Online shopping, home delivery spur record demand for Twin Cities warehouse space

The need to store, sort and deliver an increasing number of online-ordered goods is driving demand for more warehouse space in the Twin Cities area. It's also bumped up sales of industrial properties.

Tenants sought to lease a record 11 million square feet of industrial space across the Twin Cities as of June 30, exceeding pre-pandemic levels by more than 3 million square feet, a new report by commercial real estate services giant Jones Lang LaSalle (JLL) found.

Industrial sales transactions for the quarter were the fourth highest on record, at $462 million.

"We broke the all-time quarterly record in second quarter 2020 ... and it is not slowing down," JLL Research Vice President Carolyn Bates said.

With industrial tenant vacancy rates at just 5.8%, a building frenzy is now underway across the 13-county metro area, the report found. The building boom is led by Minneapolis-based United Properties, Edina-based Endeavor Development, Indianapolis-based Scannell Properties and Chicago-based Clayco Development.

In recent months the firms trucked in heavy equipment to begin constructing industrial projects in Brooklyn Park, Arden Hills, Burnsville, Inver Grove Heights, Blaine and Dayton.

High demand for more local warehouses, distribution centers and loading docks has launched a comeback for speculative builders, many of whom were shoved to the sidelines when the pandemic crushed Minnesota's office real estate market, the report found. It is the first time since 2014 that new supply under development has surpassed 3 million square feet.

Market observers credit Amazon, Target, Walmart and grocery delivery outfits for renewed interest in building speculative and large industrial sites closer to urban settings with hefty populations.

Last month Endeavor Development and Calibogue Capital started construction on the speculative Zachary Distribution Center in Maple Grove. Cushman & Wakefield is in charge of finding tenants.

United Properties, the development arm of the Pohlad family, and the Larson family, which owns Slumberland Furniture, are teaming up to build a speculative 300,000-square-foot industrial complex next door to the former Imation headquarters building in Oakdale.

In June, Winnipeg-based Artis Real Estate Investment Trust broke ground on the first of three speculative industrial buildings in Blaine just northwest of Interstate 35W and 85th Avenue. Those buildings will be 317,000 square feet.

Industrial demand is growing "like gangbusters," Bates said. JLL found that some Twin Cities developers are proposing to build speculative cold storage units and large cross-dock facilities that house trucking bays on both sides of massive warehouses or logistical centers.

Such facilities are more common in Ohio and Illinois, and "highly unusual for this market," Bates said.

While economists and state officials cheer the construction activity, the surge in industrial storage spaces is not without pitfalls.

Steel and lumber are in short supply and in some cases costs have quadrupled, delaying construction projects.

The national Institute for Supply Management reported this week that supply deliveries nationwide fell again in July and were not expected to start returning to normal until the end of this year.

JLL officials noted that Minnesota developers that have not ordered their steel can expect nine-month delays "effectively pushing any planned developments to fall 2022."

The boom in industrial projects is also boosting land prices to as much as $7 per square foot, the report found.

Right now there are more than 3.1 million square feet of local industrial projects under construction. Asked if there was a chance of overbuilding, Bates said, "it is very unlikely."

Economists are unsure that current demand can be met because of surging construction constraints and material shortages caused by pandemic shutdowns, delays and worker shortages.

"We are in a very different place from the last downturn of 2009-2011," said Bates of the pinched supply chain. "Then, we were overbuilt and vacancy was a lot higher and the demand was a lot softer. Right now, much of the supply in the pipeline is already spoken for. So there is not much concern that we will be overbuilt. If anything, it will be the opposite."

A separate report by Cushman & Wakefield said it expects industrial builds to rise again next year, with "build-to-suit" industrial buildings expected to add another 1.8 million square feet of space to the Twin Cities market through the first half of 2022.

The report noted "significant projects" on the horizon such as Amazon's 750,000-square foot distribution facility in Lakeville. That construction will finish late this year. Graco's new 464,000-square-foot manufacturing facility in Dayton is expected to open during summer 2022.