In the Twin Cities, industrial real estate is a hot commodity

A bold sign that the economy has rebounded is evident in the Twin Cities' industrial real estate market.

Two recent reports by the real estate firms Colliers International and Jones Lang LaSalle indicate that many companies in need of more manufacturing or distribution space for expansion purposes may find it a tad challenging to find buildings locally to suit their needs. Challenging, but not impossible.

Developers are responding in force with build-to-suit projects for specific clients, renovation of existing sites, or even constructing speculative buildings with no immediate tenants — the ultimate bet that the economy will improve.

"We're making gains in the economy," said Steven Nilsson, vice president/brokerage for Colliers International's Twin Cities office. "Companies are at a point where they're saying, 'We need to add on or find a bigger home.' "

Case in point: Last week, Nilsson closed on the sale of two sites totaling 15 acres in Brooklyn Park to First Industrial Realty Trust, a Chicago-based real estate investment trust. Two buildings totaling 240,000 square feet are planned for the property — which includes a long-shuttered Knox Lumber building that will be demolished to make way for the new construction.

The price for two properties was $2.6 million, according to Hennepin County property records. This isn't First Industrial's first foray in the Twin Cities — the firm recently bought the Centerpoint building in Woodbury for $13.4 million.

The economy and the lack of inventory are spurring the uptick in activity. According to the Jones Lang LaSalle report, industrial employment is expected to rebound in the spring and summer months, particularly in the construction sector.

The Federal Reserve Bank of Minneapolis recently reported that Minnesota construction and land development loans increased by 6.8 percent in 2013 to nearly $2 billion, "illustrating increased construction activity locally." And, while manufacturing exports statewide fell 0.5 percent in 2013, they grew by 7 percent in the fourth quarter.

"I think a lot of what's driving [demand for industrial space] is that the existing stock of buildings is pretty thin," said Chris Hickok, executive vice president at Jones Lang La­Salle's Twin Cities office. "Companies that can't find existing building are being forced to look at new construction."

In the first quarter, there was 527,103 square feet of absorption in the industrial market — the rate at which available space in the marketplace is leased, according to Colliers.

This appears to be the case for all building categories within the industrial sector, including bulk warehouse and office showroom properties and office warehouse space. The overall vacancy rate decreased from 9.9 percent at the end of 2013 to 8.7 percent at the end of the first quarter.

Several firms are adding space to the market by building speculative projects. Nilsson estimates that there could be anywhere from six to 12 spec industrial buildings constructed this year alone.

Minnetonka-based Opus Development Co. recently completed a 200,000-square-foot spec building at the Valley Park Business Center in Shakopee. United Properties has a 140,800-square-foot office/warehouse property in Chanhassen. And Liberty Property Trust Inc. leased bulk warehouse property it started on a spec basis in Rogers to Graco Inc., which makes pump and spray equipment.

As always in real estate, demand for industrial space depends heavily on its location. Nilsson says access to the Twin Cities' freeways and labor force is crucial. It helps if there's public transit in the vicinity of the facility, as well as proximity to courier services, since companies "want to compress the time it takes when the product goes from warehouse to end user," he said.

The JLL report indicates that there's a competitive environment for tenants vying for large blocks of modern industrial space within the Interstate 494-694 loop. Not surprisingly, astute landlords with sought-after products are proving to be "increasingly nimble and selective when securing tenants," the report says.

Colliers says functional, well-located properties are the most-coveted, but properties with some "functional obsolescence" in good locations can still be desirable for prospective tenants. And, "newer, functional properties can still meet with challenges if they have a less-than-desirable location."

One of the more-interesting projects locally is the overhaul of an aging warehouse building — the former Smurfit-Stone Container Corp. site in Roseville owned by IRET Properties of Minot, N.D. The structure is being rebuilt to reflect modern sensibilities and demand, said Todd Hanson, senior director of Cushman & Wakefield/NorthMarq, which is marketing the property.

"It's pretty unique, I'm not sure anyone has done what they're doing, which is an urban-style redevelopment in a suburban location," Hanson said.

A portion of the older building will remain for an existing tenant, Hood Packaging, which also will assume some space in the new 220,000-square-foot building. The overhaul is expected to be completed by next fall, and Hanson is actively looking for prospective tenants.

"The industrial world has so little developable land, this project takes advantage of its location within the 694 and 494 loop, which is hard to find," Hanson said.

Beyond construction of new buildings, out-of-town players in real estate also have been active in the Twin Cities market by purchasing existing properties. An affiliate of J.P. Morgan Investment Inc., for example, purchased three warehouse properties in the southwest suburban market from DCT Industrial Trust of Denver earlier this year. The buildings, located in Savage and Shakopee, total 470,000 square feet and sold for $32.5 million.

"The question is how long will this run last and will the market get overbuilt," said JLL's Hickok. "I haven't seen this much planned new construction in a long time, and I've been in the business for 27 years."

Janet Moore • 612-673-7752