Minneapolis Investment Trends: industrial market

Transcription

1 JUNE 2014 Minneapolis Investment Trends: industrial market Colliers Minneapolis - St. Paul Investment Services Group

2 Minneapolis-St. Paul A globally competitive place to invest, do business, and live. Diverse economy Intelligent workforce Thriving global headquarters Outstanding place to live Minneapolis-St. Paul is 16th in population, but consistently outperforms its size 1 st 2 nd in number of Fortune in labor force participation 500 company headquarters per capita 4 th in percentage of population with bachelor s degree or higher 5 th 10 th in number of in number of global Fortune 500 companies operating in the area Forbes largest private companies Top Investment Area: The Urban Land Institute s Emerging Trends in Real Estate 2014 placed Minneapolis on its top 20 areas for overall investment prospects, and its top 10 for development prospects. Colliers International 1

3 Minneapolis-St. Paul Investment Trends Colliers International Colliers International is a leader in global real estate services, defined by our spirit of enterprise. Through a culture of service excellence and a shared sense of initiative, we integrate the resources of real estate specialists worldwide to accelerate the success of our partners - our clients, professionals, and communities. Colliers International Minneapolis-St. Paul is pleased to present this industrial update to our clients so they can benefit from the market information provided. Included in this report are up-to-date sale and lease transactions, detailed submarket material, local capital market highlights, and other useful market tools. We offer a complete range of services to owners, investors and occupiers on a local, regional, national and international basis. The foundation of our service is the strength and depth of our local specialists. Our clients depend on our ability to draw on years of direct local market experience. We are very proud of where the Minneapolis industrial market stands today and are excited to see the upcoming trends in this constantly-evolving industry. Sincerely, Mark Kolsrud Sr. Colliers International 2 David Berglund Colin Ryan B C

4 Notable Sales Northland Interstate Portfolio size 3 Buildings - 356,176 SF office finish 49% clear height occupancy 87% close date 4/2014 purchase price buyer seller $25,650,000 ($72.01 PSF) Altus Properties ASB Capital Management Crosstown North Business Center II & VI size 2 Buildings - 140,856 SF office finish 70% clear height occupancy 86% close date 6/2014 purchase price buyer seller $8,750,000 ($62.12 PSF) Artis REIT Duke Realty Stag Capital Portfolio size 4 Buildings - 336,592 SF office finish 23% clear height occupancy 100% close date 4/2014 purchase price buyer seller $20,000,000 ($59.42 PSF) Brennan Investment Group STAG Capital Partners Colliers International 3

5 Industrial Sale/Lease Activity Sales Activity Date Property Buyer Seller Age Size Jun-14 May-14 May-14 May-14 May-14 May-14 May-14 Apr-14 Apr-14 Apr-14 Mar-14 Crosstown North Business Center II & VI West Broadway Avenue, Brooklyn Park, MN 6601 Parkway Circle Minneapolis, MN 1200 Northdale Boulevard Coon Rapids, MN Roseville Industrial Center 2265 Country Road C West, Roseville, MN 524 5th Street North Minneapolis, MN 3501 State Hwy 100 South St. Louis Park, MN Hines Global REIT Eden Prairie, St. Paul, Hopkins, MN Medina Parks 4375 Willow Drive Medina, MN Northland Interstate III, IV, V Brooklyn Park, MN Stag Capital Portfolio St. Louis Park, Coon Rapids, Osseo, MN, Milwaukee, WI Hampshire Technology Center Hampshire Ave South, Minneapolis, MN Artis REIT Interstate Partners The Reserve Group RP Mallory Group LLC United Properties Duke Realty Office Finish Price $/SF Clear Height Occupancy 140,856 70% $8,750,000 $ % Sunlite III LLP ,903 12% $3,500, $ ' 100% Modern Tool Inc - Grover Wollston Stanley Management Co Shapiro Enterprises Limited Partnership ,550 0% $5,466, $ ' 100% ,087 8% $5,400, $ ' 95% ,500 5% $6,980, $ n/a Opitz Outlet Dick Nelson ,492 20% $3,900, $ ' n/a Greenfield River's End Trading Co Altus Properties Brennan Investment Group Onward Investors Hines Global REIT ,681 82% $40,602, $ % AIC Ventures ,920 8% $3,974, $ ' 100% ASB Capital Management Stag Capital Partners ,176 49% $25,650, $ % 336,592 23% $20,000,000 $ % STAG Capital Partners ,441 50% $8,100, $ % Lease Activity Tenant Building Name Address City Submarket SF Lease Ruan Transportation Management Systems Graco Inc. Gateway North Business Center Liberty Industrial Park at Diamond Lake Highway 101 & County Rd Brockton Lane North Otsego West/Northwest 300,000 Rogers West/Northwest 227,054 Wurth Adams Northcrest Highway 610 & 169 Brooklyn Park Northwest 180,000 Citi-Cargo & Storage 3703 Kennebec Dr 3703 Kennebec Dr Eagan Airport/South of the River 150,000 Shapco Printing Inc Zane Ave N 1109 Zane Ave N Golden Valley West/Northwest 123,500 Goodwill Interstate Distribution Center II - III West Broadway Ave & Winnetnka Ave North Brooklyn Park Northwest 96,000 Data Bank Former Taystee Building 3255 Neil Armstrong Blvd Eagan Southwest 90,000 Nippon Express USA Enterprise Industrial Center 2444 Enterprise Drive Mendota Heights Airport/South of the River 76,000 Restwell Mattress Company Prairieview II th Street Eden Prairie Southwest 36,051 Colliers International 4

6 Submarket Highlights SOUTHWEST The Southwest submarket has traditionally been one of the healthier submarkets in Minneapolis. Over the past 24 months this has remained true, and the submarket continues to show signs of growth. Currently, the Southwest is seeing increased activity from larger users such as Deli Express, Bayer, Quantum Graphics, and Federal Packaging, who are all in the market looking for 100,000 square feet or more. Buildings that are 18-foot-clear and higher with vacancies over 25,000 square feet are seeing good activity and are leasing faster than they were 18 months ago at higher rates. Showroom space has also seen improvement in occupancy in the Southwest market. We continue to see the market stabilizing with steady rental increases on renewals. However, showroom space still has more supply than demand and showroom in less desirable locations is still taking extended periods of time to lease. With the help of our market-leading leasing representatives, we have been able to compile the most up-to-date market information available. Although leasing activity is strong in the core submarkets, leasing has slowed down as a whole over the past six months. Brokers are excited to see the activity that will follow the new development product that is scheduled for year-end completion dates. Our Colliers leasing specialists have the highest confidence in well located distribution centers, and believe they will command high rent, as these buildings have seen the most stable rents. Brokers and investors alike are still bullish on the flex market, although these spaces are starting to see a slight increase in occupancy. Positive economic factors that continue to drive the market include institutional investors, growth within the manufacturing businesses, and new political policies is an election year for the Minnesota government, which may put leaders into positions to change policies in favor of industrial real estate. The growth of manufacturing business has increased, but there is concern as to when this trend will plateau. Overall, the positives outweigh the negatives in this market, making leasing brokers, lenders, and investors optimistic about the Minneapolis-St. Paul industrial market. In addition to increased leasing activity, our industrial brokers in the Southwest are seeing rent concessions decrease compared to 18 months ago. Free rent on new deals is diminishing, with an average three-year lease receiving one month of free rent, and five-year leases receiving two or three months of free rent. Another notable trend in the Southwest is the increase of rental rates on renewals. Approximately 50% of lease renewals include rental rates that are at or above current asking rates. Since the overall health of the Southwest market seems to be moving in a positive direction, there are several developers, including Ryan Companies, Opus, and United Properties, that are all under construction with industrial projects. United Properties is in the ground with a 140,000-square-foot, 24-foot-clear building in Chanhassen. Opus is currently constructing a 220-square-foot, 32-foot-clear building in Shakopee, and is also in the planning stages for a similar project in Chaska. Scannell is planning to build in Shakopee as well, and has proposed a 249,000-square-foot, 32-foot-clear project there. Ryan Companies was awarded a 217,000 SF build-to-suit with Shutterfly at Dean Lakes in Shakopee. Colliers International 5

