Industrial Market Sees Solid Absorption, Declining Vacancy Rates and New Development Cycle

Spurred by a steady economy, the Twin Cities industrial market is seeing solid demand for high-clear, functional space as more companies expand and need distribution or manufacturing space. Absorption was 617,982 sf in the first half. All sectors—bulk/warehouse, office/showroom and office/warehouse—posted positive absorption. The overall vacancy rate is 10.8%.

Bulk/warehouse space reported the most leasing activity with 310,583 sf of absorption and a tight 9.7% vacancy rate. This was followed by office/showroom with 223,043 sf (14% vacancy) and office/warehouse with 84,356 sf (10.3% vacancy).

Compass_SubmarketMap_Industrial_600pxThe Northwest is the tightest submarket at 9.6%, followed by the Southeast at 10.3%, the Northeast at 10.5% and the Southwest at 13.2%.The Northwest is robust with several larger tenants actively seeking space. Signed deals included Pro-Con’s 120,000-sf lease in New Hope and Bay Islands Coffee’s 92,000-sf sublease in Plymouth. The submarket also has a strong office/showroom market driven by medical technology companies including SterilMed’s 40,000-sf lease in Plymouth and Vention Medical’s 32,000-sf in Brooklyn Park. Also, Tactx Medical is nearing a 100,000-sf office/warehouse lease in Plymouth.

The Southeast submarket has a large disparity, posting the lowest bulk vacancy rate market-wide at 5.6% and the highest showroom rate at 17.5%. It is the only submarket posting negative absorption—the result of two large space givebacks. The Northeast submarket is “simmering” with deals; however, it is nearing full capacity and the lack of functional space is constraining activity. The largest deal was St. Jude taking occupancy of the 185,000-sf Midtown Business Center in Roseville.

The Southwest submarket led absorption with activity focused in Shakopee, including TE Connectivity moving into its build-to-suit, Shutterfly’s build-to-suit under construction, and Cameron’s Coffee expansion. Additional users looking to relocate and/or consolidate in Shakopee include Federal Package and Bayer’s Crop Science. Southwest showroom space remains stagnant and mirrors the class B office market, which is struggling. Class B office space often competes with flex/single-level showroom properties.

Bulk in Highest Demand
Few blocks of functional bulk/warehouse space are available. If a user needs 100,000 sf or larger in the Northeast or Southwest, only two modern, functional options exist in each submarket. The bulk vacancy in the Southeast is a record-low 5.6% with only one 150,000-sf block remaining. The Northwest’s bulk vacancy rate is also tight at 10.0%.

Developers Stepping Up to Meet Demand
Spurred by the lack of larger blocks of functional space—primarily bulk/warehouse—and the hope of increased rental rates, developers are starting build-to-suit and speculative developments. Twelve projects totaling more than 2 million square feet (msf) are underway—eight speculative projects totaling 1.178 msf and four build-to-suit projects totaling 907,000 sf. This is the most construction since the late 1990s.

New construction costs are generally in the $40 per-square-foot (psf) range for the shell for buildings larger than 100,000 sf. The new construction “box” model is 32-foot clear, more than 250 feet deep, 50,000- to 75,000-sf divisibilities, and less than 10% finish.

Large, specialized deals are driving this development cycle. Build-to-suit properties for Ruan, Shutterfly and Cardiovascular Systems are examples. While they are a good reflection of activity and the improving economy, they are not necessarily indicative of the mainstream industrial market. These single-user buildings will impact the market as companies take occupancy and vacate multi-tenant space. Many companies are seeing value in new construction and customized facilities and are willing to pay higher rates, believing the efficiencies will save money and more modern space should help improve employee productivity.

Fewer User Buildings Available
While there is strong demand for user buildings, the inventory of available quality product is low. Listed pricing on quality buildings has increased to near pre-recession levels. Sales activity was tepid in the Southeast. Only two significant sales closed but at healthy prices. Northfield Van Lines acquired a building in Eagan for $57 psf, and Nachman International purchased a building in Rosemount for $73 psf. In the Northwest, sales activity was slow, but prices pushed pre-recession values. Sales included Gamet Manufacturing acquiring a building in Brooklyn Park and Houck Machine purchasing a building in Plymouth.

Where Is Pricing Power?
The market remains bifurcated: Landlords of functional, modern space are seeing some pricing power and concessions have diminished. For less-functional properties, however, aggressive rates and concessions remain. In some cases, the higher asking rates for new construction may help landlords of existing product push rates slightly. In the Northeast, the $5 and $5.25 psf warehouse rates for new construction set new highs for industrial space and have the effect of pulling quoted rates higher, especially for existing, newer functional product. Effective rates also are firming up. In the Northwest, rates are being pushed for new construction but are flat for existing space.

Outlook
Demand should remain healthy. The market could see 700,000 sf of absorption in the second half for a total of 1.3 msf for 2014. More activity will occur, but mostly outside of the multi-tenant universe. This absorption does not take into account the build-to-suit and single-tenant factor.

Pricing power should continue for landlords of new construction and niche opportunities like showroom space in the Northwest submarket and quality office/warehouse spaces of at least 20,000 sf in the Northeast. Large deals are expected to continue driving the development cycle. Companies in the market include Room & Board and Würth Adams in the Northwest, Bunzl USA and Wesco Distribution in the Northeast, Federal Package in the Southwest and FedEx in the Southeast

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

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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