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November « 2012 « CGC Commercial

Archive for November, 2012

Is Free Rent Dead?

by JeffMinea, 3:36 PM on November 1st, 2012, No Comments

An article appeared on the front page of the Mpls. St. Paul Business Journal recently titled: “Industrial Tenants: Say Goodbye to Free Rent”.  As a Tenant advocate, I can tell you that in 2012 that has not been the case, and I can illustrate why it won’t become the norm for awhile yet anyway.

The article quoted a 7% vacancy rate for Twin Cities industrial property, but that figure includes all single tenant facilities which increases the universe and thereby artifically lowers the vacancy rate. The true industrial vacancy rate for the Twin Cities is approximately 13.2%, with the southeast submarket reporting 16.5% vacancy (Mncar 2012 Annual Market Report). Historically, a tight market with very little free rent is one with a vacancy rate around 9-10%. With the vacancy rate dropping about 1% per year, we still have a ways to go to get to a tight market.
Now you can breath a sigh of relief! It’s still a Tenant’s market and will remain one through 2013 and beyond most likely.

In some cases, the market has tightened for some types of industrial tenants, that is, large users looking for 175,000 sf or more of bulk warehouse space. In reaction to this, Liberty Property Trust has pulled the trigger on a 227,000 square foot speculative bulk warehouse facility, and Interstate Companies has already built 200,000 square feet in South St. Paul, and has signed a lease for 50,000 square feet recently for 11 years and 12 months of gross free rent! Free rent was sure in play on that one!
So, with free rent still very much a part of transactions in the industrial sector, what about office space? The Twin Cities office vacancy rate is 16.2% (Mncar 2012 annual market report) and that means free rent will also be alive and well in that sector  for some time to come.
In either industrial of office it is safe to say that the largest requirements are going to be filled by Build-to-Suits, with examples like Sanmar purchasing land and building over 500,000 sf of industrial space in Shakopee, or United Health Group building a mega-complex in Minnetonka on the heels of completing 2 other build projects in the last 2 years. The cranes are back on the landscape and that is always a sign of prosperity!
Regardless of which party gets elected shortly, we will all need to focus on how we can improve our bottom lines, and for us, we can boost your profitability in a variety of ways in this current Tenant’s market. Clients will continue to turn to us to: address space efficiency and forecast growth, determine if they are over or under market with their rate, map out strategies to negotiate their next lease (new or renewal), and various other solutions,  and what they end up with are typical savings of 10-20% over their last rate, along with space that will be improved to carry them for the next 5 years or so.
If you have a lease expiring in the next 12-24 months, it is prime time for an evaluation of either a best lease strategy or possibly to explore a purchase of a facility. In either case, you can count on seeing a strategy and input that will best serve you and your bottom line!

If you would like a copy of my white paper, “Renewal Assistance, Benefits and Payoffs”, please let me know and I will send it over.

Thanks and I hope your business finishes strong this year!

Jeff Minea

CGC Commercial