suit in June 2011, and Medline occupied the building in February 2012.
Last summer, the developer broke ground on a 227,000-square-foot spec development at Liberty Industrial Park at Diamond Lake, the first spec development for the Twin Cities’ industrial market since 2008. The new spec building is slated for completion in January 2013.
Tracking Investment Sales
The capital markets have not returned to the boom years of 2005 to 2007, when investment sales ranged between $828 million and $742 million and cap rates fell to 7.2 percent, but the past two years have been a great improvement over 2009 and 2010.
Industrial investment sales in 2011 totaled $477 million with an average cap rate of 8.2 percent, nearly tripling 2009’s total of $133 million. Year-to-date through the third quarter, investment sales totaled $263 million with an average cap rate of 7.7 percent.
The Minneapolis/St. Paul industrial sector is on track to absorb more than 2 million square feet in 2012. While not quite rivaling the boom years, 2 million square feet still marks a considerable improvement over the past three years.
Assuming our leaders in Washington come to a budgetary solution and avoid sequestration, the Twin Cities industrial market is poised for an even stronger 2013.
— Mark Sims, SIOR, is senior vice president and principal with Cassidy Turley in Minneapolis.