The industrial market was booming before COVID-19 hit. And since? It’s reached even new heights as consumers continue to flock to online shopping. Demand for new industrial space – and not just those big distribution centers – continues to rise, in the Twin Cities market and across the country.
We recently spoke with Phil Cattanach, vice president and general manager with Minneapolis-based The Opus Group, about the new heights that industrial is reaching. Here is what he had to say.
Can you give us an overview of how strong industrial is today in the Twin Cities and the entire country?
Phil Cattanach: It’s certainly true that the industrial market has remained strong in the Twin Cities throughout the entire pandemic. But it’s been that way from a national perspective, too. Undoubtedly during this pandemic, consumers’ reliance on ecommerce has been heightened. It was already there. But it has been accentuated because of changing consumer behavior. In certain instances, the growing demand for online shopping was almost perpetuated by shutdown mandates at the beginning of the pandemic. Consumers lacked other options. That only bolstered the demand for ecommerce that has boosted the industrial market.
And this goes beyond just the large-scale distribution facilities that people equate with ecommerce. It goes through the entire supply chain, from the distribution of goods to the sorting facilities to the last-mile facilities and all the other different manifestations the supply chain takes.
And demand for industrial space hasn’t let up yet, right?
Cattanach: To a large degree this is still unfolding with the continued pressures throughout the supply chain. Organizations, particularly in the manufacturing arena, are trying to create some additional capacity for resiliency throughout their supply chain. Groups are taking on additional space. The just-in-time model has not been as resilient as we had hoped when there are supply chain disruptions. Just look at a recent example, the jam in the Suez Canal. That created global supply chain challenges during a handful of weeks. Then you look at the Port of Long Beach to see the congestion there, all the ships stacked up. Some of the larger retailers are hoping to have their goods ready to be delivered for the holidays. That stuff, all those goods, have to go somewhere. This is all placing additional demands on the industrial supply.
There is tremendous demand on the existing industrial supply. The demand for industrial space has accelerated because of the way consumers are getting their goods today.
What about manufacturing? Are we seeing an increase in demand for more manufacturing space, too?
Cattanach: We are seeing manufacturing groups that recognize that they need to grow within their space. Some of this started many years ago. You’ll see a manufacturer watch as demand for their business grows. They haven’t had a chance, though, to step back and look at the long-term trajectory of their business. It’s more difficult to pick up a manufacturing business and relocate it. The more sophisticated the manufacturing process is, the more challenging it can be to relocate it.
You can’t pick up a manufacturing process and relocate it in a day. You almost have to phase the process so that you don’t lose 60, 90 or 120 days of business. You need built-in resiliency. We did a manufacturing facility that was creating a line of plumbing testing parts. They had been in their space for close to 60 years. It was a big transition for them to go to a new facility, one that was two times the size of their existing facility. They were moving for the long haul. They weren’t thinking just 10 to 15 years down the road. They were looking at the long-term future of their business. For businesses in this situation, if they have two lines of production, they have to almost shut down one line, move it to the new facility and have it up and running before they move the other line over. Otherwise, they’ll be out of inventory.
So, yes, demand for manufacturing space is high, too. But businesses must heavily plan out their moves.
What about attracting new talent? Does new industrial space help companies attract workers?
Cattanach: There is a war for talent today. Companies are also working on attracting and retaining top talent. The physical space in which their employees work can make a difference. New industrial spaces bring in more daylight, have higher clear spaces and better air exchange. It is a more enjoyable experience to work in a building like this. That is a differentiator, especially with the ever-tightening labor market.
One of the more enjoyable things we get to experience as developers is when we move a client into a new space. Businesses have so much apprehension about that change. A lot of the businesses realize they need to move. But they have a fear of change. When they do get into their new space, after a month or so, it is almost without fail that when we meet with them they tell us, ‘Why didn’t we do this 20 years ago?’ People are excited to come into work. Recruiting has gone up. They see the benefits of that new space.
What about spec industrial space? Is Opus building more spec industrial? And are there any worries about filling this space?
Cattanach: We at Opus have been an active player in the speculative space. Five years ago, there was a little more balance in terms of spec vs. build-to-suit for our industrial product lines. It was never at 50/50, but depending on the year, it was usually about 60/40 between spec and build-to-suit. Today, we are probably closer to 80 percent or 90 percent building on a spec basis.
The most significant driver of that are the supply chain challenges. The critical components of an industrial building, the pre-cast, steel and roofing equipment, are taking longer to get today. That ends up forcing us toward more spec development. A lot of companies don’t have the luxury to call up and say they need space and they need it a year from now. If you call today, we might not have the ability to deliver your new industrial space to you in a year. We can’t get the materials we need to build it in a year. That has pushed a lot of developers to spec space because of those pinch points in the supply chain for delivering new buildings. If you don’t have inventory, you almost aren’t in the game right now.
The other part of this is that companies need space so quickly today. They are forced to look toward existing spec space instead of contemplating a build-to-suit now because of the lead times. When doing spec projects, it was not commonplace to have a lot of pre-leasing done with spec projects. In a true spec scenario, we were usually breaking ground and putting up a building without having any signed leases in place. Now, it is more common that you are at least in negotiations with possible tenants when starting construction. The stabilization of industrial spec projects is happening on a much shorter timeline than we saw several years ago.
Has COVID-19 accelerated many of this trends?
Cattanach: Prior to the pandemic, the Twin Cities market by and large was not a heavy distribution market. The size of the average building that was new, a big building for the Twin Cities, was a quarter million square feet. Today, as we look at the demands and space needs from companies, the large-format buildings are now in demand. When I say large-format, I am talking half-a-million square feet to 1 million square feet. Companies need that larger format to build up supply chain capabilities to serve the population of the greater Twin Cities market.
At the same time, COVID has forced other end users to work to catch up to Amazon. Household names such as Walmart, Target and Home Depot are all aggressively growing their distribution networks throughout the United States. The Twin Cities market is no exception.
When tenants are looking for new industrial space, what features and amenities are they looking for?
Cattanach: Tenants are looking for a higher amount of natural daylight coming into their spaces. We achieve that through heavier glass lines. We paint walls of the interior white to get more light. We’ve also seen a demand for outdoor patio or seating areas. The new spaces we are building for tenants are incorporating large training, cafeteria and break room areas to create a more welcoming environment for their workers.
What the users want and what municipalities want are handsome-looking or snappy designs that are appealing to the end user. They want to see a more corporate image instead of a big gray box that some incorrectly generalize industrial as being. We’ll add glass curtain walls at the corners of a building. We’ll highlight entrance areas to accentuate that new corporate image that a lot of users are looking for.