• The Southeast submarket, the smallest of the submarkets with 192 industrial buildings totaling 15.5 million square feet, has stabilized and is seeing improvement. The submarket boasted the largest drop in vacancy of any of the submarkets in the second half of 2005, decreasing to 15.2% from 18.8% at mid-year. The submarket also experienced an impressive 560,291 sq. ft. of positive absorption in the second half, resulting in 1,109,552 sq. ft. for the past 12 months.
• Bulk warehouse enjoyed 459,740 sq. ft. of positive absorption, helping to push down the bulk vacancy to 17.8% from 28.2% at mid-year. Two big bulk deals were signed: Citi-Cargo & Storage Co. Inc. signed a three-year lease for 312,000 sq. ft. at the Apollo Distribution Center in Eagan. The lease allows Citi-Cargo to continue operating in the facility, which the company had been leasing on a month-to-month basis since March 2005. This is an expansion for Citi-Cargo and one of the biggest leases of the year. And in another large expansion, Americdisc, a supplier of CD/DVD manufacturing services to the multimedia industry, leased 110,000 sq. ft. at the Aldrin Distribution Center in Eagan.
• Also important to point out is that two large bulk properties in the Southeast have major challenges such as location, marginal clear height or the inability to subdivide, which hinders marketing efforts. Also, two other bulk vacancies are public warehousing facilities, which show up in the vacancy numbers although they often are occupied with short-term warehousing users. They still compete for long-term deals but are never hurting quite as bad as the vacancy numbers would reflect. If these four bulk properties were removed from the universe, the Southeast’s bulk vacancy would drop to approximately 5%.
• Office warehouse saw some improvement in vacancy, dropping to 14.1% from 15.5% at mid-year; however, it is still the highest of all submarkets. Positive absorption was 137,487 sq. ft. in the second half of the year.
• Some good news for landlords in the Southeast, especially landlords of office warehouse space, is that Duke Realty Corporation’s portfolio is nearly full. This large landlord had been aggressively pursuing deals and had a big run on leasing during the past year.
• Office showroom struggled a bit with 36,946 sq. ft. of negative absorption and a jump in vacancy to 13.3% from 11.9% at mid-year.
• Two negative deals that occurred in the showroom market were EDS, a global outsourcing services company based in Plano, Texas, vacated 30,000 sq. ft. in Waters I in Eagan and returned to Dallas. Also, Blue Cross Blue Shield vacated 53,000 sq. ft. at Eagandale Tech Center in Eagan and moved back to its campus located off Highway 13 and Yankee Doodle Road. The company acquired a couple of buildings two years ago to add to its campus and is now relocating a number of groups there. These two deals more than make up for the negative absorption in the showroom market.
• Net rental rates were flat at $7.68 for office and $4.38 for warehouse.
• While activity in the Southeast traditionally has been driven by smaller space users, 10 deals were signed that were in excess of 20,000 sq. ft. This is the most this submarket as seen in many years. And many of these tenants are new to the Southeast.
• Restaurant Technologies, which recycles cooking oil, signed a 28,000-sq.-ft. lease at the recently completed Cedar Bluffs Business Center I in Eagan, just north of Highway 13 and Silver Bell Road. The company took occupancy in November 2005 and is using the space as its new headquarters. This marks the first lease for the 80,000-sq.-ft. speculative project, developed by Opus, which is a 24-foot clear, higher-image warehouse building.
• In another deal, Capitol Sales, an electronics distributor, leased 57,000 sq. ft. of office warehouse space at Trapp Road Commerce Building II in Eagan, a property owned by Duke. Capital Sales expanded from Corporate Square in Eagan
• Global Mail, a division of DHL, signed for 28,000 sq. ft. of office warehouse space at the Trapp Road Commerce Building II in Eagan. This tenant is new to the Southeast submarket.
• Davis Equipment, an Iowa-based distributor of fertilizer, spraying and grain handling equipment, took 24,000 sq. ft. of office warehouse space at the Gresser Building in Eagan. The company is new to this submarket.
• TivoliToo Inc., a developer and designer of theme-related products, leased 39,000 sq. ft. of bulk space at the Enterprise Industrial Center in Eagan. It was an expansion from a building in St. Paul.
• John Deere leased 24,000 sq. ft. of showroom space at Waters Business Center VI in Eagan, utilizing it as a classroom training facility for agricultural equipment dealers. The company is new to the Southeast submarket.
• Americraft , a carton manufacturer, took 28,000 sq. ft. of office warehouse space at the Crane Building, 353 Fillmore Ave. E., in St. Paul.
• Dalton Door, a manufacturer of residential and commercial doors, signed for 23,000 sq. ft. of bulk space at Flagship Business Campus I, 935 Blue Gentian Road, in Eagan. Dalton Door is a new tenant to this submarket.
• Granite & Quartz leased 20,000 sq. ft. of bulk space at Flagship Business Campus II, 915 Blue Gentian Road, in Eagan. They, too, are new to the Southeast.
• Few options are available in the Southeast for tenants looking for spaces of 50,000 sq. ft. or larger throughout all property types. However, if companies need 15,000 to 30,000 sq. ft., there are plenty of options available, and as a result, landlords are continuing to offer concessions.
• In new speculative development, Opus completed the new Cedar Bluffs Business Center I in Eagan (as previously mentioned). Opus also sold an adjacent parcel of land to Schwan’s for a build-to-suit.
• Also, Industrial Equities broke ground on the 43,200-sq.-ft. High Pointe Business Center II, at 680 Travelers Trail East, near Highway 13 and Portland Avenue in Burnsville. It will be a 24-foot clear office warehouse property.
• Although the bulk market has seen significant recent improvement—vacancy is now 17.8% compared with 30.8% a year ago—no new speculative bulk is planned. One reason is the lack of reasonably priced land to put up this product type.
• In sales activity in the Southeast, Cut Fruit Express acquired a 46,066-sq.-ft. refrigerated food manufacturing building at 11585 Courthouse Blvd. in Inver Grove Heights. United Properties represented the seller, Pabst Meat Supply, in the sale.
• Also, Asset Recovery Corporation sold its 41,688-sq.-ft. single-tenant building at 150 State St. in St. Paul to national company ABC Supply. United Properties represented ABC Supply in the transaction.

