It takes a certain amount of audacity for a real estate developer to spend millions on a big industrial building and then hold out hope that someone will come along and lease it.
Yet that’s how speculative development works. Although this activity all but dried up in the Great Recession, more than a half-dozen industrial “spec” buildings are either in the works or have sprouted up in the past year. For some in the commercial real estate field, this is a sure sign the broader economy is perking up.
Is it risky? “Hence, the name ‘speculative,’ ” said Dave Menke, executive vice president for Opus Development Co., which is planning a 200,000-square-foot spec industrial building in Shakopee. “We don’t have a tenant for our building today, but we’re optimistic that we will.”
Opus will submit its plans to the city in the next two months. But as vacancy rates tighten at industrial facilities and the amount of available space in the market contracts, speculative buildings aren’t such a gamble.
Ted Carlson, of Edina-based Carlson Commercial, says there are 35 potential firms in the Twin Cities market currently seeking more than 100,000-square-feet of industrial space. Most of those companies are located in the western suburbs.
In some cases, there’s a “flight to quality” as firms seek to modernize their space and improve efficiencies. Overall vacancy rates of industrial buildings in the Twin Cities range from 6.1 percent to 12.8 percent, depending on the type of structure. Some are suited to distribution operations with ample loading docks; others include office and showroom space.
Typically, companies are looking for easy access to interstate highways or rail lines, a pool of potential job applicants, and communities offering economic incentives.
Trammell Crow Co., a developer based in Los Angeles, said last month that it was building an 185,480-square-foot spec building in Roseville, part of the 13-acre Midtown Business Center. The project was touted for its proximity to nearby highways — it’s less than a mile from Interstate 35W and features direct access to Hwys. 36 and 280.
For spec developers, access to capital is key, said Eric Simmer, a partner at Interstate Partners’ St. Paul office. “In the recession, you couldn’t get anything financed. It was very complicated to get a deal done.”
In a deal financed by Associated Bank, Interstate is now building a 78,320-square-foot spec office-warehouse building in Eagan, part of the Meadow View Industrial Park.
“It’s about as spec as you can get,” Simmer noted.
Steve Buss, executive vice president with the Twin Cities office of CBRE Group Inc., says institutional investors may also invest in spec development as older existing buildings become more difficult to lease and returns from these properties decline.
“The bigger institutional groups are more open-minded to funding new development with higher returns,” he said. “The improving outlook motivates them.”
For example, Liberty Property Trust, a $7.6 billion Pennsylvania-based real estate investment trust, has developed three spec buildings in the Twin Cities over the past year totaling 443,000 square feet.
Often, if a single spec building is successful, then it’s easier for developers to market remaining space in a business or industrial park to prospective tenants. In that sense, a spec building can serve as a powerful marketing tool.
“For a lot of tenants, it’s hard to envision a building on paper,” said Brandon Champeau, an assistant vice president with United Properties, which is developing a 107,000-square-foot spec industrial building in Inver Grove Heights. “If the first building goes well, it’s easier to attract tenants” to subsequent space that may be built.
That’s what the Bloomington-based developer is banking on for the InverPoint Business Park. The firm is planning four additional buildings on land it has owned since 2007. But when the recession hit, those plans were put on hold, Champeau said.
“We monitored the market every year; now there’s just not a lot of large functional spaces in the market,” he said. “So when we see it makes sense to build, that’s what we do.” He said United Properties has talked to several potential tenants about the first spec building.