The Effects of a Strong Economy on Industrial Leasing

by | 26 February 2020

When you hear that the United States is currently in a strong economic upturn, one would immediately think that all businesses and employers would be reaping the benefits of this economic boom. However, there is a downside to a strong economy which affects nearly every facet of industrial leasing in commercial real estate product: increased construction pricing.

Industrial product (office/warehouse, showroom space and bulk distribution) has been directly affected by our strong economy, leading to increased pricing in several ways across markets like the Twin Cities.

First, a record unemployment rate of 3.2 percent in the Twin Cities has forced employers to scramble for good talent, which has impacted where companies choose to locate, how they build-out their spaces to attract new talent and what kind of amenities they are able to offer to keep their hired help.

For years, the going rate for building out tenant improvements from shell to finished office space with industrial product was between $40 and $50 per square foot. Now, with the scarcity of well-located, amenity-rich product, coupled with increased material and labor costs, typical office square foot build-out costs range between $75-$100 per square foot. Consequently, the tenant has three choices when balancing the budget to pay for this cost delta: they can either pay out of pocket, reduce their build-out finish or negotiate for more TI dollars and amortize the difference over a longer lease term.

This disparity in costs might be derived from several origins, namely, the rising cost of construction materials (some possibly related to heavy tariffs on these materials) and increased contractor employee costs. Additionally, today’s landlord now has even more power in the process due to lack of available product and because so many groups are potentially vying for the same spot.

These factors highlight some of the causes of a downside to a robust economy— particularly for tenants in the marketplace. While no one wishes for a slower economy to correct this downside, it is now more important than ever to best understand how to deal with these increasing costs in our marketplace and how to find a real estate professional to help navigate the most optimal, cost-effective path for any new or renewal lease agreement. Gone are the days when the lessee held the cards in a lease negotiation; now, it is up to the brokers on both the tenant and landlord sides to help negotiate a fair and equitable outcome for both parties.

About the authors:

As a Vice President with the Colliers International | Minneapolis-St. Paul, Rob Brass provides exceptional brokerage services throughout the entire Twin Cities metro area, specializing in the sale and leasing of industrial properties and land in the western suburbs.

As a Vice President at Colliers International, Steve Nilsson specializes in sales and leasing in the Twin Cities commercial real estate market. Steve represents a variety of major developers, institutional owners and Real Estate Investment Trusts (REITs). By sharing with clients his extensive market knowledge, Steve has successfully secured repeat business from many of the industry’s top companies.