Industrial development, sales activity and leasing all dipped during the first quarter of 2024 across the country. And in the Minneapolis-St. Paul market? CRE professionals working this sector saw the same thing: Demand for industrial space has finally cooled.
That doesn’t mean that the industrial market is struggling in the Twin Cities. It just means that it has returned to a more normalized state. The activity levels that this sector saw in 2020 and 2021 were not sustainable or normal.
Part of this is connected to the higher interest rates that have hit the commercial real estate market since 2022. These rates make it more expensive for investors to borrow the money they need to acquire all commercial assets, including industrial real estate. And while the Federal Reserve Board has indicated that it will no longer increase its benchmark interest rate, it hasn’t slashed this rate, either. And that has kept other interest rates higher, too.
What does that mean for the industrial sector in the Twin Cities today? Joseph Mahoney, senior director with Opus Development Company, said that there is still demand from both investors and tenants for industrial space here. That demand, though, has cooled to pre-2020 levels.
“From a sales perspective, there is not much on the market in Minneapolis today,” Mahoney said. “But I can say that there has been good reception for the few projects that are on the market. The biggest shock that came with the higher interest rates has subsided. There is more confidence among investors in the lending environment today than what we saw in 2023.”
That doesn’t that it is easy for either investors to make industrial deals or developers to build new industrial facilities. Interest rates might not be rising, but they’re not falling, either.
Mahoney, though, said that he is optimistic about the trend in which demand for industrial space and new construction is heading.
“Six months ago, we might have had two or three investors that were bidding competitively on industrial properties,” Mahoney said. “That is closer to eight or 10 groups now. There is more capital and buyers out there for the product today.”
More industrial development on the way?
What about industrial development activity? Will that pick up in 2024?
Probably not. As Mahoney said, the pace of speculative industrial construction has slowed dramatically both across the country and in the Twin Cities market. Mahoney predicted that no new spec industrial developments will get off the ground this year in the Minneapolis-St. Paul market.
“For a true spec project? There’ll be between zero and two of those this year in our market,” Mahoney said. “We will have to wait and see if that prediction comes to fruition.”
What is still solid is the demand from tenants looking for industrial space. Mahoney said that when he speaks to brokerage company officials, they tell him that there is anywhere from 10 million to 13 million square feet of active users hunting down industrial space now in the Twin Cities market.
That is just slightly less than what the market saw two years ago, Mahoney said.
What has changed is the size of industrial properties that users are seeking. Mahoney said that users looking for 300,000 square feet of space or more are not as active today. More users are instead searching for industrial property in the 30,000-square-foot range, he said.
The Twin Cities market absorbed about 1.7 million square feet of industrial space in the first quarter of 2024, Mahoney said. That’s a step back from the figures this market saw in 2021 and 2022 but is slightly more activity than in the pre-pandemic years.
Staying busy
Despite the slowdown in the local industrial market, Opus is remaining busy in this sector, Mahoney said.
Opus is leasing up one industrial project in Apple Valley and a second in Shakopee. Both are spec projects. Opus also plans to start construction on a new industrial facility in Maple Grove next year of 246,000 square feet. Opus can’t yet name the client filling this space.
Mahoney said that industrial projects today need a solid amount of space leased before construction begins.
“The lending environment is challenging today,” he said. “There is uncertainty in the capital markets. So having at least a portion of a project pre-leased is important. It’s harder to get financing on a project that is 100% spec. The build-to-suits or the partially pre-leased spec projects will continue to earn financing, though, if they are good projects.”
The slowdown in new industrial projects means that it can be difficult today for end users to find space. Users looking for space of 100,000 to 150,000 square feet in areas closer to Minneapolis and St. Paul will have an especially difficult time, Mahoney said.
Users seeking larger chunks of industrial space must look toward farther-out locations such as Dayton or Shakopee, Mahoney said.
“There is not a lot of availability out there,” he said.
Users seeking newer industrial space are looking for certain amenities today. They want higher ceiling heights, with 28-foot heights increasingly becoming the bare minimum for many end users. Users also want outdoor storage and ample trailer parking.
Power availability is important, too, especially considering how long it can take for switchgears or transformers to arrive for tenants interested in upgrading their power.
Other companies are looking for lifestyle amenities such as walking trails, green outdoor spaces or nearby retail options. Large windows that let in plenty of natural light are important features, too, Mahoney said.