HEARTLAND SNAPSHOT, MARCH 2008

Minneapolis/St. Paul Industrial Market

The Twin Cities industrial market slowed significantly during the last half of 2007, posting only 193,870 square feet of positive net absorption during the fourth quarter. Despite this slowdown, 2007 was a good year for the market, with total annual absorption at approximately 1.4 million square feet, up slightly compared to 2006.

On average, transactions are taking longer than expected to close, fueled in part by anxiety over Minnesota’s economy. According to Toby Madden, regional economist for the Federal Reserve Bank of Minneapolis, economic perception may be bleaker than reality right now for most Minnesota businesses. Widespread news coverage of the floundering housing market, sub-prime credit woes, rising unemployment and increased fuel costs have many business leaders concerned, but most companies are still reporting solid orders and steady growth. Smaller companies are feeling more of an economic crunch right now than large corporations.

 Vacancy across the metro sits at 7.3 percent. The Airport/South of the River submarket comes in at the high point of that average at 9.16 percent, while Minneapolis North posts the market’s lowest rate at 5.2 percent. Other vacancy rates include the Southwest at 9.54 percent; St. Paul East at 6.43 percent; and the West/Northwest submarket at 6.94 percent.

Rental rates are reflecting this decreased vacancy with slightly higher rates. Rates for office/industrial flex space ranges from $8 to $9.40 per square foot marketwide, while general warehouse space ranges from $4 to $5.45 per square foot.

Lease terms and concession packages vary throughout the five metro submarkets, but across the board, quality, functional space with higher clearance and reasonable rates continues to attract strong interest from tenants. Three large lease transactions were recently signed, each representing growth within the Twin Cities metro area. Walgreens signed a 10-year lease for 335,000 square feet at 13201 Wilfred Lane in Rogers. This will be the company’s first warehouse in Minnesota. The Dow Chemical Company has leased for its FilmTec Corporation division a 225,235-square-foot industrial building located at 7600 Metro Boulevard in Edina. The site was previously a parts distribution warehouse leased by General Motors. Finally, Uline has leased 140,000 square feet in the Highway 55 Distribution Center in Eagan for expansion of its box sales division.

Large-scale industrial development is taking place marketwide. In Eagan, in the Airport/South of the River submarket, plans are underway for Boulder Lakes Business Park, an 80-acre office and office/showroom development located on Lone Oak Road, which could eventually add as much as 1 million square feet to the submarket. The development landed a 72,000-square-foot tenant fourth quarter 2007, when StayWell Health Management signed on to relocate its headquarters to a new single-story office building within the park. Several other developments are in the pipeline within this submarket, including Highway 55 Distribution Center in Eagan, and 35/13 Crossings in Burnsville, with more likely to be announced soon.

In the Southwest submarket, the completion of a significant portion of the Highway 212 project is spurring growth in the industrial sector. Land sales in the Chaska/Chanhassen area are on the rise, with new projects expected to begin along the newly opened highway this year.

 In the Minneapolis North submarket, the 132-acre Blaine Preserve development signed Arrowhead Electrical as a 50,000-square-foot anchor tenant for its first 100,000-square-foot building within the park. A second 100,000-square-foot structure is planned to open this spring.

Cobalt, a new developer to the Twin Cities area, is also focused on a site in Rogers for industrial development. The company joins a wide array of locally based developers currently working across the market.

The changing landscape of industrial development necessitates that developers keep an eye on the entire metro area. The competition for prime sites is very intense and growth is spread throughout the metro, creating a balance between the various submarkets.

The industrial market should remain relatively stable this year. We are near an equilibrium in the cycle right now, but the outlook for 2009 is cloudier. It remains to be seen if the economic downturn will have a significant impact on the industrial real estate market.

— Ted Carlson is a vice president in the industrial brokerage division of Minneapolis-based NAI Welsh.

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