Over the last three years there has been more than 11 million square feet of new industrial construction in the Twin Cities and many new buildings have been constructed with a 28′ clear height. This new construction is a departure from what has historically been a 24′ clear height market. 28′ clear allows a developer to build a building that appeals to the largest possible tenant prospect pool while broadly appealing to a wider subset of institutional investors.
Institutional buyers consistently pay top prices for commercial real estate investment properties and actively seek out newly constructed, premier buildings. Modern, industrial bulk warehouses, which offer high credit tenants, taking large blocks of space, while maintaining low office buildout percentages, are in high demand for the institutional buyer.
Newer distribution buildings often have 32’ clear or greater and nationally, clear heights will often reach 40’ clear. The Twin Cities is not currently a top distribution market, so 32’ clear is more frequent. However, the more common, existing building size in this market is 24’. Institutional buyers are not as interested in this product type due to the changing environment of warehouse use, evolving tenant space utilization and the high finish nature of 24’ clear buildings. Therefore 28’ clear is the minimum height many institutional buyers will consider. This alone would lead many developers who would have previously built 24’ clear industrial buildings to increase to 28’ clear to maintain the highest resale value.
The Twin Cities falls behind larger national markets when it comes to new development clear height because fewer tenants understand how to take advantage of higher clear height or are unwilling to invest in the necessary racking and equipment. Recently however, we’re seeing tenants more willing to invest, which will enable them to take advantage of potential reduced occupancy costs. A final consideration of clear height industrial product is the cost additive. For example, a 150,000 – 200,000-square-foot industrial building will have a construction cost differential of $1.50 SF for every 4’ in building height. Higher construction costs can be attributed to the need for additional building material and increased floor thickness.
Developers have shown the willingness to develop at a higher cost to obtain top resale value by appealing to the institutional investor. Appealing to eventual institutional buyers of commercial industrial buildings is driving building clear heights higher and office proportions lower, and though the Twin Cities market may be slower on the vertical growth plan than other larger markets, 28’ clear seems to be the sweet spot for our emerging market and is already attracting outside investment and the focused of new development.