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MINNEAPOLIS-Although a large majority of Twin Cities manufacturing and technology companies expect to invest in their businesses in the near future, the Twin Cities industrial market faces several hurdles such as rising steel prices and the lack of suitable land that may constrain new development. The Twin Cities industrial market vacancy rate essentially held steady the first half of 2004 with a direct vacancy rate of 15.7% or 17.5% with sublease space, according to a recent industrial market survey by United Properties, the Bloomington, MN-based commercial real estate company.

This is up slightly from 15.2% or 17% with sublease at year-end 2003. A slow, controlled recovery is expected to continue this year, with demand for space coming from expanding small and mid-size companies. The state of Minnesota in March released a survey of more than 160 Twin Cities manufacturing and technology companies in which the large majority said they were “very likely” or “somewhat likely” to make new investments this year in employment, capital equipment and/or new or expanded facilities. “The prospect for additional real estate growth in this sector looks good,” says United Properties vice president Jason Meyer.

Office showroom and office warehouse properties reported marketwide vacancies at 11.2% and 14.4%, respectively, holding steady from year-end 2003, according to United. However, the bulk warehouse market is dragging the industrial market down with vacancies of 20.6%, up from 18.6% at year-end 2003. Much of the empty space is the result of companies downsizing or going out of business. Thirty-five bulk buildings with spaces of 50,000 sf or larger, totaling nearly 10 million sf, are available across the Twin Cities market. “Many of the obsolete properties will be torn down or repositioned,” Meyer says.

New industrial construction will be constrained as industrial developers continue to be faced with the rising price of steel and other building materials. Another development hurdle is the lack of industrial-zoned land as cities once open to industrial development now want higher-finish, higher-image commercial development, Meyer says. “Industrial developers are also finding themselves competing with housing developers who are moving further and further out and acquiring land once designated for industrial,” he adds.

The Northwest submarket, the second largest, is poised to be the first to recover and could see its vacancy drop from 11.4% to 10% over the next year. The submarket is experiencing speculative development occurring in Rogers and Brooklyn Park.

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