Industrial markets have been in the unique business position of becoming increasingly more valuable during the pandemic.  The value of e-commerce, same-day delivery, and infill development is more important today than it was a year and a half ago.

I recently moderated the Bisnow webinar panel Minneapolis Industrial Update which included developers of industrial facilities from United Properties and Ryan Companies. The panelists Connor McCarthy, Development Director at United Properties, and Eric Morin, National Director of Architecture, Industrial at Ryan Companies both confirmed that the pandemic has accelerated an already growing industrial sector. Eric stated that “the reasons we are seeing the growth and explosion in the market aren’t new, they have all been here for several years, those trends have just been accelerated (by the pandemic), studies suggest maybe by five years in terms of acceleration and adoption for e-commerce especially for e-groceries and other items.”

Both panelists agree that many of the challenges other sectors have faced due to the pandemic have not been as big of an issue to overcome in the industrial sector. Many of these businesses were deemed essential, workers needed to be on-site, and the naturally distanced workplace lent itself well to continued operations. Connor points out that businesses that figured out how to ramp up distribution like “Amazon, Target, and Walmart all did very well during this pandemic”.  The rapid growth in this industry is also opening up new opportunities for construction companies who are being called upon to modify existing warehousing and develop new buildings in an effort to meet increasing demand.

Submarkets in the Twin Cities Emerging as Hot Industrial Hubs

The Twin Cities submarkets are running hot in the industrial sector agreed the panelists. The northwest quadrant is seeing the most active development due to access to both labor and roads but that doesn’t mean the other markets aren’t also doing well.  They both noted that labor is absolutely the number one concern for businesses across the board in their sector.

Cold storage is in high demand and is increasing in primary and secondary distribution markets.  As grocery stores move direct-to-home, increased demand for cold storage space creates a big opportunity for development but it also has its challenges. Trying to get the right mix on a speculative basis is difficult, particularly when it comes to cold storage and freezer space.  In addition, the city approval process is often more difficult due to the build specs needed up front which can be difficult to nail down in the early stages of development.  It costs 2-3 times more to build a cold storage facility than other spaces.  In addition to this, a very small number of companies own the majority of cold storage sites in the US creating a barrier to entry.

The last-mile delivery trend is also creating an opportunity in the market, however, conducting due diligence and identifying the risk and opportunities a particular site provides is very important.  The panelists agree that in-depth traffic studies are needed to determine adequate access to highways and the surrounding community. These particular facilities also have naturally high parking needs for both employees and delivery vehicles.  The combination of traffic, parking, and labor issues require developers to become increasingly creative with their site selection.  Historically, developers would look to farmland outside of the cities, but with the trend in customers wanting everything sooner, site selection is more crucial than ever before.

Pain Points for Developers are Real

Developers must conduct increasingly complex due diligence and take into account issues of remediation, re-zoning, or re-entitling a site as risk issues.  In addition, close proximity to a city will increase a site’s cost.  The market rent for a first-tier suburb vs. a third-tier suburb vs. a business district, all affect the premium someone pays, which in turn factors into project budgets and the offerings developers are able to provide to the marketplace.

Design changes to help mitigate these costs are being explored and implemented but a big issue that developers face today is a shortage of steel.   Connor points out that “in Oct 2020, the lead time for steel from the date of commitment to showing up on-site was around 12-16 weeks and today it’s 36-40 weeks…and costs are up 50% as well in this same time period”.  As a result, build-to-suit development is becoming increasingly challenging with the timeframe needed to order steel for a fully designed building now sitting at 12-18 months ahead of time.

Trends in Industrial

Supply chain weaknesses have been identified during the pandemic which could result in businesses needing more space.  There is also a trend in reshoring manufacturing to the US creating a sense of security that manufacturing at home provides.  With this in mind, good land, sites, and specs will continue to be in high demand.  Automation is increasing in manufacturing and warehousing facilities and the current labor shortage amplifies this need.

Finally, another important trend in the industrial space is a greater need to have access to data.  Getting high-quality fiber to a site is just as important as electricity these days.

Outlook

Long-term demand in the industrial space is growing consistently year on year.  Developers are meeting current needs but new design opportunities will open up for distribution centers with more development, construction, and design which is good news for Twin Cities developers.

To watch the full webinar and hear much more about industrial sector development including thoughts on repurposing shopping malls, what to do about ghost kitchens, and more, please listen to the full webinar at: https://www.bisnow.com/webinar/minneapolis/minneapolis-industrial-update-7027.

About the Author

Brandi Kerber focuses her practice on real estate law, nonprofit law, and corporate law. She advises clients in connection with all aspects of real estate transactions including development projects, commercial and residential sales, and leases, cellular tower leases, commercial loan transactions, construction contracts, easement agreements, title registrations, zoning matters, and lot splits. Brandi advises nonprofit organizations on a wide range of matters including organization, income tax exemption, property tax exemption, and sales tax exemption. She also represents closely-held businesses in corporate matters as well as mergers and acquisitions.