HEARTLAND SNAPSHOT, JULY 2004

MINNEAPOLIS/ST. PAUL INDUSTRIAL MARKET

The Minneapolis/St. Paul industrial market has seen a significant shift in manufacturing space as companies downsize or export their production, according to Eric Dueholm, vice president in brokerage services with Edina, Minnesota-based Grubb & Ellis| Northco. Many of the resulting vacant properties have been empty for long periods of time while others have been absorbed by non-manufacturing uses (local distribution or services-related uses). The companies seeing expansion in their production are often those serving the construction or medical products industries.

“The for-lease market has been negatively impacted by low interest rates and an increased level of user sales,” Dueholm says. “But brokers and property owners are finally reporting a noticeable increase in demand from companies looking to lease.”

The market is beginning to see a limited amount of speculative development again after 3 years of very limited activity, Dueholm says. Marfield Belgarde and Yaffe Companies have broken ground on a 260,000-square-foot distribution center along Interstate 94 in Rogers. “This is the market’s largest speculative project in several years,” Dueholm says.

In St. Paul, CSM Corp. is in the process of completing an 89,000-square-foot speculative office/showroom building. CSM has also broken ground on a 44,000-square-foot office/ showroom facility in Eagan and is leaning toward moving forward on an 80,000-square-foot office/warehouse building in Blaine.

“Office showroom buildings — particularly those located near major technology and medical technology campuses — have already begun to recover and should be positioned well for a recovery,” Dueholm says.

“Due to the lack of affordable, developable land, most industrial developments are occurring well outside the 694/494 loop,” Dueholm says. Much of this development has occurred in the northern suburbs along Interstates 35, 10 and 94.

The exceptions to this are infill projects that have been built during the last few years. Several of these projects have been constructed on formerly contaminated land, including CSM’s Westgate V in St. Paul and Real Estate Recycling’s France Avenue Business Center in Brooklyn Center.

Companies related to the medical field have increased their occupied space significantly in recent years. “Although many of the larger medically related companies have tended to locate in company-owned buildings, their suppliers and off-shoot startups have begun to eat up space in the for-lease market,” Dueholm says. “The northeast and northwest submarkets will continue to attract medically related companies as the larger medical players in those markets (St. Jude Medical, Medtronic, Boston Scientific and Guidant) continue to grow. Several of these companies have not only attracted suppliers to the market, but have been the training ground for many individuals who have since left to start up their own companies.”

Reis, a national real estate research service, recently reported a slight decline in effective rental rates for the third consecutive year, dropping from $4.26 to $4.15 per square foot. “Asking rates have remained relatively flat,” Dueholm says. “The general consensus is that effective rental rates should remain stable this year and potentially see a modest increase next year.”

The year-end 2003 vacancy rate was 11.2 percent, up for the third consecutive year as new construction has outpaced net absorption nearly 7 to 1 during that time, according to Reis.

“Traditional manufacturers are not fueling this recovery,” Dueholm says. “Well-located, but lower-clear industrial buildings have seen their target market dry up during the past 3 years. The companies that occupy these buildings in the future will have different requirements and will require significant renovation.”

©2004 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.