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Survey Says… Rental Rates on the Rise!

by Chris Garcia, 12:39 PM on June 26th, 2013, No Comments

With vacancy rates decreasing and an economy that continues to improve, Landlords are feeling bullish on the Twin Cities commercial real estate market.   Recently we conducted a survey with six prominent Landlords to get an understanding as to what their perspective is in the next 6-12 months.  The questions asked were:

  • Have you raised you rates?
  • Do you plan to in the next 12 months?
  • Any plans to build a new building on a speculative basis?
  • How much free rent will be offered in 2014?

The results of the survey were along the lines of what was expected with one surprise.  Two of the Landlords surveyed were predicting that free rent would go away in 2014.  That would be the first time since 2000 that free rent was not standard in new leases.

Notes from Survey:

  • Every Landlord expects free rent to decrease in 2014
  • As mentioned above, two Landlords predict free rent will go away completely in some sub markets
  • One Landlord expects to build spec in 2014
  • Most will only build if the perfect site presents itself
  • Four Landlords have raised their quoted rates, only 1 has no plans to, and the last has plans to start increasing them in 2014
  • All six would only build 24’ clear and higher for industrial, none have plans for office or flex (single level office with low clear)

Most Landlords are raising their rates on office and industrial between 5-10%.  The market for high clear industrial space is tight and there are more situations where Tenants are competing for space.  Office still has plenty of space available however there are certain areas where it is tight.  For example, Downtown Class A for large blocks of space is extremely tight.  The Bone Marrow Group is looking for 200,000 SF with little to no options.  They are now getting close to a build to suit near Target Field, which should break ground in 2014.

Rental rates have not increased in years and while Tenants never want their cost of doing business to go up, it really has been a long time since Landlords have seen an increase.  It is hard to imagine that free rent will go away in 2014 however if the market continues to improve at the same rate, it very well could.  The Landlord could have the upper hand in 2014 or 2015.

The one item that the Tenant almost always has in their favor is the high cost to replace them.  When a Tenant moves from one location to another, the cost to re-Tenant is almost unavoidable.  Down time, tenant improvements, and real estate fees are associated with finding a new Tenant and are expensive.  That is not likely to change any time soon.

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