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Industrial market strengthens

  • Article by: DON JACOBSON
  • Special to the Star Tribune
  • September 25, 2011 - 2:17 PM

The Twin Cities' industrial real estate market is showing continuing signs of strength so far this year -- albeit only in certain segments -- with even some new "spec" construction either planned or underway on properties rehabbed by the St. Paul Port Authority.

The key to success in the current market, according to those involved with the new projects, is flexibility and offering the right kind of product in the right locations in an industrial market that's showing overall "positive absorption." Yet it remains extremely depressed in some sectors.

The bifurcated nature of the recovery is important to understand when looking at the post-downturn industrial real estate landscape. For instance, older warehouses with clear ceiling heights lower than 24 feet aren't getting much traction. Owners of such "functionally obsolete" buildings are struggling to find tenants because corporate users are moving in directions that don't favor them.

They will likely have to turn to "redevelopment, rezoning or repurposing" to get them generating cash again, a second-quarter analysis of the industrial market by the Twin Cities office of Cassidy Turley concluded.

Also struggling is the key Dakota County submarket, including such warehousing bellwethers as Eagan, Lakeville and Mendota Heights.

As the second-biggest geographic submarket in the Twin Cities with 14.5 million square feet of inventory, Dakota County performed poorly, registering a slight increase in vacancies in contrast to the Twin Cities area as a whole, which experienced a decline in industrial vacancy rates from 12.8 percent to 12.3 percent, according to the Cassidy Turley report.

It marked the third straight quarter of "positive absorption," or the amount of space getting leased in comparison to space coming vacant. The health of the industrial real estate market rate also varied widely in product type.

Big, bulk distribution warehouses showed solid gains, logging 340,000 square feet of positive absorption. Continuing demand from the biggest of big users seeking ultra-modern new space with 34-foot clear ceiling heights will likely result in the construction of new, "build-to-suit" facilities in the coming months, the analysis predicted.

But also showing strength is the much more common "office-warehouse" and "office-showroom" categories, which, as their names imply, involve a combination of unfinished bulk warehouse space with a smaller, finished office or retail component.

Such facilities are sometimes called "flex space" because they can be easily changed to suit the user's needs, with finished space added or subtracted as the tenant's business evolves. Modern flex space usually features clear ceiling heights of between 18 and 24 feet.

Two new St. Paul projects are showing the confidence that developers have in the continuing recovery of well-located flex space buildings. Both are being on done on spec and are taking place on redevelopment parcels that were prepared and made available by the St. Paul Port Authority.

St. Paul-based Wellington Management says it's trying to get ahead of the office-showroom curve with the ongoing construction of the 60,000-square-foot third phase of its River Bend Business Park along the Mississippi River west of the city's downtown.

Tanya Bell, the firm's vice president of acquisitions and development, said Wellington did the same thing with the park's first phase in 2005, which went up as industrial market was early in a recovery mode.

She said she already has "four or five" tenant prospects for the new effort.

"It helps to already have something in the ground when the market rebounds," she said. "We've also designed this building with maximum flexibility in mind. It will have enough parking if the tenants turn out to be more office users than warehouse users."

Location is also especially important in making flex space work in this market, as the struggles of Dakota County show.

"Fundamentally, it's a well-located business park that will draw tenants from the southeastern suburbs as well as from St. Paul," said Phil Simonet of Paramount Real Estate, which is handling the leasing for River Bend. "The two previous buildings are 100 percent leased to a wide spectrum of users."

Also poised at the launching pad in St. Paul is the 68,000-square-foot Meridian Industrial Center, which Minneapolis-based Industrial Equities hopes to get underway soon along Pelham Boulevard in the city's Midway District.

That project, envisioned for the site of the former Overnite Express truck terminal, is on hold as the local neighborhood council appeals a St. Paul Planning Commission decision granting the effort the go-ahead on the grounds it conflicts with the transit-oriented zoning goals of the nearby Central Corridor light rail project.

But that hasn't dimmed the enthusiasm of Industrial Equities CEO John Allen, even though he says he's lost a potential major tenant due to the delay. There's a significant amount of pent-up demand in the office-warehouse sector that has been simmering during the economic downturn that is now on the verge of being unleashed, he says.

Don Jacobson is a St. Paul-based freelance writer.

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