It’s undeniable that the COVID-19 pandemic has changed everything, including commercial real estate. But there is hope throughout the Midwest that particularly strong markets and sectors will recover quickly from whatever damage they suffer from the economic fallout of the pandemic.
And one of those strong sectors? Industrial in the Minneapolis/St. Paul area. As two key CRE pros working this market say, the Twin Cities industrial market has been strong for so long. And before COVID-19 disrupted everything, this sector was poised for another strong year in 2020.
This gives hope that once life does return to at least some normalcy in the country, that the Twin Cities’ industrial market will pick up where it left off in early 2020.
Matt Rauenhorst, executive vice president and general manager at Opus Development Company, said that as of early March, tenants were still hunting for modern industrial space throughout the Twin Cities market.
“Demand is high for space that helps them distribute their products as efficiently as possible to their customers,” Rauenhorst said. “Many companies are looking to upgrade from their current industrial space to space that is more modern and offers more of the amenities and features industrial users want today.”
The biggest challenge might be finding that space. Rauenhorst said that developers have only added a modest amount of industrial space to the Minneapolis/St. Paul market during the last several years. Yes, new industrial space has risen here. But it’s risen at a measured, conservative pace.
This has led to steady, strong occupancy levels, Rauenhorst said.
“We’ve had a nice, in-balance marketplace over the last five to seven years,” said Rauenhorst. “I don’t expect to see that change anytime soon.”
When tenants are on the hunt for new industrial space, what amenities are they looking for? Rauenhorst said they want clear heights of at least 32 feet. They then focus on finding the appropriate amount of dock doors and drive-in doors for their businesses.
The most important amenity of all, though, remains location. Rauenhorst said that industrial users remain focused on finding the location that helps them deliver products to their customers as quickly as possible.
Like in every market in the Midwest, the growth ecommerce and the dominance of Amazon has directly impacted the industrial sector in the Minneapolis/St. Paul market. Rauenhorst said that developers continue to transform large retail spaces throughout the area into industrial facilities.
“That trend is continuing,” he said. “The demand for more efficient distribution channels and same-day delivery continue to have an effect on the industrial sector.”
Rauenhorst said that the Twin Cities market will remain an attractive one for industrial users. There are worries now about the spread of COVID-19 and how it will impact commercial real estate in general. But the fundamentals of the Twin Cities industrial market are strong, and that should mean a bright future once U.S. life returns to a more normalized level.
“This is a good market for companies that need industrial space,” Rauenhorst said. “The Twin Cities is a stable market. We have a number of large Fortune 500 companies. We have a strong employment base. We have good access to labor. We are excited about the continued strength of the Twin Cities.”
Brian Netz, senior managing director with the Minneapolis office of Newmark Knight Frank, said that the Minneapolis/St. Paul industrial market has traditionally been a strong one. There are plenty of reasons why, but Netz points to the Twin Cities’ diversified economy as the most important.
“Our economy is incredibly varied,” Netz said. “We have medtech, ecommerce and strong manufacturing. Our food-related businesses are strong. We are not reliant on one or two industries to drive our growth and activity. We are spread out enough so that when activity rises and falls in some industries, it doesn’t send our entire economy into a downspin. That is something other markets might not have.”
The local industrial market benefits from an educated labor pool, too, Netz said. There are some 40 colleges and universities within an hour’s drive of Minneapolis’ central business district. These colleges range from small liberal arts schools to the massive University of Minnesota. There is plenty of brain power in the area, then, to attract companies.
Then there’s the more conservative approach developers here take to spec construction. As Netz rightly points out, Minneapolis turns into a frozen tundra once every year. The rule of thumb, then, is that the big developers here tend to break ground in April, not earlier, every year.
This leads to measured growth, and keeps vacancy rates down and demand strong for industrial product, Netz said.
“There is not as much spec development going on here as you might see in other markets,” Netz said. “Some of that has to do with our construction window. But it also has to do with the average size of our industrial developments. Our industrial buildings might not be as large as what you’d see on average in Cleveland or Kansas City, and certainly not what you see in Chicago. A building of 200,000 square feet is a large one n Minneapolis. In other markets, they are building 400,000-, 500,000- or 600,000-square-foot industrial facilities.”
In 2018, Netz said, the Minneapolis/St. Paul area saw 16 industrial buildings rise from the ground on a spec basis. In 2019, that number was only 12. This proves just how measured developers are in this region.
What happens now, though, with the COVID-19 pandemic upending life in the United States? Netz, like other CRE professionals, said he doesn’t yet know. But like others in the industry, he is continuing to work hard to close deals. And he said that Newmark Knight Frank remains open for business, with company officials hopeful that the commercial real estate market will recover quickly from whatever damages it sustains during the pandemic.
“We are open for business. We are still doing all the same things we do all the time,” Netz said. “We are all working off our cell phones and laptops remotely all the time anyway. We’re still doing business here.”
Netz said that he still went on three building tours during the week of March 19. He had just one deal that he was working on hit the pause button during the week, and the reason behind the delay is COVID-19.
“But even that is normal,” Netz said. “How often is a deal put on pause? All the time. It happens all the time, regardless of the market or economic conditions. I remain optimistic. This is probably a good time to be in industrial. It seems to be largely business as usual right now in this sector. The retail and service sectors are certainly struggling, and that is unfortunate. But when it comes to the industrial side, everyone is continuing to press forward.”