“Ride out the storm,” may be the refrain of industrial developers, landlords and tenants, as the recession and the resulting uncertainties have all players in the Twin Cities commercial real estate industry watching carefully and exploring their options.
For starters, development has ground to a halt. This may be the silver lining, however, since it will enable the market to more easily absorb existing product and sublease space, thus allowing the market to recover more quickly when the economy begins to turn the corner. There is a small amount of spec product on the market, but this represents such a small amount that it has little to no impact.
Fortunately, the restrained development has allowed the industrial market to catch its breath. During the first quarter, absorption fell in positive territory, with nearly 197,000 square feet absorbed, leading to a slight decline in vacancy from 10.1 percent to start the year to 9.9 percent by the first quarter’s end. The modest absorption has largely been driven by smaller deals.
Another side effect has been the collapse of the land market. Land prices have come down as much as 50 percent from their highs during a flurry of activity some 12 to 18 months ago. Savvy developers continue to acquire land for future development, but both buyers and sellers have become more creative. Instead of buying land outright, developers are structuring purchase options, allowing the seller to proactively place its property in the market with a developer that will apply time, expertise and marketing. In turn, the developer does not have to bear any carrying costs until a definitive project is identified. In other cases, where sellers will fire-sale the property, developers are buying land with cash for pennies on the dollar.
Location has become even more important for owners looking long-term. In particular, developers and investors are focusing on the core assets inside the Interstate 494/694 Loop that rings the metro area.
Key challenges remain for landlords. Tenants are using the market’s weakness to renegotiate their current leases and to look for ways to reduce costs. Many large users are actively shopping the market. As examples, Star Exhibits is looking for 180,000 square feet and ExpedX for 150,000 square feet in the Northwest submarket.
Other large deals will play a part in reshaping the market, albeit through a game of musical chairs that still leave some seats empty.Target recently vacated in excess of 500,000 square feet of distribution space in Shakopee, Minnesota to occupy the 400,000-square-foot Worldwide Distribution Center in Bloomington, Minnesota. COKeM International will move to one of the vacated facilities in July. A video game distributor, COKeM will expand to 157,000 square feet in the Valley Green Business Park in Shakopee from its current 110,000 square feet of leased space in Plymouth, Minnesota. Graybar Electric will consolidate three facilities from Minneapolis and North Dakota to occupy 120,000 square feet in Brooklyn Park, Minnestoa. And Superior Logistics is taking 300,000 square feet in the MDI building in the St. Paul/Midway submarket.
The wealth of space and lack of activity among users are placing pressure on rents. Bulk warehouse rates were down 2 percent from third-quarter 2008 to the end of the 2009’s first quarter, and office showroom rates dipped 4 percent during this period. Office warehouse space showed a slight increase of 1 percent during this timeframe. Rental concessions also are increasing as supply exceeds demand.
Moving forward, absorption will remain flat to negative over the balance of the year. Tenants will continue to use this as an opportunity to move up in quality and find better locations, or, more likely, they will utilize the threat of leaving their current location to renegotiate with their current landlord. Landlords with the right product will continue to see transactions but they must remain competitive to seal those deals.
— Mark F. Sims is a principal and senior vice president in Colliers Turley Martin Tucker’s regional office in Minneapolis/St. Paul. He specializes in industrial sales and leasing.