Desires of millennials reshape industrial real estate

Much has been written lately about the impact of the millennial generation on the office and apartment development. Less obvious, however, is how millennials are also changing industrial real estate.

Three aspects of that market — huge bulk distribution centers, the bread-and-butter office-warehouse sector and obsolete manufacturing/warehouse buildings — are each changing quickly because of them, Twin Cities commercial real estate executives say.

Perhaps because industrial real estate generally isn't as visible as high-profile corporate offices or glitzy new apartments, it doesn't get as much attention as other building products. But as a gauge for where the overall economy is heading, it's probably the most telling. And as the economy is being reshaped by millennials, industrial real estate is being remade.

One big way millennials are quickly changing the market is their preference for e-commerce. With their buying power on full display, e-commerce has exploded, and the supply chain for delivering goods purchased over the internet has created the need for much larger bulk distribution warehouses than have ever been seen in the past.

The first local example was the arrival of Amazon.com Inc. to Shakopee. The Seattle-based company shook up the local industrial market last year with the opening of a massive, 820,000-square-foot distribution center.

The latest is a sprawling, 402,000-square-foot warehouse in Lino Lakes being built by United Properties for Distribution Alternatives, a third-party e-commerce logistics company. It boasts 32 feet of clear ceiling height, also a new standard for big distribution centers.

"Thanks to e-commerce, your brick-and-mortar retailers are going out of business, and in their place these huge distribution warehouses are popping up," said Chris Garcia, a principal with St. Louis Park-based commercial real estate brokers Lee & Associates and an expert on the industrial market. "Basically, say goodbye to Macy's and say hello to a box in a cornfield."

Not only are there more third-party logistics providers looking to build more massive distribution centers in the Twin Cities, Amazon also might not be done here.

"You look at other U.S. markets, and they're building two big distribution centers everywhere," Garcia said. "So I wouldn't be surprised to see Amazon do a second Minneapolis center within, say, the next 24 months."

Meanwhile, the broker said, the preferences of millennials are also having a big effect on the office-warehouse market, which is by far the most common type of industrial real estate. There, employers catering to young workers are bringing the same sensibilities they seek in downtown offices.

"Millennials who work in warehouse environments want those same kinds of things," Garcia said. "They want to be close in to the urban core, rather than out in someplace like the northwest suburbs, and they want 'cool' space with features like exposed concrete floors, open ceilings and common areas for employees to collaborate."

The prime example of that, he added, is Hyde Development's hugely successful Northern Stacks, which offers new-construction office-warehouses with 32-foot clear ceiling heights, and also boasts millennial-friendly amenities such as a brewery and an indoor go-kart track.

The millennial preference for close-in locales is also fueling the conversion of long-vacant or outmoded urban industrial buildings into creative spaces. Perhaps the local developer most associated with that phenomenon is Minneapolis-based First & First, whose latest project is the conversion of the former King Koil mattress factory in St. Paul into Vandalia Tower.

"Our philosophy is to respect the architecture and rich history of the buildings we develop, while simultaneously recognizing that these spaces require the necessary updates in order to make them competitive and attractive to a 21st century workforce," First & First said in a statement.

"We have found that our tenants, particularly millennials, share this thinking and are naturally drawn to locations with deep historical significance, but they also need to be functional in a modern business setting."

Don Jacobson is a freelance writer based in St. Paul. He is the former editor of the Minneapolis-St. Paul Real Estate Journal.