Caution is the course that many industrial tenants are pursuing in the Twin Cities of Minneapolis and St. Paul, especially when it comes to leasing or acquiring new space. This is partly to do with being prudent and partly to do with firms' continued inability to dislodge money from the frozen capital markets.
“More so than I have ever seen in the market, companies are very reluctant to consider relocating,” says Bill Ritter, senior vice president of Welsh Companies. “Any company that has the ability to consolidate or renew is looking at that versus the cost associated with physical relocation.”
For those that are in the market for space, Ritter has optimistic news. “I have never seen a better time to be a tenant in over 25 years of experience leasing and selling industrial real estate,” he says. Ritter goes on to say that a unique trend is developing in which landlords are trying to get their tenants to renew 12 to 18 months before the end of their lease terms, and they are willing to rewrite the current rental agreement — with discounted rates — if the tenant agrees.
“Sure, the landlord is giving something up, but if that tenant leaves in a year or 18 months, they certainly could have 6 months to 2 years of down time,” Ritter says, adding that the costs to re-lease the property, along with the often-expected tenant improvement allowance, will set a landlord back much more than trying to renew the tenant with a reduced rental rate. “So, there is an immediate cost impact to the landlord, because they are reducing rent, but they are offsetting that by security the tenant to a new, long-term lease.”
Significant sales activity has halted in the Twin Cities market. What is driving the market today is deals for less than 10,000 square feet. Ritter explains that his company’s transaction volume is up nationally from both 2008 and 2007, but the total revenue and square footage of these deals are down. His brokers are busy working smaller deals to remain active, even though those transactions come with lower commissions. Ritter does not think the market has bottomed out, either. He says that he receives calls daily from industrial users looking to sell their properties. He sees the current downturn leveling off over the next year then growth coming on slowly.
In Ritter’s opinion, market improvement will most likely come in 2011. “The difficulty and the complication of seeing growth throughout the next couple of years is the existing shadow space that each business continues to maintain,” Ritter says. He adds that most businesses have seen no hiring at best and layoffs at worst during this recession. Before businesses will need additional space, they will have to internally absorb their space that currently sits empty. “In light of that,” he says, “we do not see any type of significant need for build-to-suit projects or new construction at all.”
— Coleman Wood