U.S. Industrial Market Spotlight: Minneapolis-St. Paul

by | 28 September 2017

“Unlike the economic market shifts experienced in some major metro markets, the Minneapolis-St. Paul industrial market has the benefit of historically steady market cycles. Because the Minneapolis-St. Paul market consists of different types of products from mixed-use, office warehouse to bulk warehouse, the market has experienced strong and steady absorption over time. The diversified and stable economy in Minneapolis-St. Paul attracts a variety of tenants to the market, from traditional distribution users, to e-commerce and medical technology, which drives market competition and low vacancy rates in both existing and built-to-suit industrial properties.” — Bill Wardwell, SIOR Executive Vice President & Managing Director, Brokerage Services

Key Strengths:

The Minneapolis-St. Paul metro area has one of the largest millennial population concentrations in the country. This demographic is creating extensive demand for online and last-mile retailers, wholesalers and third-party logistics companies. This demand is creating record low vacancy rates in the area and spurring new development, as well as redevelopments of older manufacturing locations. One such redevelopment, Northern Stacks, was featured in the 2017 winter issue of NAIOP’s magazine, Development.

Logistics Driver:

The Minneapolis-St. Paul region is blessed with many logistics drivers from the sea, air, rail and road:

Minneapolis-St. Paul has port access through the Port of Duluth.  Duluth is located approximately two hours away from the Twin Cities in northern Minnesota. While the port is not widely used for finished goods that are typically stored in distribution centers, raw materials including iron ore and grains, which are the main economic driver of north/central Minnesota, pass through the port and are a demand driver for industrial real estate in the region. The Port of Duluth is the largest and busiest port in the Great Lakes.

The Minneapolis-Saint Paul International Airport is consistently ranked as a top airport and has extensive flight options as a Delta hub. (Formerly Northwest Airlines was headquartered here before their merger with Delta.) Delta also manages an air cargo hub and DHL, FedEx and UPS fly cargo in and out of the airport.

Historically, the region was reliant on the agriculture industry, creating the need for an extensive rail network. Many major railways pass through the area. Rail through the area is now a primary method of oil transportation coming from the Bakken oil fields in and around North Dakota.

Ultimately, the region remains a dominant trucking transportation area. Chicago remains the main trucking hub of the Midwest, but Minneapolis-St. Paul is important as a secondary hub that extends trucking routes within a multi-state area. The Dakotas, much of Iowa and parts of western Wisconsin all fall into the greater logistics range of Minneapolis-St Paul.

Vacancy:

After peaking at more than 13% in 2010, the Minneapolis-St. Paul industrial market has enjoyed steady year-over-year drops in overall vacancy. Today, vacancy stands at 6.8%, the lowest vacancy rate in more than a decade. Vacancies declined significantly despite more than 7 million square feet of new development in 2015-2016. Office warehouses maintain the lowest vacancy rate of our three main product types at mid-year 2017 at 4.7%, with bulk warehouses maintaining a vacancy rate of 8.6% and office showroom/flex at 10.6%. Properties near the airport and south of the market maintain the tightest vacancy rates in the region, finishing mid-year at 4.7%.

Absorption:

Demand for industrial space in Minneapolis-St. Paul was strongest in 2015, when the market absorbed more than 4 million square feet. Since then absorption has remained solid, finishing 2016 at 1.4 million square feet, and more than 600,000 square feet for the first half of 2016.

In the second quarter of 2017, more than 450,000 square feet of multi-tenant space was absorbed, bringing the annual total at mid-year to more than 600,000 square feet. The pace of annual absorption is behind the last three years but still expected to have a strong end-of-year figure. Bulk warehouse absorbed 300,000 square feet of new space this quarter, compared to 275,000 square feet for office showroom/flex, losing just over 115,000 square feet. The west/northwest metro had the most absorption in Q2, but four of our five submarkets posted positive absorption numbers this quarter.

Development:

New construction has been a huge part of the industrial story for the last three years. During the recession and early recovery period, investors were reluctant to begin new construction projects. Construction picked up heavily starting in 2012 with the majority of early projects being build-to-suit buildings. The options for leasing remained tight, so speculative projects began. Primary areas for new construction were well-located infill sites including Roseville, Fridley, Brooklyn Park and New Brighton.

While new completions are down for the first half of 2017, construction starts have increased. The next tier of development in the region is expected to be further south along the I-35.

Historical Data

  Inventory Overall Vacancy Rate Overall Net Absorption New Supply (Construction) Asking Rental Rate (PSF/YR)
2007
130,652,171 9.9% -52,588 2,212,303$6.89
2008
131,365,696 10.7% -1,122,369 1,256,508$7.13
2009
132,951,174 13.1% -3,354,826 120,000$6.70
2010
133,654,222 13.3% -289,766 75,255$6.24
2011
133,712,116 12.6% 946,746575,778$6.22
2012
134,099,715 10.7% 2,654,198603,149$6.62
2013
134,405,089 10.6% 136,3091,531,303$6.29
2014
135,460,801 12.1% -1,994,338 2,050,070$6.73
2015
137,608,803 9.0% 4,243,0804,341,925$6.87
2016
138,912,567 7.3% 1,435,3603,882,663$6.93
YTD 2017
139,141,767 6.8% 631,862415,893$6.84

  Overall Vacancy Rate Q2 2016 Overall Vacancy Rate Q2 2017 Asking Rental Rate Q2 2016 Asking Rental Rate Q2 2017
10,000-24,999 SF
16.3% 3.0% $6.96$6.50
25,000-49,999 SF
6.3% 6.4% $6.87$6.80
50,000-74,999 SF
6.4% 5.9% $6.90$6.82
75,000-99,999 SF
8.9% 8.1% $6.89$7.00
100,000-249,999 SF
10.4% 7.0% $7.17$7.00
250,000-499,999 SF
9.7% 8.4% $6.66$5.78
500,000 SF +
0.3% 2.2% $6.75$5.19

Source: Colliers International

For more insights, learn about the top 10 U.S. industrial emerging markets positioned to experience the most robust increases in demand from occupiers and owners. And stay tuned for more U.S. Industrial Market Spotlights!

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James Breeze is National Director of Industrial Research for Colliers International in the United States. Based in the Greater Los Angeles area, he prepares quarterly and specialized industrial research reports and interprets trends and data across the country.