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METRO
MARKET OVERVIEW SECOND HALF 2002
The Twin Cities industrial real estate market showed signs of improving conditions over the second half. Landlords, however, are still dealing with the effects of a market overbalanced in favor of tenants. While holding the line on quoted rental rates, landlords are increasing their use of competitive marketing tools such as free rent, more generous tenant improvement packages and enhanced broker commissions to maintain their buildings’ occupancy levels. The result is that net effective rates are being discounted by as much as 10-20%, especially among bulk warehouse properties where vacancy rates remain stubbornly high.
Vacancy decreased to 14% from 14.6% in July 2002
Overall vacancy for industrial properties decreased to 14.0% for direct space and 16.1% including available sublease space, a modest improvement from the mid-year rates
of 14.6%/17.4%. Vacancies declined in three of four submarkets, with only the Southwest submarket continuing to experience increasing vacancy. Second half absorption
was a positive 592,193 square feet for the metro market, a significant upward turn from the negative (187,070) square foot mid-year absorption number. Absorption was
positive for each of the three property types as well – bulk warehouse, office showroom and office warehouse.
Vacancy in bulk warehouse properties is 16.4%/20% across the metro area. Bulk warehouse vacancies are especially high in properties in outer-ring suburbs such as
Shakopee and Chaska in the Southwest submarket and Rogers, Brooklyn Park, Maple Grove and Champlin in the Northwest submarket. Leasing activity in the core areas of
these two submarkets is significantly stronger than in those perimeter cities. In the Southeast submarket, several large vacancies in a handful of bulk warehouse buildings
are responsible for a significant portion of its 23%/31.4% bulk warehouse vacancy rate.
Both office showroom and office warehouse properties showed some improvement in vacancy rates over the second half. Vacancy declined to 11.8%/14% at year-end for
office showroom properties, down from the mid-year figures of 13.6%/15.6%. Office warehouse vacancy inched down to 13.3%/14.5% at year-end, versus 13.8%/15.6% at
mid-year.
New construction continues in 2002, with 11 new buildings
New construction delivered 887,020 square feet of new product to the market in 2002. Much of the new product consisted of speculative projects, as indicated by the 35.8%
year-end vacancy rate among the 11 new buildings that came online.
THE OUTLOOK
Even though the economy continues to show modest but steady growth, industrial space users are putting more emphasis on cutting costs and increasing productivity than on hiring new people and leasing new space. Demand will likely continue to be constrained through the first six months of 2003, or until corporate profits begin to outperform market expectations. Tenants will continue to have numerous options for space, which will keep landlords in a highly competitive mode.
New development is at a virtual standstill, with just two significant multi-tenant properties under construction at year-end – the Hilltop Business Center in Oakdale and a project developed by Bridgerail Building in Minneapolis, which is already substantially preleased. The industrial market still needs increased strength in demand, which will be preceded by stronger economic growth and the return of job creation, which has been missing in the last 12-16 months.
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