• “Plugging away” might best describe leasing activity in the Northeast in the second half of 2005. While there a number of significant mid-sized deals, there was also a handful of buildings in the submarket that lost larger tenants. In other words, the Northeast experienced a lot of give and take in the second half of the year. This submarket, with more than 30 million square feet of industrial space, boasts the Twin Cities’ largest industrial market.
• Vacancy in the Northeast increased to 14.9% from 12.5% at mid-year 2005. Absorption fell to 36,692 sq. ft. of positive absorption from 473,680 sq. ft. at mid-year. 
• Net rental rates were flat at $7.83 for office and $4.13 for warehouse.
• Office showroom reported an increase in vacancy to 8.6% from 7.4%, primarily the result of new construction that came on line in the second half. Showroom absorbed negative 11,719 sq. ft.
• The office warehouse vacancy inched up to 13.3% from 12.6%, absorbing 16,927 sq. ft. Meanwhile, the bulk warehouse vacancy jumped to 20% from 14.7%, absorbing 31,484 sq. ft. At 20% vacancy, the Northeast’s bulk market is the highest of any submarket.
• The major factor that contributed to the bulk’s significant hike in vacancy is the addition of a 2.2-million-square-foot property to the multi-tenant market. St. Louis-based Commercial Development Co. Inc. (CDC) purchased the BAE Systems facility in Fridley, which is Minnesota’s largest industrial building, for $19 million. BAE, which acquired United Defense Inc. earlier this year, decided to sell the building and sign a long-term lease for more than half of its space. CDC is now trying to fill the remaining 850,000 sq. ft. with tenants.
• In the past six months, five leases were completed in the Northeast that were 50,000 sq. ft. or larger. The largest deal signed was Asset Recovery Corp. taking 88,000 sq. ft. in a bulk warehouse property at 807 Hampden Ave. in St. Paul. The property is owned by ING Clarion Industrial Property Group. Asset Recovery signed a seven-year lease.
• O’Reilly Automotive signed a two-year lease for 50,000 sq. ft. of bulk warehouse space at 2213 Charles Ave. in St. Paul, in another Clarion-owned property. O’Reilly acquired Bumper to Bumper, an existing building tenant, and then expanded within the portfolio.
• Deluxe Corporation signed a four-year deal for 64,000 sq. ft. of office warehouse space in the former Distribution Alternatives building at 4440 Round Lake Road in Arden Hills. Landlord CSM Corporation purchased the vacant building in 2004, put Deluxe in 50,000 sq. ft. in the first quarter of 2005, and Deluxe subsequently expanded into another 64,000 sq. ft.
• Warren Steven Window Fashions took 75,000 sq. ft. of office warehouse space at 600 Hoover Street, a 174,408-sq.-ft. property in Minneapolis. Industrial Equities purchased this vacant building and leased space to the custom window coverings fabricator.
• Also, City Cargo signed a 61-month lease for 82,500 sq. ft. at 3070 Long Lake Road in Roseville.
• On the other hand, there were also several large blocks of space that came back to the Northeast submarket. Aveda Corporation, for example, finally officially vacated its 109,000 sq. ft. at the Roseville Distribution Center at 2929 Long Lake Road in Roseville. (Aveda consolidated its operations in Blaine by relocating to a new 126,000-sq.-ft. distribution center developed by CSM Corporation).
• Also, Honeywell Inc.’s lease for 123,000 sq. ft. officially ended in the Terrace Drive building in Roseville, owned by St. Paul Properties. Capp Industries has a tenant in its building at 2123-2125 NE Broadway Ave. in Minneapolis, which is marketing 51,240 sq. ft. of space for lease. Allina expanded within the CSM Corporation portfolio earlier in 2005; however, its former 43,000-sq.-ft. space on Elm Street in Minneapolis came back on the market for CSM.
• Leasing activity was slow in the summer and into early fall; however, toward late fall this submarket saw an increase in the pace of activity across the board and in the number of viable users scouting the market. In the first half of 2006, the Northeast likely will reap the benefits as some of these users find space.
• The submarket also will likely see a handful of multi-tenant buildings purchased by single users and taken off the multi-tenant market. The 327,000-sq.-ft., multi-tenant Fisher Nut Building in St. Paul’s Midway, for example, is for sale. There was a very interested buyer, but the deal fell through. The former peanut factory, now called Wycliff Industrial Center, is reportedly for sale for $4.99 million.
• Three new office/showroom projects were delivered in the second half of 2005. They include the White Bear Business Park, Oakcrest in Roseville, Phase II of Lexington Preserve in Blaine. All three new buildings have available space that adds up to approximately 200,000 sq. ft. of vacancies, which pushed the showroom vacancy upward.
• The 84,788-sq.-ft. White Bear Business Park, at Highway 96 and Interstate 35E is a unique property with office, warehouse and even retail possibilities. The owner is occupying 30% of the building and working to lease the remaining space. Rates are $4.75 for warehouse and $11 for office.
• The 48,077-sq.-ft. Oakcrest building at 1975 Oakcrest Avenue in Roseville developed by Roseville Properties remains vacant, as does the Phase II at Lexington Preserve in Blaine. The 87,748-sq.-ft. building on Pheasant Ridge Drive was developed by CSM Corporation.
• One trend in the Northeast is some very aggressive leases were negotiated and completed for decent product at less than $3 per square foot. Typically, these low rates are offered for obsolete, older product. However, during the summer’s “dead zone,” landlords had to grab the deals they could. They had to be aggressive, especially in some of the portfolios that have languished during the past 24 months. This trend will taper off, although there is probably another 200,000 sq. ft. of decent space that could go for these sub-$3 rates. An example of this is the Asset Recovery deal St. Paul. The company signed for 88,000 sq. ft. in a deal that was a less than $3 per square foot.
• Making headlines in the Northeast is the Mounds View City Council’s approval of plans for Fridley-based Medtronic Inc. to build a new $65 million corporate campus on the site of a golf course. Medtronic says the campus will employ 3,200 people and serve as the world headquarters of its cardiac rhythm management unit. The company broke ground on the project in December and said it has future plans to build two more buildings at the Mounds View site, which would bring the campus to 1.5 million square feet.

