Continued Demand for Industrial Product Maintains New Construction Trend
VACANCY AND ABSORPTION TRENDS
The third quarter of 2018 marked the ninth consecutive quarter of positive absorption in the Minneapolis-St. Paul metro multi-tenant industrial market with 436,000 square feet of total absorption. Bulk Warehouse once again was the dominant product type, with 300,000 square feet of space absorbed. The Southwest was the most active submarket in terms of new leases signed, with the West/Northwest following closely behind, with 201,000 and 197,000 square feet of positive absorption, respectively.
Overall vacancy rates decreased slightly to 6.26% from 6.3% last quarter with new spec construction completions keeping the vacancy rate from dropping even more. The Airport/South of the River submarket had the lowest vacancy rate of our five tracked industrial submarkets at 4.59% and the Northeast came in second with a rate of 4.91%. The amount of sublease space on the market is up slightly from last quarter, which only has a minor impact on the overall multi-tenant market vacancy.
New construction has continued to be one of the main drivers of change within the Twin Cities industrial market because new deliveries are often the best option for the rapidly expanding bulk industry and the Northeast and West/Northwest submarkets are leading the way in these new deliveries. The Northeast has many premier infill redevelopment options, so new construction along major arteries in the Northeast has been very active.
In the West/Northwest, there are several large industrial business park developments, especially in Brooklyn Park, that have consistently seen new deliveries in the last several years. Demand for new Bulk Warehouse space shows no sign of slowing, so construction momentum should continue in this product type and potentially expand into additional submarkets.
Supply continues to be outpaced by demand in Q3 across all industrial product types, as sales activity and investment demand continue to rise. However, there appears to be less one-off industrial building sales for both investment and owner-user purposes compared to demand. While one-off buildings have been slow to come to market, there have been several value-add options that have sold in recent months. On the other side of the spectrum, the institutional and portfolio sales market has been quite active in Q3, with a number of large portfolios that have come to market and sold.