Outlook

The Southeast could see 600,000 sq. ft. of positive absorption in the next 12 months; most absorption will occur in bulk and office warehouse properties. A few of the remaining large chunks of space should lease. In addition, the submarket will continue to see significant activity from small to medium-sized users. Positive growth and an optimistic outlook in the economy will further encourage existing tenants in this submarket to consider expansion upon lease expiration. The optimism of industrial business owners and executives will be key to continued positive absorption in the Southeast. 

This submarket will continue to see reduced concessions.

The Southeast will see fewer user building sales because the supply of buildings is very low and companies are finally getting realistic. Southeast landlords will begin to see more and more of these companies considering the multi-tenant leasing market.

Inver Grove Heights, the next obvious location for development in the Southeast, will finally be getting some long-awaited infrastructure. The northwest corner of the city, which encompasses an area of approximately 3,000 acres, will be served with sewer, water and other infrastructure by 2007. This will open up the entire Highway 55 corridor to future development. Many developers are ready for the new opportunity. United Properties, for example, owns 42 acres in Inver Grove Heights with plans to build the 200,000-sq.-ft. Inverwood Business Park I at Highway 55 and Barnes Avenue. Also, Opus controls more than 150 acres in the Cottage Grove area along Highway 61.With available land, Inver Grove Heights and Cottage Grove will be key southeast areas for industrial growth.

In future speculative development, Wellington Management, in a joint venture with the St. Paul Port Authority, plans to break ground in early 2006 on the 76,000-sq.-ft. River Bend Business Park I, a higher-finish office showroom property at 355 Randolph Ave. in St. Paul. Quoted rates are $10 for office and $5 for warehouse.