Industrial Market Pulse - What’s Really Happening in the Twin Cities Market?
Pre-COVID, the Minneapolis-St. Paul industrial market was moving full speed ahead, reporting historically low vacancy of 5-6%. Enter coronavirus stage left, and the pause button was hit hard and fast in response to the government-mandated shutdown. Fast forward to this fall, and for the most part manufacturers have retooled and adapted procedures to operate more efficiently and safely in this pandemic-stricken world.
Clearly, COVID-19 has taken a toll, but what does that mean for manufacturers in terms of commercial real estate?
A key factor impacting the Twin Cities industrial market is pent up demand from the manufacturing and distribution categories. In early 2020, eight speculative office/warehouse development projects were on the horizon. However, uncertainties surrounding the pandemic and political environment caused developers to pump their breaks effectively delaying approximately 1 million square feet of new leasing opportunities.
The Lack of available space presents a major challenge – one that has led to a ‘flight to quality’ whereby tenants find themselves compromising on location and relocating to first-ring suburbs in order to secure new, quality space. Evidence of this trend is AbleConn Electronics, a client that is relocating to 110,329 square feet in the Opus Group’s new Arbor Lakes Corporate Center in Maple Grove. After 60 years in the same New Hope facility, the electronics
manufacturer is doubling its footprint and upping its game with a new state-of-the-art manufacturing and showroom facility in support of an aggressive growth strategy.
Another somewhat unexpected trend is the recent ‘flight to safety.’ Following the civil unrest experienced in Minneapolis this past summer, business owners with facilities in urban areas are expressing concern about vandalism and employee safety. As a result, some companies are abandoning prior locational requirements altogether and electing to relocate to the suburbs in pursuit of safety for their employees and their property.
Regardless of location, expect landlords to push for longer term leases. In fact, 7 to 10-year deals have become the new norm due in part to ever-increasing construction costs. In short: the more expensive the tenant improvement buildout, the longer the lease term when the cost is being amortized over the length of the lease. Landlords are also looking for the stability achieved through a longer lease term. In that case, it may be a good time to negotiate with your landlord on a lease renewal/extension.
Landlords are also pushing rental rates upward given the lack of supply. Gone are the days of $8.00/$4.00 psf lease rates. Instead, expect to pay upwards of $12.00/$6.00 psf for well-located, quality office/warehouse space.
And if you’re contemplating the purchase of a facility in lieu of leasing, good luck – opportunities are few and far between for owner occupiers. Conversely, for building owners looking to get out of the real estate business, now is a great time to capitalize on the strong investment sales market. You may want to consider entering into a sale/leaseback arrangement which would allow you to sell the asset while still remaining in the facility under a long-term lease. A side benefit of a sale/leaseback is that you free up capital for your business – and that may be a very appealing trade-off during these uncertain times.
By Tim Olsen, Commercial Real Estate Broker & Partner at Carlson Partners LLC (www.carlsonpartnersllc.com)