CSM's Brooklyn Park project

MINNEAPOLIS—Some developers have looked at the Twin Cities’ low vacancy rates and decided to launch speculative development projects, but many more will probably decide to sit on the sidelines for at least one more year and see what happens.

“If you’re not running full steam right now, you’re probably waiting until next spring,” Scott Moe, the vice president of leasing and development for Minneapolis-based CSM Corp., tells GlobeSt.com. The severe Minnesota winters are probably to blame, as the cold weather adds tremendous costs to construction. And he does not see other developers getting the needed approvals from municipal officials that would allow groundbreakings for major spec projects this year.

As reported in GlobeSt.com, both CSM and First Industrial Realty Trust, Inc. have just started spec projects in the Minneapolis suburbs. First Industrial broke ground this week on a 142,290-square-foot speculative facility with 32′ clear height on a recently acquired site at the Interstate North Business Center in northwest suburban Brooklyn Park. And CSM just announced plans to develop two spec projects — a 202,000-square-foot office and warehouse facility in Brooklyn Park, and a 270,000-square-foot bulk warehouse facility, also with 32′ clear height, in Rogers, another northwest suburb.

“There are a lot of development people in town sitting on land, and naturally they want to put that land to use,” Moe says. “I’m guessing that they are going through a lot of the calculations that we did.” But at this point, most will decide for now to merely observe the efforts by both CSM and First Industrial, and perhaps jump into the spec market next year. “They’re probably saying, ‘we’ll see how they do and what kind of rents they get.’”

CSM officials have been thinking through these issues for quite a long time, he adds. They noticed that the supply of modern bulk warehouse space sank very low over the past 18 months. But for most of that period, “it just didn’t seem like there was much demand. But about six months ago, that was when we saw a lot of companies out in the market looking for space.”

“The last piece of the puzzle, and probably the hardest one for those in our business, was to determine if these companies could pay enough in rent to support development,” Moe says. However, “the economy has been so tough on everybody for so long that there was no new construction,” and therefore, no new rental rates for product comparable to what CSM planned to build. Attempts to pinpoint rental rates for proposed developments by analyzing rents in existing product require an “apples-to-oranges” comparison.

However, after what Moe describes as “months and months of kicking the tires,” CSM officials decided these two suburban markets were well worth the risk. “I rely very heavily on the broker community,” he explains, to better understand what kind of rents companies nosing around for space are willing to pay. Particularly helpful were Dan Swartz from CBRE, who will handle leasing for the Brooklyn Park development, and Mark Sims from Cassidy Turley, who will oversee it for the Rogers spec. “I trust brokers’ perspectives, so I spend a lot of time polling them.”

Moe was not dissuaded from breaking ground in Brooklyn Park by First Industrial’s decision to start its own spec in the town. “We think there is room for the two of us,” as the two projects are somewhat dissimilar, and it’s a submarket with a great deal of depth. Rogers, by comparison also has great demand, but is somewhat peripheral, and does “not have any product for us to go up against. The picture doesn’t get much rosier that that.”