2017 ended strong for the Twin Cities industrial market. The 4th quarter saw 1.1 million square feet of positive absorption, which was by far the strongest quarter of the year. Net absorption totaled 2.36 million square feet for the year. This puts 2017 slightly below the positive pace of 2016 and 2015 but still well above annual averages of the past 15 years.
Vacancy rates continued to remain at all-time lows as demand for industrial space outpaced new supply. The metro-wide vacancy rate of 6.6% is below 3rd quarter’s mark of 6.8% and has improved from the 2016 year-end figure of 7.0% vacant.
The Southwest and Northeast submarkets stood out as the best performers of 4th quarter. The Northeast continued to benefit from some of the most centrally-located new industrial developments throughout the metro area. Those developments, including Northern Stacks, positioned the Northeast as the leading submarket in terms of net absorption both in 4th quarter and year-to-date. Within the Southwest, Shakopee accounted for 375,000 square feet of positive absorption with new construction completions. Year-to-date, the Shakopee-led Southwest submarket recorded the second highest total absorption of all five submarkets.
Construction has continued to be one of the main drivers of large-scale leasing activity in the metro. As the overall vacancy rate continues to drop and the demand for industrial users rises, new construction is often times the only option for users of a certain size.
Fourth quarter 2017 saw 1.65 million square feet of industrial construction completed – significant for year, yet alone one quarter. Year-to-date, a total of 2.9 million square feet of industrial space was completed, with 1.75 million of that multi-tenant product. The year-end construction total is roughly in line with the prior three years which saw approximately 3 million square feet completed each year.
There is an additional 2.5 million square feet of industrial space currently under construction and expectations are for several new speculative multi-tenant projects to be announced soon. Estimates show 2018 recording more total square feet of new construction than 2017.
In terms of rental rates, average asking rates are $4.91 psf for warehouse space and $8.97 psf for office. Rates have remained consistent on the macro metro-wide scale for the last two years. New construction is continuing to receive a 10-15% premium. While overall rent is not increasing, there has been a decrease in concessions granted compared to previous years, effectively raising total real estate costs for tenants.
The Real Cost of Labor Shortage
The most recent unemployment figure for the Twin Cities metro area is 2.4%, which is the lowest unemployment rate in the nation for metro areas with over one million in population. This puts the Twin Cities significantly below the full employment figure. Anything below full employment means that companies are being negatively impacted by losing opportunity and work, which should be a cause for concern. Main job sectors finding it difficult to find qualified employees are the trades and manufacturing, including many industrial focused tenants.
From a real estate perspective, it is even more important for tenants to be located where they have the best chance of finding workers. Firms spend a significantly higher amount on wages than real estate, so added rental cost of a location that is more desirable from a recruitment standpoint is dwarfed by total cost of paying more in wages to lure employees.
A hypothetical company with 100 employees in 100,000 square feet paying $15 per hour is spending four times more for labor annually than total gross real estate. For every dollar they would have to pay to attract an employee due to poor location, it would be the equivalent of raising rent by $2 per square foot. When industrial average rates are in the neighborhood of $4.50 per square foot to start with, paying even a slightly higher rate for a better location could save costs in the long run.