7 northwest The Northwest submarket has consistently been one of the most robust submarkets in the Minneapolis industrial market. The Northwest has seen positive absorption for the 8th consecutive quarter, dating back to Q3 of It comes as no surprise that our submarket experts are seeing rent concessions diminish in both Office/Warehouse and Showroom product. They are noticing that about 70% of all renewals in either product type include higher rates, and landlords are starting to increase asking rates and decrease concessions. First Industrial is under construction on their Interstate Distribution Center II - III totaling 238,000 SF. Currently Goodwill has commited to 96,000 SF in that project. In the first half of 2014, the Northwest submarket has seen a number of large build-to-suit developments. Duke Realty built a 300,000-square-foot facility for Ruan Transportation, and United Properties is under construction on a 180,000-squarefoot office/warehouse facility for Wurth Adams off highway 610 in Brooklyn Park. Additionally, CSM, First Industrial, Opus, and United Properties all have plans to build 32-foot-clear office/warehouse buildings in this submarket. CSM has a 270,000-square-foot development located in Rogers, and a 202,000-square-foot building in Brooklyn Park. Both First Industrial and United Properties each have a 140,000-squarefoot development in Brooklyn Park. Opus is currently constructing an 80,000-square-foot building in Plymouth. Amazon, Clearfield, Nilfisk, FedExand Room and Board are all searching for large requirements in the Northwest market. The strong demand from users is helping to perpetuate the bullishness of spec development. In addition, our market professionals have explained that office/warehouse rents in the Northwest still have room to grow, and it is difficult to predict where rents will go if the incoming supply of product outweighs the demand. For now, the future is still looking bright. Northeast/Midway Northeast and Midway submarkets have seen an increase in market activity in the first half of In the past 18 months, this submarket has seen an increase in active users and the start of some promising new developments. Currently, larger users such as Hunt Electric, Life Fitness, Savers, Bunzl, WESTCO, Papercraft, and American Carton are all in the market looking for at least 100,000 square feet. The number of active users increases significantly when the requirement drops down below 50,000 square feet, which is why developers have zeroed in on potential development sites over the past 18 months. Our market experts have continued to state the limited availability within quality product type, as options that could accommodate larger users are likely crossed off the list due to functional obsolescence. This fact, together with steady user activity, has gotten the attention of developers. In the first quarter of 2014, St. Jude Medical leased 185,000 square feet in a spec building developed by Trammel Crow, which set the standard of new development within the Northeast/Midway submarket. Developers are aiming at building a minimum 32-foot-clear product that can accommodate a number of different sized users. Most recently, Hyde Development broke ground on a 213,000-square-foot spec building at the Northern Stacks in Fridley. United Properties plans to convert the old St. Paul Saints Ballpark site into 200,000 square feet of industrial space in In addition, Meritex is expecting to complete 129,000 square feet of new spec development off Highway 280 and Terminal Road in Roseville by the end of IRET is under construction on their redevelopment of 3075 Long Lake Road for a 32 clear, 192,000-square-foot, front loading distribution center. In Blaine, CSM, Industrial Equities, and United Properties all have land that can accommodate most build-to-suit opportunities in the market. Phase I of Hyde Development s Northern Stacks redevelopment is under way. The 213,000 SF bulk 32 clear distribution building will be delivered in the fourth quarter of Colliers International 6

8 Submarket Highlights In addition to increased leasing activity, our Northwest/Midway industrial brokers are seeing rent concessions decrease compared to 18 months ago. For example, free rent on new deals is diminishing rapidly. On an average, five-year lease landlords only need to give about two months of free rent to be competitive within the submarket. Our experts are seeing that about 80% of lease renewals are getting done at or above recently-increased asking rates. southeast The Southeast submarket is the smallest industrial market in the metro. However, this submarket still regularly performs well in comparison of its size. This is positive news for the submarket since the Southeast tends to lack larger users, and brokers within this market state that leasing activity is very strong for product type less than 50,000 square feet, and 24 clear, though options are limited. On the flip side, there are several 32ft clear buildings in the Southeast with vacancies over 120,000 sf that are experiencing very slow activity. year-end delivery date. Furthermore, Launch Properties has one build-to-suit project in the Southeast submarket located in Lakeville. Trends within the market are showing that bulk warehouse still has the highest potential for rent growth, as well as quality office/warehouse products. Free rent is decreasing to one or two months on new deals with less than five-year lease terms. Lease experts say that 75%-85% of renewals are being completed at increased rental rates. Landlords are willing to provide tenant improvements if the tenant has a lease term percentage of seven years or more, and are willing to amortize the costs. Lastly, many cities within this submarket have real estate incentives available. Data Bank signed a 15-year lease for 90,000 SF with Liberty Property Trust. With spaces being difficult to find, developers have different spec projects in the pipeline. Scannell broke ground on a 71,000-square-foot project in Mendota Heights, and United Properties has a 90,000-square-foot project also located within Mendota Heights. Both projects are scheduled for a Planned new industrial 24ft clear or higher under construction/proposed southwest > Under Construction: 589,800 sf > Proposed: 257,000 sf > 5 projects Northwest > Under Construction: 717,544 sf > Proposed: 3,470,885 sf > 21 projects midway > Under Construction: 544,079 sf > Proposed: 0 sf > 3 projects northeast > Under Construction: 0 sf > Proposed: 916,000 sf > 4 projects southeast > Under Construction: 176,000 sf > Proposed: 1,698,304 sf > 9 projects Colliers International 7

