Industrial vacancies at 2-year high

The faltering economy and credit crunch have cast a pall over the market for industrial properties, hampering the sale and leasing of buildings throughout the Twin Cities area.

Vacancies have increased since the start of the year and are at their highest levels since 2006, according to a third-quarter report by the Twin Cities office of Colliers Turley Martin Tucker. The amount of subleased space -- a sign of businesses cutting back or eliminating operations altogether -- has nearly doubled over this time last year, the report said.

Almost 2 million square feet of subleased space are on the market. And the increase from just the second to the third quarter of this year was close 500,000 square feet.

Colliers declined to identify the properties that account for the plethora of subleased space on the market. Peter Mork, senior vice president of industrial leasing at Bloomington-based Welsh Companies, said small and medium-sized businesses appear to account for most of the space being vacated. An example, he said, is about 20,000 square feet in St. Louis Park recently put on the market by data storage company Ciprico Inc., which filed for Chapter 11 bankruptcy in July.

The continuing decline in the area's manufacturing sector is partly to blame for the deteriorating industrial market. The number of manufacturing jobs in the seven-county area averaged 181,616 over the 12 months that ended in March, according to the Minnesota Department of Employment and Economic Development (DEED). That's down about 2.5 percent from 2005 and 16.3 percent from 2000.

Sales of industrial properties also are suffering this year.

Pete Rand, a vice president at Bloomington-based NorthMarq Investment Services, said the number of listings and deal volume have declined in the past several months.

To make deals, some sellers are having to accept lower prices. Earlier this year, Rand estimated that the tight credit market had shaved an average of 7 to 10 percent off purchase prices for top-tier industrial properties since 2006. Rand now said average purchase prices have fallen 5 percent more since April.

As a result, some sellers have simply taken their properties off the market. Earlier this year, the owners of Arden Hills I, II and III, a 375-000-square-foot industrial complex at Interstates 35W and 694 that is 98 percent leased, withdrew their listing with NorthMarq. "There were several offers, but none ... acceptable to the client," Rand said.

Some sellers are going to extra lengths to close deals. Last month, the owners of a vacant industrial building in St. Paul sold the property for less than half the original asking price after trying unsuccessfully to auction it in June. An auction is an unusual step for a commercial property that isn't in foreclosure or other financial distress.

The building had been owned and occupied by Digital Excellence, a DVD and CD duplicating firm that had moved to Plymouth after another business bought the company. The St. Paul building initially was listed at $4.3 million but had no takers.

David Stokes, a broker with Colliers' industrial sales and leasing division, said there was no sale at the auction because no offers met the minimum bid of $1.65 million plus a buyer's premium of 8.5 percent of the sale price.

"The auctioneer started off asking if there were bidders for the minimum, and there was complete silence," Stokes said. "He went lower and still nothing. It was kind of nerve-wracking."

Although the auction concluded with no acceptable bids, Stokes said he stayed in contact with a couple of bidders, one of whom eventually bought the building for about $1.86 million.

Brokers trying to lease industrial buildings are offering incentives such as short-term leases or leases that allow a tenant to opt out for a penalty that's less than the balance of the lease, according to Tony DelDotto, a NorthMarq vice president who specializes in industrial properties. DelDotto said the owners of an industrial property in Rogers reportedly offered up to a year's free rent to a large tenant.

Welsh Companies' Mork recently negotiated a concessionary deal that resulted in a full lease for a 153,000-square-foot property in Otsego to BTD Manufacturing and T.O. Plastics. Both businesses are subsidiaries of Otter Tail Corp. of Fergus Falls, Minn.

The deal with T.O. Plastics resulted from cold calls to all Otter Tail subsidiaries to see if any would take the 57,000 square feet of space in the building that BTD didn't want, Mork said. The deal with BTD might not have been done if the owner of the Otsego building, Duke Realty, had not assumed a lease at BTD's former home base in New Hope so that BTD could relocate. The New Hope space is on the market for sublease.

"Duke deserves a lot of credit for taking that on," Mork said. "That was a huge concession."

Susan Feyder • 612-673-1723