New office, industrial and medical real estate projects continue to percolate in the Twin Cities development pipeline, but as in other recent postrecession years, the number and scope of the projects are modest.
Nevertheless, a trio of developers active in the Twin Cities said this week that they've been able to pull off new projects despite tight financing, rising costs and limited demand, in part, by picking the right locations and competing hard for a relative handful of expanding businesses.
Speaking Tuesday in Golden Valley at a panel hosted by the Minnesota chapter of the Commercial Real Estate Development Association, Mark Davis, principal of the Davis Group, Tim Elam of Indianapolis-based Scannell Properties and United Properties Executive Vice President Bill Katter talked about how they've been able to keep business humming.
Panel moderator Murray Kornberg of CBRE Capital Markets Group put the current situation into perspective: In the 1980s, 126 million square feet per year of office space was developed nationwide, while during a second peak period from 1998 to 2002, 83 million square feet per year came on line. CBRE is predicting only 18 million square feet of new office development per year from 2013 to 2015.
"The story for industrial isn't that much different," he said. "You can see we're really at the bottom of the cycle here in the delivery of both types of products. It's not surprising, given where we've been in the last five years."
The niche probably least affected is medical real estate, which is dominated by a small group of health care providers seeking to expand into new markets or replace aging facilities.
Davis, whose company has built 457,000 square feet of medical office building space since 2010, said his pipeline includes a new 56,700 square foot building opening next month in Vadnais Heights, anchored by a new Allina Health clinic.
The key to obtaining construction financing nowadays is to have the projects substantially pre-leased, he told the audience of commercial real estate players.
"Last week we started a new project along Interstate 394 which is 100 percent pre-leased by Minnesota Eye Consultants, and we will soon begin work on a multitenant building on Hwy. 7 in Minnetonka for which North Memorial Health Care is the anchor," Davis said. "We need them to be at least 60 to 70 percent pre-leased to be comfortable."
In the industrial real estate sector, a key to fresh development is for Minnesota to remain competitive on costs with other states as national and regional companies look to upgrade their logistics networks, added Elam, whose Scannell Properties is building a 280,000-square-foot distribution facility for FedEx in Maple Grove.
"I compared the construction costs between the Maple Grove project and comparable one we're doing for FedEx in Indianapolis and found they were 8.8 percent higher here, which is actually lower than I expected," he said. "Maybe that's because of contractors fighting for business and the lack of construction opportunities."
Permitting and impact fees (levied by local governments), however, were 373 percent higher, Elam noted, and 100 percent higher than the average of four bulk distribution projects Scannell has performed in the Chicago area.
Don Jacobson is a St. Paul-based freelance writer and former editor of the Minnesota Real Estate Journal. He has covered Twin Cities commercial real estate issues for about a decade.