9 bulk warehouse absorption Minneapolis-St. Paul Investment Trends Vacancy and absorption trends Investment Market Dynamics YTD 2014 Q $200 $100 $80 $40 demand continues to be bifurcated, with location being a key differentiator in tenant $180 $90 demand. Functional, well-located properties are in the highest demand, but $80 among $160 properties that are dealing with some functional obsolescence, location can make up for $140 $70 other $120limitations, such as low ceilings or old age. newer, functional properties can $60 still meet with challenges if they have a less-than-desirable location. $100 $50 Vacancy Volume $ (mil) net absorption rental rate Price PSF market indicators there was 527,103 square feet of absorption in the industrial market during the first quarter of all product types had positive absorption, with bulk warehouse properties absorbing the most at 249,359 square feet, followed by 225,764 square feet in office showroom properties, and 51,980 square feet in office warehouse space. Vacancy decreased from 9.9 percent at year-end 2013 to 8.7 percent. office warehouse properties have theprice lowest psf vacancy rate at 7.5 volumes percent, followed by 8.2 percent vacancy in bulk quarterly - flex & industrial warehouse, with office showroom posting the highest vacancy rate of 13.6 percent. percent Vacant $60 all submarkets, office showroom properties have the highest vacancy rates. $30 the across $40 suburbs have the lowest office showroom vacancies, with the minneapolis$20 northern north $20 percent, and the West/northwest at 12.3 percent. the southwest, by comparison, $10 at 10.6 $0 largest concentration of office showroom space, but the highest vacancy $0 Vacancy has the rate at Q1 '06 Q1 '07 Q1 '08 Q1 '09 Q1 '10 Q1 '11 Q1 '12 Q1 '13 Q1 '14 20% 14.6 percent. the southwest submarket faces the most competition from office space, as both office and showroom space is concentrated in the same geographic areas along the 13.1% 12.5% 15% Ind Qtrly. Sales Volume Flex Qtrly. Sales Volume Ind Price PSF Flex Price PSF 11.5% 10.5% 494 strip, and Class B vacancies are high at 17.6 percent. in addition to lower vacancies in 10.4% 9.1% 8.7% 9% 8.6% 10% office showroom space, the West/northwest is leading the recovery in vacancy in office warehouse space; vacancy is lowest here of any product type and submarket at 5.9 percent. 5% ECONOMIC AND EMPLOYMENT GROWTH SUPPORTIVE INDUSTRIAL COMMUNITY in the northwest, concessions are decreasing and landlords are able to hold to their asking economic growth in Minnesota was strong atrates, 2.8 percent In 2013, a landlords tax increase was to signed into lawtoonsign warehouse while in the southwest, continue be aggressive tenants. space, sf absorbed GDP growth compared to 1.8 percentq1 nationally. And, in contrast which made Minnesota the only state to tax warehousing. This Vacancy has reached lows for bulk warehousewould spacechoose at 8.2 percent overall. to national trends, financial services employment has returned to ledhistoric to concern that companies to locate theirnewer, properties with 24 ceiling heightsstates. or higher estimated to pre-recession levels, while nationally it is still only well-located about one- bulk warehouse warehousing operations in neighboring Witharethe have even lower vacancies of two to fouralready percent. developers have responded, real and are third of absorption its way back. All occupations within the seven-county warehouse industry being extremely competitive, net building andover planning both speculative andrallied build-to-suit projects. opus 200,000 metro area are expected to have a 12% employment growth estate organizations against this bill. On completed March 2014, the 3,000,000 square in shakopee at Valley park Business Center. united properties has a 140,800-squarethe period of More construction and industrial industry had their voices heard, and Governor Dayton 1,677,707 1,410,063 1,369,692 specifically, 2,000,000 1,355,744 1,261,325 foot flex property with 24 a new ceiling under in Chanhassen. liberty extraction occupations 914,877 are expected to527,103 grow over 25% in the signed taxheights relief bill thatconstruction eliminated the warehouse tax. 1,000,000 property trust has leased the bulk warehouse property it started on a speculative basis in 0 same period. Jobs within this category include construction The Minnesota Industrial Real Estate community truly rose to the rogers. Graco inc. signed a lease there before the scheduled completion date of Quarter (1,000,000) trades workers, (928,872) brick masons, carpenters, drywall and ceiling occasion, which shows the positive support the state has for its two of (2,000,000) tile installers, insulations thriving industries. (2,430,461) workers, and more. These occupations (3,000,000) are very 2006 common tenants buildings for 2011industrial YTD Minneapolis-St. Paul 8.03% 7.87% New York 7.11% Chicago 6.68% San Francisco 6.46% Los Angeles 8.31% Dallas 7.46% Colliers International 8 Atlanta *Average Industrial cap rate over the past 4 quarters. Information provided by Real Capital Analytics.

