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ABSORPTION MAKES A
POSITIVE SWING IN THE SECOND HALF
While
the Twin Cities industrial market suffered through more than 1 million
square feet of negative absorption during the first half of 2003, it was a
whole different ballgame at year’s end. A surge in activity –
including a large number of smaller deals -- resulted in 1.1 million
square feet of positive absorption in the second half, indicating an
upturn in the previously lackluster industrial market. As vacancies edge
down, there is cautious optimism that the market is coming back around.
The
overall vacancy was 15.2 percent, 17 percent including sublease space at
year-end, dropping slightly from mid-year with vacancies of 15.9
percent/17.8 percent. The Northeast and Southeast submarkets reported the
most positive absorption of space. The Northeast moved from negative
643,586 square feet of absorption mid-year to a positive 469,840 square
feet. Most of that activity occurred in office/warehouse. The Southeast
advanced from negative 367,050 square feet to a positive 307,240 square
feet, with the most dramatic effect felt in the office/showroom sector.
The Northwest continued to see positive absorption throughout the year,
with the majority of this is in bulk warehouse properties. Meanwhile, the
Southwest experienced negative growth, suffering from a soft market and
the continued fallout from corporate consolidations.
A
fair amount of the leasing activity across the board was not the result of
big, headline-breaking deals. Instead, it was many persistent, smaller
deals that helped vacancies edge down. Also, some deals occurred under the
radar screen, including subleases that were renewed to direct leases with
landlords. The industrial market is seeing more activity and positive
signs of recovery, however, it is slow, controlled growth.
MORE
SPACE INQUIRIES ARE COMING IN
Most
of the submarkets reported more confidence and less caution among
companies, resulting in more space inquiries. In the Southwest submarket
alone, a half-dozen large users are scouting for space in excess of
100,000 sq. ft. As the businesses continue to recover, some are beginning
to grow again and consider what they have for space.
The
manufacturing industry, as a whole, continues to sputter, as Minnesota
lost more than 40,000 manufacturing jobs during the past two years. Many
of these jobs were lost as manufacturers left Minnesota for locations with
lower operating costs, with the resulting loss creating significant excess
industrial space. The second half of 2003 did show some upticks in the
manufacturing sector, mostly in expansions of existing businesses. Within
the manufacturing sector, the businesses that have survived are seeing
definite increases in business, and are benefiting from the consolidated
competitive environment. However, while some jobs may return, most of the
firms are increasing production with productivity gains due to robotics or
out-sourcing certain functions. Some of those that are considering
expansion are asking for short-term leases with the landlord.
While
experts say the recession has ended, unfortunately, it has been a fairly
jobless recovery so far. However, unemployment is predicted to take a bit
of a turn in 2004, as experts project the jobless rate will average 5.8
percent, a drop from the current 6 percent. Before the industrial market
can see a major rebound, job growth needs to come back.
LESS
SPACE BEING DUMPED ON THE MARKET
Not
as much space came back on the market in the second half of 2003 and
little new construction was delivered in 2003. Much of the development is on hold waiting for significant
preleasing activity. The only sizeable project under construction is the
98,250 square foot Westgate Business Center V in St. Paul. The lack of
significant new empty space coupled with the anticipated increased demand
will reduce the vacancy rate into next year.
Steady
interest in single-user property sales continued during the second half of
the year. The low interest rates and healthy supply of quality properties
enticed some companies to take advantage of buying rather than leasing.
Meanwhile,
it is still a tenants’ market. Quoted net rental rates remained soft at
year-end. They averaged $4.29 per square foot for warehouse space and
$7.88 per square foot for office.
THE
OUTLOOK
A
healing recovery will begin in 2004. The overall trend will be modest
growth, and the market will see slow, methodical absorption.
The
give back of space is not over, but there won’t be as large of chunks of
space coming back on the market in the next year. The demand for
single-user buildings will still exist, especially if prices drop and
capital remains cheap. However, it is expected that the availability of
these user properties will decrease over the next 6-12 months.
Companies
will move ahead with caution. Much of the fuel coming from those firms
that have survived so far and the smaller to mid-size companies who are
expanding for the short-term.
While
very selective new speculative development may begin in late 2004 and
early 2005, opportunities will either be far beyond the inner core –
down to Lakeville, up to Forest Lake and out beyond Rogers and nearing the
Wisconsin border. Any inner ring development will come from redevelopment
of obsolete buildings, however, it is likely that cities will pressure
developers away from industrial and toward higher uses like retail or
residential.
Quoted
rental rates will hold steady; they are at the bottom and likely will
remain there for six to 12 months. However, landlords will continue to cut
aggressive leases to draw and retain tenants.
By
the end of 2004, there could be as much as 2 million square feet to 2.5
million square feet of positive multi-tenant absorption, plummeting the
vacancy to 12 percent. The
growth will be broadly based, so it should be steady and slow. The medical
device/bio-tech industry, for example, will continue to thrive and look to
expand. Some manufacturing
industries, such as plastics, printing and logistics/fulfillment, will
continue to prosper due to a consolidated competitive environment and will
be looking for additional space.
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