Cushman broker expects big rent jumps for small industrial spaces
Listen to this articleLarge users of industrial spaces may start to see their rents climb over the rest of 2024, but smaller users, those from 20,000 to 100,000 square feet, can expect their rents to shift upward significantly, at least according to one broker from Cushman & Wakefield.
More than 2.5 million square feet of industrial space is under construction, and vacancy is around 4.5%, according to a first-quarter report on the Twin Cities industrial market from Cushman & Wakefield.
Cushman Executive Director Hudson Brothen said in an interview with Finance & Commerce that the market is “starting to slow down” overall and that he considers the vacancy rate unhealthy. The current market conditions, he said, is most likely going to start impacting users who want smaller spaces.
Brothen said that he had a group that needed 30,000 to 40,000 square feet of space near Chaska in the southwest side of the metro. Normally, there are a handful of options, Brothen said, but this time that was not the case.
“We had a whopping one option to entertain,” Brothen said.
Patrick Hamilton, market director for Cushman & Wakefield said there was a run-up in demand that was met by developers over the last few years, so there has been a decent amount of new construction hitting the market recently. But most of the leases have been for users with a footprint of over 75,000 square feet.
“If you start to triage the building list away from the new construction to better second-generation space and older buildings — the smaller you get, the more constrained the vacancy rate gets,” Hamilton said.
Hamilton said he doesn’t expect much speculative development to deliver for small users in the next one to two years. Brothen said this will put upward pressure on rental rates for all users. The rental rates average is $7.88 per-square-foot according to the report.
“Depending on geography, for 100k-plus users, it might hold steady or increase slightly,” he said. “But I don’t think you’re going to see the huge increases compared to some of the smaller groups.”
As for splitting up larger warehouses into smaller warehouses for multiple occupants, Brothen said that kind of action is possible but can be costly and difficult to figure out operationally, like figuring out how to split utilities between tenants. Brothen said he has seen it work on a small scale, citing an example of a 25,000-square-foot warehouse that was split into smaller bays, but not on a larger scale.
What would start to help make smaller footprints work, Brothen said, is if developers viewed them as long-term assets. Most of the time, Brothen said, developers “build them, fill them and sell them,” which keeps a final dollar amount in mind for the developer.
“If someone can come in and build buildings to keep them long-term, then I think they can start making sense of building speculatively because you don’t really care what your exit dollar amount is or exit cap rate,” he said. “It doesn’t matter because you’re going to keep it.”
Absorption is just under 805,000 square feet, according to the report.
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