10 Investment Market Dynamics (Con t.) vacancy Percent Vacant 20% 15% 13.1% 12.5% 11.5% 10.4% 10.5% 9% 9.1% 8.7% 10% 8.6% 5% YTD SF Absorbed net absorption 3,000,000 1,410,063 1,369,692 1,677,707 2,000,000 1,355,744 1,261, , ,553 1,000,000 0 (1,000,000) (928,872) (2,000,000) (2,430,461) (3,000,000) YTD > The 10-year Treasury has decreased to more than 5% over the past month. As of mid-june, it is at 2.63% > Oversupply of capital and higher debt goals are making lenders more aggressive. > Among commercial property types, industrial continues to be favored by lenders, trailing only multifamily in desirability. This is primarily due to industrial s strong, improving fundamentals, and the lower costs of ownership. > With the re-emergence of CMBS, competition among lenders has increased, resulting in lower spreads, higher LTVs, and some relaxing of covenants and recourse. > In addition to basic property fundamentals, a property s location and functionality will help determine lender pricing and structure. > Lenders have expressed an increased willingness to look at slightly out-of-the-box deals, including hangout on single tenant deals and those with lease roll risk. 10-year u.s. industrial cap rate (%) 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Year Treasury Ntl. Industrial Cap Rate Ntl. Flex Cap Rate Colliers International 9

11 2013 Colliers Minneapolis Business Activity 23M SF UNDER MANAGEMENT 10.7M TOTAL SF SOLD INDUSTRIAL SALE TRANSACTIONS INDUSTRIAL LEASING BROKERS 24.9M TOTAL SF CURRENTLY LISTED Colliers Minneapolis - St. Paul Investment Services Group Colliersmsp.com/investmentservices Mark Kolsrud Sr David Berglund Colin Ryan Pia Robertson Sr. Real Estate Analyst Elle Plein Real Estate Analyst Cassie Durch Brokerage Services Assistant Colliers Minneapolis - St. Paul Industrial Group Eric Batiza Paul Bickford Brad Bohlman, SIOR Sr Lisa Brass Associate Mike Brass Rob Brass Jay Chmieleski Brian Doyle Dan Friedner Jeff Jiovanazzo Ryan Krzmarzick, CCIM Nick Leviton Evan Molde Peter Mork, J.D. Sr Brian Netz Steve Nilsson, CCIM, SIOR Andrew Odney Joseph Owen Colin Quinn Associate Bill Ritter, CCIM, SIOR Sr Eric Rossbach Jason Simek Colliers International 10

12 485 offices in 63 countries $2.1 billion USD in annual revenue 15,800 professionals and staff 1.46 billion* square feet under management $75 billion USD in total transaction value * Square footage includes office, industrial and retail property under management. Residential property is excluded from this total. All statistics are for Minneapolis-St. Paul 4350 Baker Road, Suite 400 Minnetonka, MN DIRECT Accelerating success.