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METRO
MARKET OVERVIEW FIRST HALF 2003
Industrial
property owners developed a bad case of the blue-collar blues in the first
half of 2003, as the market slipped back into negative growth mode. The
year began on a more promising note, with 2002 positive absorption of
405,000 square feet among all Twin Cities industrial properties. But that
proved to be a false start, as absorption fell back to negative
(1,035,866) square feet at mid-year.
Soft
demand was the obvious reason for the falloff in absorption. But that was
not the sole reason. Many companies exited the multitenant market, or at
least reduced their reliance on multitenant space, by taking advantage of
current economic conditions, including an increased supply of buildings
available for sale and very low interest rates, to purchase their own
single-user buildings. While the majority of purchases are in the 20,000
– 40,000 square foot range, there were also several transactions for
buildings in the 50,000 to 100,000 square foot range. Overall, companies
purchased well over 1 million square feet of industrial properties for
their own use over the first six months of the year.
BLUE COLLAR WOES HOBBLE MARKET’S RECOVERY
Still, soft demand is the number one reason why the industrial vacancy
rate jumped from 14%, 16.1% with sublease space at year-end 2002, to
15.9/17.8% at mid-year. That’s where the blue-collar blues come in:
bread and butter manufacturing jobs are down by 39,000 across the state
over the past two years. Some of those jobs will come back as the economy
gathers momentum, but not all. Many have been lost to other states or
countries, as manufacturers have shifted operations out of Minnesota to
lower-cost locations that give them a better competitive footing in the
global economy.
Rental rates give a slightly different picture. Net quoted rental rates
for warehouse space edged up to $4.27 per square foot for all properties
metrowide, compared to $4.23 per square foot at year-end. In selected
transactions concessions may trim as much as 10 - 30% from the quoted
rates. Softness is most apparent in the Shakopee area of the Southwest
submarket, where net effective rental rates for bulk warehouse space may
be as much as 30% less than quoted rates.
COMPANIES
BEEF UP ON BULK WAREHOUSE SPACE IN THE NORTHWEST
Conversely,
activity for bulk warehouse space in the Northwest submarket increased
substantially with large blocks of space being absorbed by users such as
Office Depot, Scherer Brothers, Chep and LDI Inc. That brought the vacancy
rate for competitive bulk warehouse space down almost 6 percentage points,
from 18.6% at year-end to 12.7% at mid-year. Overall vacancy in the
Northwest decreased almost a full percentage point, to 13.6% versus 14.5%
at year-end. The next lowest submarket vacancy rate belonged to the
Northeast, with a 14.4% rate at mid-year.
Several major Northeast industrial space users, including Medtronic and
Kodak, that were exploring the market for new space at the beginning of
the year withdrew their interest and renewed leases in their existing
locations. The lack of growth
from larger companies coupled with a broad-based retreat of smaller
companies vacating 10,000 – 20,000 square foot spots left the Northeast
submarket with negative absorption of (603,586) square feet for the first
half.
SHAKOPEE PROVES TO BE A BRIDGE TOO FAR IN THE CURRENT ENVIRONMENT
Continuing fallout from corporate consolidation, along with the
softening conditions in the Shakopee area, contributed to an increase in
vacancy in the Southwest submarket to 16.6%, versus 14.2% at year-end.
Among bulk warehouse properties, the vacancy rate for competitive space
increased to 22.5% from 16.5% at year-end. Among the major contributing
factors were significant new vacancies left behind in the wake of ADC
Telecommunications’ corporate consolidation.
Best Buy Corporation also vacated 440,000 square feet of high tech, office
showroom product in a variety of buildings throughout the Southwest
submarket as a result of its consolidation into new head quarters in
Richfield. Banta Corporation took advantage of the market softness to
relocate its Eden Prairie operations to 122,000 square feet in Shakopee;
they left behind a vacancy of 80,000 square feet in Eden Prairie and are
trying to sell a 335,000 square foot facility in St. Paul, that they
intend to vacate.
Significant
new vacancies in two large distribution centers accounted for the majority
of the increase in vacancy in the Southeast submarket. Few landlords
escaped the first half of the year unscathed by a falloff in demand. In
all,17 industrial buildings in the submarket showed negative absorption
over the six-month period.
THE
OUTLOOK
The
recovery in the industrial market may be on shaky legs, but it is
stabilizing. Few experts expect the market to grow at the same pace as it
did in the late 1990s. The pace of recovery will be more measured, and
some segments may recover quicker than others. Growth among medical
technology companies will ensure some continuing new demand from that key
Twin Cities business sector. Blue collar manufacturing will be slower to
recover. Corporate consolidations will add some new space to the market in
the second half of the year, including as much as another 300,000 square
feet of former Best Buy space in the Southwest submarket.
The
market for for-sale, single-user properties will continue to be healthy,
adding to the competitive pressures on the multitenant market.
New
construction has been at a standstill, although developers’ optimism for
the future of the Twin Cities industrial market is still strong. Many of
them are staying busy through this dry period by making plans for new
developments once the current drought is ended – perhaps in 2004-2005.
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