Five Factors that are Driving Net Rents in the Industrial Real Estate Market?
Almost every occupier of industrial real estate has either directly experienced the seemingly rapid increase of current net rates, or has heard stories about strong net rate increases on renewals, new construction, and existing vacant space across the Twin Cities Metro area.
Five main forces are driving net rents upward and will continue to do so for the foreseeable future:
Low Supply: Industrial vacancy rates across the country are at all-time lows. Minneapolis and Saint Paul are no different. The Third Quarter’s industrial vacancy rate is at 4.0% with distribution space and office-warehouse vacancy rates at 3.4% and 3.5% respectively. With tenants competing for fewer spaces, price (rental rate) paid is increasing dramatically.
High Demand: Net Absorption of available space YTD is 3.87 million SF compared to 1.20 million SF through Q3 2020. Many tenants need more space to expand fast-growing operations. Other tenants are migrating to higher-quality buildings that provide operational efficiencies, lower operating costs, and attractive work environments that help to retain existing employees and attract new hires. The increased tenant activity coupled with a lack of available space has compounded the upward pressure on rental rates.
Limited New Development: The cost of new construction has dramatically risen over the past 1224 months and supply-chain delays are adding time and additional expense to every new project; not to mention the soaring cost of land. The Mortenson Cost Index registered a 9% construction cost increase over the past 12 months in Minneapolis/St. Paul. New development is simply not being delivered to the market fast enough to meet the high demand for industrial space.
Increased Inflation: As inflation takes hold, it appears as though it is not “transitory”, but rather sustained. As a result of the strong industrial real estate market paired with generationally high inflation, Landlords are demanding annual net rent increases of 4-5%. Many tenants are surprised when proposed lease renewal rates are 10-15% (or more) above their current net rates. Many tenants ultimately end up paying these renewal rate increases because of the lack of vacancy in the market.
New Landlord: Link Logistics Real Estate is now the largest industrial landlord in the Twin Cities and continues to aggressively acquire more properties. Currently, Link Logistics owns approximately 16 million SF in the Twin City area and has increased net rates on renewals, and new lease transactions, while limiting tenant improvement allowances and free rent. The other landlords in the market are following Link’s lead, resulting in higher net rent in every industrial product type.
We anticipate that the market characteristics specifically described above will continue uninterrupted for the next 12-24 months, subject to an unforeseen exogenous variable impacting the industrial real estate market. A deadly strain of Covid-19, an unplanned war, or hyper- inflation could all alter the strength and resiliency of the US economy and the industrial real estate market.
Clients Come First with Merger of Excelsior Advisory & Paramount Real Estate Corporation
Minneapolis, MN (June 23, 2021) – Excelsior Advisory, LLC and Paramount Real Estate Corporation today announced the companies are merging to create an industry leader in commercial real estate in the Twin Cities. The combined companies will operate under the new name Forte Real Estate Partners LLC beginning in August 2021.
Forte Real Estate Partners will excel in seven primary commercial real estate areas: Advisory, Brokerage-Acquisitions/Disposition, Project Management, Property Management, Portfolio Services and Workplace Solutions, which will broaden their collective scope of services to the market.
The ownership team will include Jim Jetland and Steve Brown of Excelsior Advisory and Philip Simonet of Paramount Real Estate Corporation. All have worked in the commercial real estate industry for more than 35 years and bring vast experience and deep client relationships to the newly created company. Fred Hedberg, Principal of Paramount, will continue to provide commercial real estate services to his clients as part of the Forte team. The headquarters for the combined company will be located in Bloomington, MN.
Excelsior Advisory, LLC, an affiliate of The Excelsior Group, was formed 7 years ago to focus on tenant representation and real estate advisory, project management and lease administration services. Paramount Real Estate Corporation is celebrating 25 years of providing tenant representation, landlord representation, acquisition & disposition services, and third-party property management. Together they offer deep, experienced resources to meet the commercial real estate needs of existing clients and new clients.
“The two companies have a great deal in common and share a commitment to creating innovative real estate solutions, providing exceptional service to our clients and prospects, and continuing to develop long-term committed relationships. We are excited to build our culture around those core values,” said Jim Jetland, President of Excelsior Advisory.
“We are proud of what Jim Jetland, Steve Brown, and their colleagues have accomplished on our platform. We have enjoyed the opportunity to work with them and watch their business mature over the last seven years. We know that the Excelsior Advisory team will continue to grow and bring tremendous value to their clients. We’ll be rooting for their continued success,” said Chris Culp, CEO of The Excelsior Group, who will exit the Excelsior Advisory partnership resulting from the merger with Paramount.
“Fred Hedberg and I have had the exceptional opportunity to work as business partners for the past 25 years,” said Phil Simonet of Paramount. “I am grateful for Fred’s leadership, vision and, most importantly friendship. We feel fortunate to be able to continue working together as we build Forte Real Estate Partners.” Phil went on to say “I am also extremely excited about my new partnership with Jim Jetland and Steve Brown at Excelsior Advisory, LLC. Jim and Steve are admired for their work ethic, career accomplishments and outstanding reputations in the commercial real estate industry and business community in general.”