The Twin Cities are continuing to experience record-breaking numbers in the industrial space. There’s over 4.5M square feet under construction locally and in Q1 2022 vacancy sat below 3%. There’s high demand for Class A product and a rapid acceleration of speculative construction, buildouts and modular solutions to accommodate growth.
At the same time, we’ve seen rising interest rates, high inflation, surging material costs and supply chain challenges. Let’s not also forget the increases in land and sale prices due to limited inventory. 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.
Last year the story centered on skilled labor, or the lack thereof. That trend will continue, along with rising material costs and long lead times. We’re seeing significant delays for steel and around 16 months for precast. Roofing is spanning across four quarters with cost escalations upwards of 15%. There’s no single culprit either. Raw materials, driver shortages, overcrowded ports, and other national and international disruptions are just some of the factors contributing to unprecedented cost escalations
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 still 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 below 5% in some instances, 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 recently built a 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, last-mile shipping trends and reverse logistics facilities.
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, along with EV charging stations. You can get even more granular with the type of lights, toilets, sinks, windows, HVAC distribution and appliances in the building. Additionally, there are 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 as e-commerce continues to boom. According to the United Nations, in 2021, consumers spent $870 billion online with U.S. merchants, up 14% from the year prior. Global e-commerce jumped to nearly $27 trillion. Shopping habits have changed, marking an increased need for reverse logistics facilities dedicated solely to product returns.
*Data provided by JLL and CBRE’s Quarterly 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: