The industrial commercial real estate market has seen significant growth in recent years with the rise in e-commerce being a contributing factor. With the onset of the COVID-19 pandemic, the demand for warehouse space increased dramatically and delivered a healthier than predicted trajectory for the asset class.
Nationwide lockdowns at the beginning of the COVID pandemic forced businesses to work remotely and consumers to stay out of stores. Typical purchasing of goods and services shifted to online venues, forcing businesses to seek immediate additional warehouse space to keep pace with consumer needs. In Q2 2020 alone, the US saw two years’ worth of market growth within e-commerce space.
Landlords saw a huge increase in demand for warehouse leasing nationwide. But with construction projects paused and a lack of supplies and delays, existing product quickly began to stretch thin. Vacancy began to drop as businesses snatched up the limited available industrial space. The Minneapolis-St. Paul market saw vacancy drop to 4.3%. This drop in availability allowed landlords and investors to increase rates for space with plenty of users still willing to pay.
The user demand brought about an increased activity for investors both nationally and locally. When Blackstone Real Estate Trust acquired their Minnesota industrial portfolio in Spring of 2020, Link Properties (a subsidiary of Blackstone) began to push their office and warehouse rates in all properties. Tenants were forced to strategically build in larger budgets for rents on renewals and relocations during an already tumultuous year. While the market indicated 2.5% to 3% annual increases to base rent as standard, Link began pushing 4% to 4.4% increases with little to no room to move.
Most recently, Blackstone announced their acquisition of WPT, a move that would add 109 properties to their already dominant portfolio. This monopoly of the industrial market indicates that inflated rates are here to stay in the Minneapolis-St. Paul metro. Shortly after Blackstone’s acquisition news, Prologis (another dominating investment company in the MSP market) also announced that they were planning to follow suit and raise rents 10% across the board.
Despite a discouraging outlook for prospective tenants from a rent-cost perspective, the push on rates enforced by institutional investors may have positive rippling affect for private or smaller landlords. These independent landlords may be able to drop rents slightly to be more attractive to prospective tenants, that is, if the space is available.
With the significant demand in growth from users, developers are maximizing the need with new ground up projects. In Minnesota, there is currently about 5 million square feet either under construction or proposed for the metropolitan area. In addition to the low availability, with more than a billion square feet of total US warehouse inventory more than 50 years old and with lower than 20’ clear height ceilings, markets are due for new, updated product.
The next issue: Finding available land in last-mile locations and metro areas with easy access. There is no doubt COVID-19 and e-commerce has created a surge in the industrial sector. Now, we see how tenants, investors and developers continue to keep up in a challenging market and difficult times.