Industrial Insight | Q4 2016:
New construction slows, stymies investment sales
New spec development is slowing due to land scarcity, rising construction costs, and needed time to let existing vacancy fall
While build-to-suit (BTS) construction remains steady, speculative development is slowing down. This is partly a factor of increasing costs for new construction, including labor and supply costs and land valuations. As such, asking rates for new construction are also increasing at a nominal rate. Fortunately, tenant demand is not expected to taper and there are a number of large bulk availabilities that remain on the market, particularly in the Northwest submarket. Nonetheless, the dwindling supply of Class A product is slowing down investment sales. In this market, product that is listed for sale almost always trades and Minneapolis-St. Paul’s higher yields are now attracting the national players.
Fewer low to medium finish properties are resulting in a high finish market
Brokers and tenants have recently been finding this market’s availabilities to be overbuilt on the finish side. The majority of tenants in the market are seeking low to medium finish levels. The most common property type in demand is office warehouse with distribution space. Asa result, tenants that require minimal office square footage often end up purchasing or leasing overbuilt properties and then later have to pull out the facility’s existing offices. This adds extra expenditures on both the front and back-end due to higher costs per square foot and the added expenses of demolishing prebuilt office.
Outdoor storage is at a premium as municipalities try to eliminate it
Currently there are numerous tenants in the market looking for three or more acres of outdoor storage. There are fewer options as cities become increasingly opposed to such usage. It is now common that any time an industrial facility sells, it is expected that existing zoning requirements will tighten to discourage outdoor storage. Consequently, the demand for facilities with outdoor storages is far outpacing supply and the trend is expected to intensify.