Industrial properties hit by slump in economy

The unsteady economy and the credit crunch are casting shadows over the market for industrial properties, affecting the sales and leasing of buildings throughout the Twin Cities area.

Vacancies increased in the first quarter and are at their highest levels since 2006, according to a report by Grubb & Ellis/Northco Real Estate Services of St. Louis Park. Research by the Twin Cities office of Colliers Turley Martin Tucker shows increases in small, medium and large blocks of open space, with a 45 percent jump in large blocks since 2006.

The Colliers report also notes a decline in asking prices for listed industrial properties.

In the past 12 months, 10 percent of the listed buildings -- including manufacturing, distribution and showroom properties -- have trimmed their asking prices by an average of 12 percent. Some properties within that subset, which Colliers doesn't identify, have dropped their initial asking prices by 50 percent.

Vacancies and rental rates are expected to remain flat at least until the second half of this year, Colliers said.

The continuing decline in the area's manufacturing sector is partly to blame for the lackluster industrial market. The number of manufacturing jobs in the seven-county metro area averaged 183,271 for the 12 months that ended in September, according the Minnesota Department of Employment and Economic Development (DEED). That's down about 9 percent from 2004.

Projections by DEED show the area's manufacturing employment posting a further decline by 2014, to 182,492 jobs. But research director Steve Hine cautioned that that figure might be too optimistic, given that the estimate was made in 2004, before the current slowdown.

"There is a significant amount of uncertainty out there that has affected the industrial [property] market," said Duane Poppe, a second vice president for industrial sales and leasing at Colliers. In addition to higher vacancies, some tenants are asking for short-term renewals on their leases, because they don't want to get locked in on space, he said. Some landlords are offering incentives, including a few months of free rent, he said.

Pete Rand, a vice president at Bloomington-based NorthMarq Investment Services, said the number of listings and deal volume have declined in the past several months.

"This isn't the best time to sell, unless you have a specific reason for doing so," he said.

Late last year, the seller of one NorthMarq listing, Baker Technology Plaza in Minnetonka, decided to hold off until the market revives, Rand said. "There were offers, but nothing that was considered acceptable," he said.

The credit crunch has raised borrowing costs and tightened lending standards for all types of real estate. Buyers who used to be able to borrow 80 percent of a property's purchase price now may only be able to get a loan for 65 percent, Rand said.

To make deals, some sellers are having to accept lower prices. Rand estimated that the tighter credit market has shaved an average of 7 to 10 percent off purchase prices for top-tier industrial properties since 2006.

The weaker economy has caused some buyers to hold off on purchasing buildings that have a significant amount of vacant space, because they're not sure how long it might take to fill it, Rand said. "They're more reticent to pay for a property's upside potential."

The more cautious approach by buyers doesn't appear to have affected properties that have high occupancy levels and solid tenants, Rand said. Arden Hills I, II and III, an industrial complex at Interstates 35W and 694 that NorthMarq is marketing, recently received more than 50 requests for offering circulars, he said. The 375,000-square-foot properties are 97 percent leased, he said.

One of the area's most closely watched industrial property transactions, the pending sale by 3M Co. of a five-building complex on St. Paul's East Side, also is proceeding on schedule, according to 3M spokeswoman Donna Fleming Runyon. She said the company hopes to choose a buyer by the end of June.

John Allen, president of Roseville-based Industrial Equities, said that the market slowdown has primarily affected properties in outer-ring suburbs that may now be perceived as less attractive because of higher transportation costs.

"Those that are in close -- where there's a high concentration of workers, proximity to public transit and rail lines -- are doing fine," Allen said.

Bill Ritter, senior vice president of the industrial group at Bloomington-based Welsh Companies, said some of the slowdown in sales is simply a moderation of an overheated market.

"We're getting back to a more realistic market now," he said.

Susan Feyder • 612-673-1723