Strong Leasing Velocity and Absorption of Prime, Functional Space in Industrial Market; Development Ramps Up

  • Market continues to tighten for modern, functional properties
  • Vacancy rate of 10.6% is the lowest in a decade
  • Bulk space has lowest vacancy rate at 8.8%
  • Tight market conditions lead to new development—both speculative and build-to-suit
  • Some upward pressure on rates is occurring and concessions are diminishing

Demand for Twin Cities multi-tenant industrial space continues, particularly for high-clear, functional space. Absorption ramped up to 1,024,401 square feet (sf) in the second half for nearly 2 million square feet (msf) in 2013. This activity helped push down the vacancy to 10.6%—the lowest in a decade. The vacancy rate peaked at 16.4% in 2010.

Compass_SubmarketMap_Industrial_600pxThe Northwest and Southeast submarkets were tightest at 9.4% and 9.3%, respectively. The Northeast was at 10.5% and the Southwest reported 12.9%. The Northwest led in absorption with several noteworthy leases, including Graco’s 227,000-sf lease of new speculative bulk/warehouse space under construction in Rogers and Shapco Printing’s 120,000-sf lease of office/showroom space in Golden Valley.

Most of the big deals in the Southeast submarket occurred outside the multi-tenant market when users purchased buildings or leased single-tenant buildings; multi-tenant leases were smaller, bread-and-butter deals. Activity in the Southwest was focused on Shakopee, a hotbed of activity that landed some heavy hitters like Emerson Process Management, Datacard Group and Shutterfly. Much of this activity is in build-to-suits and building acquisitions. Shakopee continues to be a sought-after market with ready-to-develop sites and city-offered incentives.

The Northeast is reaching full capacity in its functional space. St. Jude leased the entire 185,000-sf speculative Midtown Business Center underway in Roseville. Target, 3M and two companies in the booming brewery industry also signed large leases.

Lowest Vacancy in Bulk Space
Bulk/warehouse space is tightest at 8.8%. Limited blocks of functional bulk space exist. The Northwest and Southwest each have just six options. If a user needs 100,000 sf in the Northeast, three options currently exist. If they need 50,000 sf, fewer than five options exist. The Southeast’s bulk vacancy is just 4.4%. This demonstrates that the Twin Cities has an increased distribution presence and capacity. Vacancy for office/warehouse is 10.3%, and office/showroom is 14.2%.

New Development Ramps Up
The shortage of larger blocks of functional space is driving demand for new development as developers across all submarkets seek to take advantage of recovering market conditions. Six speculative projects are underway. Two are already fully leased to single users (Graco in the Northwest and St. Jude in the Northeast). Indianapolis-based Scannell Properties is making a case to become a major player as it snaps up land. Its projects include a build-to-suit for TE Connectivity in Shakopee, a speculative project in Mendota Heights, and a couple of FedEx facilities. Trammel Crow is back in the market with its speculative project in Roseville, which St. Jude is leasing. United Properties, Ryan Cos., Opus, Hyde Development, Liberty Property Trust and Interstate Partners are also working to control sites. A handful of build-to-suits are underway, including Olympus in the Northwest and Shutterfly, TE Connectivity and Compass Data Centers/Savvis in the Southwest.

User-Building Sales Increase
The lack of leasable space options also led to strong user-building sales. In the Southwest, a dozen sales closed. In the Northeast, Superior Third-Party Logistics acquired Mid-City Business Center North and U-Haul bought the 154,000-sf former Quality Park building. In the Northwest, Proto Labs and Creative Banner Assemblies acquired buildings. Some upward pressure on pricing occurred for these sales.

Pricing Power for Prime Space
Landlords continue to gain some pricing power on functional, modern space, and concessions have tapered off. In submarkets with new construction, the higher asking rates may help landlords of existing space push rates a bit. In the Southeast for example, Interstate Partners is achieving rates of around $11 psf and $5 psf at Meadow View Industrial Park. Aggressive rates and incentives, however, are still available market-wide for less-functional properties.

Demand should remain strong. The market could see 1.2 msf to 1.35 msf of absorption in 2014, led by the west submarkets. More deals could get done, but a significant amount may not be in the multi-tenant universe; they could be user-building sales, build-to-suits and leases at single-user buildings.

The lack of functional space is expected to continue driving development. Two or three additional speculative projects and four to six additional build-to-suits could be announced in 2014. Big users seeking space include Würth Adams and Room & Board in the Northwest and Bayer CropScience, United Natural Foods Inc. and Deli Express in the Southwest.

Slight upward pressure on rents is expected. Also noteworthy is the number of corporate headquarters sites for sale in the Southwest, including SuperValu, UnitedHealth Group and Datacard Group. Some may sit on the market for a while because the space is very specialized. Some sites could be redeveloped for other uses, but some of the space could compete with the multi-tenant market.

To read more, visit the January 2014 edition of Cushman & Wakefield/NorthMarq’s Compass report, now available online.  Visit the web site:

About Cushman & Wakefield/NorthMarq

​Cushman & Wakefield/NorthMarq is a joint venture formed in September 2011 by NorthMarq Real Estate Services and the Minnesota operations of global real estate services firm Cushman & Wakefield. By combining the talent of both organizations at the regional level with the global platform of Cushman & Wakefield, we offer clients the best combination of regional strength and global capabilities. The result: the leading commercial real estate firm by all measures in the Upper Midwest.
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