Industrial buildings still stars of the Twin Cities commercial real estate world

As office owners in the Twin Cities toil to fill their buildings, find other uses for them or sell them at a staggering discount, there’s one sector of the commercial real estate world where owners, investors and developers aren’t so dour: Industrial.

Demand for space inside the many nondescript warehouses, distribution centers and manufacturing buildings that are now ubiquitous across the Twin Cities suburbs has held steady into 2025. And following a lull in construction last year, developers expect to pick up the pace.

The overall vacancy rate for such industrial buildings in the metro area ended 2024 at 4.6%, two percentage points below the national average, according to a year-end report from Colliers, a commercial brokerage. That’s slightly lower than the year prior, below historical averages and just a fraction of the double-digit vacancies that are plaguing office buildings in the metro.

“It’s a great time to be in industrial,” said Tom O’Brien, vice chair of investment sales and capital markets for Colliers. “Investors and lenders like it, and we’ve had good steady rent growth and anticipate significant rent growth.”

CBRE, another commercial brokerage, said the direct vacancy rate (not including space available for sublease) fell to 3.4% at the end of 2024 after three stable quarters. Bulk warehouses had the highest vacancy rate (9.6%) with the Minneapolis and North Central submarkets posting the lowest vacancy rates, 2.9% and 3.2%, respectively.

The growth of e-commerce has fueled demand for industrial buildings, stoking the need for new warehouses as well as distribution and logistics facilities. Amazon, for example, has been a major space user in the metro area. There’s also been significant need for manufacturing space from companies like States Manufacturing, which makes electrical power distribution equipment. That company signed a lease for more than 500,000 square feet in Dayton, making it one of the biggest deals of the year.

Beyond demand, vacancy rates for the industrial sector have been humming along at near-record lows in part because developers have pulled back on building new ones because of higher interest rates and construction costs.

Last year, developers completed nearly 4 million square feet of new industrial space in the Twin Cities metro area, a 55.8% decrease from the previous year, according to a fourth quarter report from Cushman & Wakefield. That’s despite a nearly 18% increase in new leasing activity, which rose to the highest level in nearly two years. That increase came partly from at least a half-dozen new leases for 100,000 square feet or more.

There have been many more slightly smaller leases as well. Last month, Twin Cities-based Endeavor Development said HM Cragg, a backup power solutions company, signed a lease for 92,224 square feet at Endeavor’s new Nexus at Opus Park project in Eden Prairie, which should break ground in the coming weeks. The two-building project will have a total of nearly 175,000 square feet.

Tony Wand, president and CEO at HM Cragg, said in a statement that the new facility will meet the company’s current needs and provide it with the room for long-term growth.

“In addition to the facility itself, the location and local amenities are very desirable and will serve as an asset for our employee-owners,” Wand said.

The company will move from its current home on Bush Lake Road in Edina into its new building in early 2026.

Joe Bergman, a partner at Endeavor, said the move is an effort to consolidate from two smaller locations into a larger single campus.

“They are looking for a more modern building that can serve as a flagship space,” Bergman said. “Which is in the kind of vibrant and easily accessible location that will help them attract and retain the talent they need to sustain their growth.”

As office owners look for new uses for their buildings and/or the sites they sit on, replacing them with industrial buildings like Nexus at Opus Park is one option, alongside converting them for residential use.

Endeavor plans to soon demolish the former American Family Insurance office campus, which sits on a 14.4-acre site in the mixed-use Opus Park near the intersection of Shady Oak Road and highways 169 and 62.

The campus was appealing to Endeavor — and prospective tenants — because it’s within walking distance of the newly built Opus station on the Southwest Light Rail Line, Shady Oak Retail Center and 6 miles of newly upgraded walking trails.

Josh Budish, principal at Endeavor, said despite promising fundamentals, such office-to-industrial deals are often difficult to execute.

“The challenge of finding a seller with appropriate pricing expectations as well as a site that makes sense from a size and zoning perspective makes this strategy unlikely to become a trend,” he said.

Nonetheless, Budish said the sector’s robust demand, limited supply and steady rent growth make industrial developments more appealing than other kinds of commercial projects.

“We see a broad swath of investors from retail to institutional scale that are looking to deploy capital in the industrial sector, and we expect industrial’s risk-weighted performance to continue to be strong, particularly in relation to other classes of real estate,” he said.

Cushman & Wakefield said investor sentiment at the end of last year was the strongest it had been since 2021. Although sales of industrial properties were solid in 2024, Cushman said a number of institutional investors pulled back a bit in anticipation of a more favorable debt and regulatory environment.

Investors are clearly on the hunt for acquisition targets. One of the biggest industrial sales of 2024 was the December sale of the Midway Mile Industrial Campus in St. Paul, a portfolio that included 18 warehouses with nearly 1.9 million square feet of space. It sold for $156 million.

The sector isn’t without its macroeconomic challenges, though, including persistently high inflation, higher interest rates and the recent strain of potential tariffs.

“To the extent that those factors combine to negatively impact user demand, we could see some cooling in the industrial real estate sector,” Budish said.

He said Endeavor recently acquired a site in Vadnais Heights and another in the Midway neighborhood in St. Paul. The company is planning to break ground this spring on at least five projects with a total of about 525,000 square feet of speculative and build-to-suit projects.

“To paraphrase Kevin Costner: ‘When we build it, we are confident the users will come,’” he said.

O’Brien agreed that higher borrowing and construction costs will remain barriers for some projects this year. Even a little relief in interest rates or construction costs coupled with more rent growth could trigger a flurry of additional activity.

“We’re right on the precipice of being able to unleash even more speculative development,” he said. “On a macro level, a lot of the institutional investors want to be in industrial.”