Outlook
The Northeast could see 600,000 to 700,000 sq. ft. of positive absorption in 2006. The absorption would happen as a result of continued steady growth with no new significant space coming on the market. The general take is that there is a moderate amount of demand that built up during the past four years. This submarket is finally seeing a slow and steady rollout of that demand.

No new speculative development will likely occur in 2006. With several new spec buildings open with significant vacancies, developers will be hesitant to move forward until these spaces fill.

In the next 12 to 18 months, there may be downward pressure on rates with the new product on the market.

Four preliminary projects, totaling nearly 695,000 sq. ft., are in various stages of development. Moen Leuer has preliminary plans for the 500,000-sq.-ft. The Preserve at I-35W and 95th Street in Blaine. The developer is fighting through land issues. Net asking rates would be $9.75 for office and $4.75 for warehouse.

Also in Blaine, there are plans for the 36,746-sq.-ft. Blaine Business Center at County Road J and I-35W.

Talks in Blaine continue regarding a possible new $675 million, retractable-roof Vikings stadium. State funding is a major issue, and no special legislative session was called in 2005 to further discuss the project. If the stadium is built, it would have a major impact on future development in the Northwest.

In Minneapolis, Interstate Partners has preliminary plans for the 80,000-sq.-ft. Broadway Center at Northeast Broadway Avenue and I-35W. Net asking rates would be $12 for office and $6 for warehouse. And in White Bear Lake, McGough Construction Co. has preliminary plans for the 78,000-sq.-ft. White Oak Phase II at Highway 61 and Buerkle Road. Significant pre-leasing is required.