MARKET INSIGHT POST

Q2-2023 Minneapolis-St. Paul Office Market Update

Q2-2023 Industrial Market Report created by Minnesota Commercial Real Estate Association. For more information, you can reach them at: www.mncar.org

Forte Principal, Phil Simonet, provides insight to the Twin Cities industrial market report recently released by MNCAR/REDI.

The Twin Cities industrial real estate market continues to demonstrate strong leasing and sale activity; however, the pace of new signed leases (net absorption) in 2023 is significantly lower than 2022. In fact, net absorption for second quarter 2023 was 304,000 square feet compared to 1.4 million in second quarter 2022. Year-to-date net absorption is also down compared to last year. 1.5 million square feet has been absorbed year-to-date compared to 2.5 million square feet in 2022.

While 2023 leasing activity is trending downward, net lease rates remain exceptionally strong and vacancy rates remain less than 4%. Net lease rates are now approaching $13.00+ per square foot for office space and $7.00+ per square foot for warehouse space. The pace of new industrial building development is slowing due to the combination of higher interest rates, which increase costs, and higher capitalization rates, which reduce the value of completed buildings. Annual net rent increases of 4%-5% remain the market standard.

The two geographic submarkets that are displaying potential overdevelopment are Woodbury/Lake Elmo with 1,200,000 square feet of new space becoming ready for occupancy in a traditionally untested submarket and Cottage Grove with over 1,000,000 square feet of new speculative development where a lead tenant has not yet been identified.

Q2-2023 Minneapolis-St. Paul Industrial Market Update

MARKET RECAP:

All Properties:

Total Inventory: 281,519,679 sf

Total # of Buildings: 3,225

Absorption: 304,037 sf

Vacancy: 3.9%

Asking Rate Low: $7.92 NNN

Asking Rate High: $11.20 NNN

Under Construction: 10,388,195 sf

Multi-Tenant Properties

Total Inventory: 148,547,333 sf

Total # of Buildings: 1,813

Absorption: 208,782

Vacancy: 5.8%

Asking Rate Low: $7.94

Asking Rate High: $11.28

ECONOMIC OVERVIEW:

According to the Bureau of Labor Statistics (BLS), the unemployment rate for the Mpls-St Paul metropolitan statistical area (MSA) increased 80 basis points to 2.9% for May 2023 from 2.1% for May 2022. The unemployment rate for the US was at 3.6% in June 2023 which is the same as last year. State of Minnesota unemployment rate was 2.9%. The Mpls-St Paul MSA saw an increase in job growth and industrial also increased in job growth specifically in manufacturing by 2,600 during the same period.

MPLS-ST. PAUL AREA EMPLOYMENT STATS:

MARKET OVERVIEW:

The Mpls-St Paul industrial market consists of 281.5 msf in eight counties across the metro. Overall there was 304,000 sf of positive absorption for Q2 2023 and bringing the YTD to 1.5 msf positive absorption. Multi-tenant only properties posted 208,000 sf positive absorption bringing the YTD to 857,000 sf positive absorption. The overall vacancy rate for the quarter was 3.9%, with multi-tenant vacancy at 5.8%. To date, there are 58 construction projects throughout the market totaling 10.3 msf and 14 properties have been delivered YTD with 2.66 msf.

MARKET HIGHLIGHTS:

At the close of Q2 2023, the market experienced over 4.0 msf of leasing activity in 201 transactions. The Northeast market shows the lowest vacancy rate of 2.4% while the Southwest market is at the top with 5.3% for all properties. The Northwest bested all markets with 432,000 sf positive absorption led by the new delivery of 401,000 sf for Blu Dot while they vacated 266,000 sf. The Southwest market posted the highest drop with 166,000 sf negative absorption led by IWCO vacating 151,600 sf for sublease. Sixty five properties sold totaling 3.8 msf for $329.6 million.

MARKET STATISTICS BY PROPERTY TYPE

Multi and Single Tenant:

Q1-2023 Market Statistics by Property Type (Multi & Single Tenant) Graph

VACANCY RATES BY MARKET

Multi and Single Tenant:

Q1-2023 Vacancy Rates by Market (Multi & Single Tenant) Graph

LEASE RATES BY MARKET

Multi and Single Tenant NNN:

Q1-2023 Lease Rates by Market (Multi & Single Tenant NNN) Graph

MARKET STATISTICS BY PROPERTY TYPE

Multi Tenant:

NEW DEVELOPMENTS BY MARKET:

YEAR-TO-DATE DELIVERIES BY MARKET:

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Industrial Market Experts

Phil Simonet

Principal

Phil.Simonet@ForteREP.com

John Young, CCIM

Vice President

John.Young@ForteREP.com

Dan Lofgren

Vice President

Dan.Lofgren@ForteREP.com

Joe Jetland

Senior Associate

Joe.Jetland@ForteREP.com

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