The Minnesota Twins might not have set any records in 2021 nor were they ever on a ‘hot streak’ but one area that’s booming (and something to be excited about) is industrial development and redevelopment. Right now, the Twin Cities are at a record-breaking 11 million SF of industrial user needs. Over 5 million SF is currently under construction with 3 million of that being speculative development. In Q2, 54% of overall activity was new leases or expansions, pushing down the vacancy rate.*
These numbers have endured even as COVID, the Colonial Pipeline, Suez Canal, and Texas deep freeze wreaked havoc nationally and internationally. Now, let’s throw in rising material costs and supply chain challenges, as well as land price increases. Where does that leave the industrial sector, specifically in the Twin Cities?
Here are 5 key insights.
1. Construction and design teams are being combined on the front-end with a mix of technology to minimize schedule delays and material cost escalations.
We all know that steel is in short supply. It’s taking upwards of 9-months or more and pushing the schedule of industrial developments into late 2022. Outside of steel, we’re also seeing material delays across precast wall panels, roofing membrane, and more. These supply chain delays are hitting every market, making it more important than ever to get creative and find opportunities to condense the schedule in other ways.
Combining design and construction teams on the front end is key for procuring and locking down prices earlier in the process. As a national design-builder with in-house architectural design and engineering, ARCO has used this strategy to give owners and developers live feedback while dollarizing their decisions. A national procurement strategy can also help with rising material costs. Last, but not least, add in a suite of construction technology that provides everything from real-time access to project information to unit cost data for more accurate pricing.
2. Local jurisdictions are impacting project timelines now more than ever.
Speed to market is everything, but most jurisdictions are not operating at pre-pandemic levels. Developers and industrial end users are coming into the Twin Cities market oftentimes from out-of-state – or even out of country (see our example in the next section) – and are not always prepared for the timelines they’re being given. To circumvent that, owners and developers should seek transparent partners who know the local market, effectively manage risk and can proactively communicate potential roadblocks.
3. New capital is entering the market and developers are diversifying their portfolios.
Increasing capital markets activity is resulting in record-breaking cap rates, even reaching the low 5% range, which is unprecedented in the Twin Cities industrial market.* Good developers have a lot of capital to choose from – whether it’s from private equity, investment managers…etc. There are also more buyers on every deal, and these buyers are willing to pay a little bit more, especially if it’s their first entry into the industrial sector. We’ve seen a lot of activity in the Northwest and Southwest submarkets as well as the rise of life sciences, technology/security, transportation and even defense. For instance, ARCO is building a 20,000 SF manufacturing facility in the Southwest submarket for a cybersecurity and defense company out of Europe.
4. Rent growth is outpacing pro forma rents…to some degree.
You hear in the industry about developers trying to capture the rent growth, but it really depends on the type of building. For some spec buildings, developers still want leases to be long-term, secured cash flow. Other business parks can execute short-term leases and capture rent growth within reason.
5. Industrial design is becoming more hyper-focused on sustainability and last-mile shipping trends.
When designing an industrial facility, sustainability is at the top of the list. Jurisdictions want to know how these buildings can be more sustainable and have less negative environmental impact. Solar and solar-ready buildings are a large component of that. You can get even more granular with the type of lights, toilets, sinks, windows and appliances in the building. Additionally, you’re seeing more infill facilities, making the parking lot almost worth more than the actual building. We’re also seeing more creative designs for the influx of smaller box trucks and service and delivery vans versus the 53-foot trailer.
*Data provided by JLL and CBRE’s Second Quarter Industrial Market Reports
Did you know ARCO is the #1 contractor for warehouse & distribution facilities in the U.S., according to ENR? If you have a question on the industrial sector or would like to get more information on industrial unit costs, contact us today: