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MINNEAPOLIS-As some of the largest and fastest-growing companies in the Twin Cities feel the pinch of the slumping economy, vacancy rates in the area’s industrial sector have risen 1 percentage point to 11.4% in the first half of this year, according to a recent market report from United Properties. Telecom leaders like Eden Prairie-based ADC Telecommunications, one of the most expansive companies in the region over the past few years, abruptly slammed on the brakes as the market for fiber-optic equipment took a downward turn and capital funding sources dried up.

Demand also cooled from big space users like Seagate Systems, Johnson-Matthews and Cypress Semiconductor, all with substantial operations in the Twin Cities.

For the abundance of smaller companies that serve these larger tech companies, times were equally tough and many found themselves over-committed for space.

Coupled with an increase in business failures, including several mid-sized to large local companies, this contributed to a substantial increase in subleasespace–up more than 50% since January.

With sublease space included, the vacancy rate is 14.2%, enough to give space users reason to feel optimistic about their near-term bargaining power,according to officials at United, a Bloomington-based commercial real estate firm. From 1995 to 2000, the Twin Cities added more than 17 million sf of new industrial space, in the midst of unprecedented absorption. For the first time in more than six years, absorption was to the negative side, at minus 635,760 sf.

New development activity, not presently under construction, has virtually come to a halt as developers postponed planned projects until they receive significant pre-leasing or the market shows signs of coming back into equilibrium. Slightly more than 665,000 sf of new construction came onlinethe first half of the year. Nearly 1.5 million sf will be added to the market over the next six months.

Building owners held the line on rental rates for the first six months of the year, but concessions are on the rise. Although demand will likely begin to pick up the second half of the year, it will take time for the industrial market to absorb the amount of vacant space currently available. Property owners looking to stimulate demand over the next six to 18 months may need to adopt even more aggressive marketing tactics and consider rate reductions in order to be competitive.

A bright spot in the overall market picture was the continuing growth of the medical technology sector in the Twin Cities. Led by such giants as Medtronic, St. Jude Medical, Guidant and Boston Scientific, the players in this core Twin Cities industry provided a needed stimulus for new space in an otherwise largely quiet market.

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