Continued Industrial Demand Encourages Steady Market in 2019
VACANCY AND ABSORPTION TRENDS
The industrial multi-tenant market continued its positive absorption trends, recording the tenth consecutive quarter of positive absorption and maintaining historically low vacancy. Construction activity is high, but developers are relatively constrained in speculative construction, so demand for quality product continues to outpace deliveries, keeping the market extremely strong.
Leasing activity has been most noteworthy in Bulk Warehouse and Office Warehouse buildings with clear heights of 28’ and higher. The Minneapolis-St. Paul metro has not traditionally been a true distribution market, so the supply of quality distribution buildings has been limited. The majority of new construction has been this product type, as last mile distribution has continued to grow in the Twin Cities at a rapid rate. There was 185,000 square feet of bulk distribution absorption in quarter four. In the total Twin Cities industrial market, 1.3 million of the total 1.75 million square feet of annual absorption was in the bulk distribution product type. The overall demand for industrial product is even higher than the 185,000 square feet of absorption would indicate if both multi-tenant and single-tenant demand are considered. This was reflected in Q4, as there were several large negative swings in absorption from tenants who exited the multi-tenant market for owned, single-tenant buildings. Digging into the submarket figures for 2018, the St. Paul East submarket had the strongest quarter, led by demand in the Midway area. The Midway, located between Minneapolis and St. Paul, contains many older industrial buildings, but the superior central location has kept demand very high. The West/Northwest had the largest annual absorption, a trend that has continued from the last two years, due to the fact that West/Northwest has had the highest annual construction numbers.
Rental rates have remained steady, with only slight increases. The asking rate of warehouse space has grown the most in the West/ Northwest and Northeast markets, at a 3% annual increase in both markets. This is due in part to the fact that these markets are experiencing the most deliveries of new product year over year. The asking rates of office build-outs in industrial buildings is rising at a higher rate, due to the amount and quality of tenant improvement build-out requirements.
New construction deliveries are continuing to shape the industrial market change and influencing where tenants are moving. The Twin Cities saw 2.8 million square feet of new industrial completions in 2018. The average new construction over the last 20 years in Minneapolis has been 2.2 million square feet per year, so 2018 was still roughly 25% higher than an average year. Developers are still active, but are scaling back speculative development in favor of more build-to-suit projects, a trend expected to continue in 2019.
The investment market for industrial product remained strong, with 2018 setting all-time highs in volume of industrial sales at nearly $1.2 billion. There were a number of large portfolios sold, which resulted in high-volume numbers. In terms of price per square foot, 2018 also set an all-time high. New, quality product continues to be one of the highest demand building types for all investment sales. 2018 also set a new high benchmark for Flex/Office Showroom buildings, which is significant because the Minneapolis-St. Paul metro has a higher proportion of Showroom buildings than most other metro areas.