Big distribution spaces with high ceilings are in demand but supplies are almost nonexistent in the Twin Cities market. That situation has prompted some real estate experts to believe that new construction of state-of-the-art warehouses is practically a given in the metro's improving industrial market.
There are at a half-dozen "big users" out looking for large chunks of warehouse space of at least 200,000 square feet -- but are being stymied by the lack of modern facilities with "clear heights" of 32 feet, industrial brokers say.
"These users include a printing company, a packaging company, a distribution company, some government-type users," said Judd Welliver, a broker for Welsh Cos. who concentrates in the southwest metro sector. "They're out looking for big boxes."
It's another sign that the Twin Cities' industrial market is on the way back -- if not to optimum health, then at least to a place of modest gains.
Welsh's figures for the first quarter of 2011 identified some 310,000 square feet of positive absorption of commercial space in the metro.
Overall leasing momentum plus the lack of enough product for big users point to the likelihood of new construction of modern distribution facilities.
"There's only one distribution building in our entire market with 32-foot clear heights that can accommodate big users, but there's five or six companies out there looking for big spaces, most of whom are currently in this market," Welliver said.
Agreeing with his assessment was Ted Carlson, owner of Edina-based Carlson Commercial Real Estate. He said things are indeed looking up in the industrial sector.
More demand than space
"There's a real lack of quality space in the market, especially in large blocks of space," Carlson said. "There's a demand for almost 2 million square feet from acting users. That's why we're gong to see new speculative distribution warehouses being built."
Several brokers noted that Liberty Property Trust has purchased 55 acres of land in Rogers for a future industrial park -- a sign that big new warehouse product could be in the offing.
That's also true for infill redevelopment sites closer to the Cities' core, said Carlson, an expert in the east metro region. Three industrial users are preparing to buy and develop vacant parcels at the Highcrest Industrial Park in Roseville. The park's owner, Minneapolis-based Meritex Enterprises Inc., has demolished a large building that decades ago housed Univac Corp.'s development center to make more room there, Carlson noted.
The number of companies going out of business and shutting their doors, which was a big factor in the market's 2009 plunge, has leveled off, helping vacancy numbers. As big companies continue their push to cut costs, they're looking at their real estate costs and seeking how best to align them with "lean" manufacturing processes.
Tad Jellison, who represents industrial tenants for the Minneapolis office of Jones Lang LaSalle, said corporate users are looking to cut down on the number of facilities they lease, consolidating them into fewer spaces that have higher ceilings to accommodate more merchandise.
"Tenants want the extra clear height to go two or three racks higher and save on square footage," he said. "Consolidation has been huge for us -- we call it co-locating."
Attractive to REITs
The Twin Cities industrial market is also becoming more attractive as a destination for institutional investors such as real estate investment trusts and pension funds, the experts say.
An example is the $115 million transaction last year in which Canadian firm Artis REIT bought a 2 million-square-foot Twin Cities portfolio from San Francisco-based AMB Property Corp. Those kinds of deals will likely continue, predicted Steven Buss, an executive vice president at CB Richard Ellis' Twin Cities office.
"Those institutional investors are telling us they're bullish on industrial real estate in the Minneapolis-St. Paul market," he said. "Newer, more modern warehouses in the 24- to-32-foot clear height range are seen as very desirable."
Why? Big real estate investors, who first look to markets such as California's Inland Empire, Seattle and New Jersey to find steady returns from industrial real estate, are finding that prices there are becoming too high and so are branching out into secondary markets, and the Twin Cities area is right at the top of those lists.
"They're looking at which areas are recovering most quickly in terms of leasing fundamentals, and my feeling is that by the end of the year there will be more investors coming into our market," Buss said.
One reason why the Twin Cities is seen as a top investment market is that, despite some painful company shutdowns, a closer look at the figures shows that only "a very small percentage" of industrial tenants went totally out of business during the recession, he said.
"The point is we're going forward," Buss said. "With 1 million square feet of positive absorption since the beginning of 2010, it's headed in the right direction. Maybe it not what we'd call totally healthy, but it's better than going negative."
Don Jacobson is a St. Paul-based freelance writer.
