Growth tapering in Twin Cities office, industrial real estate markets

This year and last have been relatively good times for the Twin Cities' office and industrial commercial real estate markets. Vacancy levels in the office market are nearing pre-recession lows while a massive building boom has been ongoing in the industrial sector.

A panel of top local experts met this week for an industry-sponsored event at the Hopkins Center for the Arts to assess whether the trends will hold. Their verdict generally was "yes," though likely not as robustly.

They said the Twin Cities remains at the center of a strong regional economy that is attracting new residents and capital investment from around the world. That is introducing new players to both the office and industrial sectors, pushing up rents and sparking strong interest from capital investors seeking to buy and build commercial properties.

The downside is that we may be nearing or at the peak of the wave of the current cycle. Indeed, the title of the event, "Riding the Wave," implies it will inevitably break.

Last year was a truly amazing one for the building of new high-ceilinged bulk distribution warehouse space, as well as other industrial real estate, with a record 4.8 million square feet of new construction delivered into the market.

This year, however, the amount of new space built — while still quite healthy by typical standards — will not be nearly as high. And there is another big difference: Rather than being built mostly on a speculative basis as previously, the balance has shifted to "build-to-suit" projects, meaning developers are proceeding only when they have a specific user lined up.

"In 2014, developers sensed the demand was there to do speculative projects, so they hit the gas pedal," said Tim Elam, the Twin Cities leader of Indianapolis-based industrial developer Scannell Properties. "But this year, only 30 percent of the product delivery will be 'spec,' while 70 percent will be built-to-suit.

Matt Oelschlager, a first vice president with CBRE, added, "There are still a lot of positives, one of them being is that the activity we are seeing is from companies growing, rather than from making 'lateral' moves. And we certainly aren't seeing any corporate downsizings."

The future of speculative building, the panelists agreed will likely be with smaller "infill" projects on reclaimed land closer to the urban core, such as Hyde Development's Northern Stacks project in Fridley.

With the metrowide vacancy rates finally nearing pre-recession levels and rents rising, it has been an upbeat 18 months for office brokers and landlords. Downtown Minneapolis, especially, has benefited from a suburban-to-urban migration, said Erin Wendorf, a vice president with Transwestern.

"Amenities to attract 'Generation Y' users are becoming more important than ever," she said. "Organizations are leveraging their spaces as tools to attract and retain talent like never before. The cost of replacing employees is high, so investing in a downtown 'unique statement space' that highlights a company's brand and culture is a big trend."

But that hardly spells doom for the suburban office market, said Steve Shepherd of Colliers International. "Suburban offices can create their own amenities," he said, citing the Wirth Corporate Center in Golden Valley as an example of how an outmoded "Class B" suburban office building could be made attractive to younger workers with common-area renovations and a location near a major city park.

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