• The Southwest, with 284 industrial buildings totaling 22.78 million square feet, saw its vacancy drop slightly to 11.6% from 11.9% at mid-year. However, following a hefty amount of absorption during the first half of 2005—at 876,954 sq. ft.—absorption dropped off significantly to just 30,515 sq. ft. at year end.
• Office warehouse experienced the most positive absorption at 86,186 sq ft., helping push down the warehouse vacancy to 9.3% from 10.2% at mid-year. Bulk warehouse saw 41,417 sq. ft. of negative absorption, and the bulk vacancy ticked up slightly to 18.8% from 18.4% six months ago. Office showroom experienced 14,254 sq. ft. of negative absorption, while the vacancy dropped slightly to 9.3% from 9.7%.
• Some of the larger leases signed in the Southwest in the past six months include ATMI leasing approximately 60,000 sq. ft. in a building on Louisiana Avenue South in Bloomington. The company downsized from 100,000 sq. ft. it was leasing down the street from this property.
• Delphax signed a lease for the 44,977-sq.-ft. Netco Building, located at 6100 110th St. W. in Bloomington. This tenant is relocating from Minnetonka.
• Cardiocom signed a 63-month lease with Steiner Development for 25,398 sq. ft. at 7972 Century Blvd. in Chanhassen.
• Fastenal Co., an industrial distributor, signed a 60-month lease for 7,719 sq. ft of industrial and retail space in the former Midwest Mastercraft building at 8600 Excelsior Blvd. in Hopkins. The deal included $39,000 in improvements and no free rent.
• Most of the deals that were completed in the Southwest were inner submarket deals—meaning few new companies relocated to the submarket and existing companies did some moving around.
• Also, four or five larger groups vacated showroom and warehouse spaces to purchase their own buildings. Cross Telecom, for example, bought the former 89,000-sq.-ft. Awardcraft building at 10900 Nesbitt Ave. S. in Bloomington from Degonda Corporation for $3.75 million.
• Stratasys Inc. purchased the 84,430-sq.-ft. Edenvale Crossing Business Center II, at 7623-7631 Anagram Drive in Eden Prairie.
• Duplication Factory Inc. acquired a building in Chaska, at 4275 Norex Drive. The company had been leasing the building.
• Also Bailiwick, a company specializing in the deployment of information technology solutions, purchased the 45,000-sq.-ft. former Pemstar building in Chaska for its headquarters.
• These user building sales in the second half of 2005 prove interest is still very strong. The good news for the submarket, however, is good user buildings are becoming more difficult to come by compared with 12 months ago. That means companies have fewer options. They can either try to find available land for a build-to-suit—which is very difficult in the Southwest—or they will take another look at the multi-tenant leasing market.
• A decent number of larger users have been scouting for space in the Southwest market during the last six to nine months—many of them tenants from other submarkets—however, they have not yet landed. Some stayed put because of the limited options in the Southwest. Some that wanted to purchase buildings were stymied due to a lack of user buildings for sale. Even some companies that wanted to lease were unable to find large enough spaces in the product they needed. Some tenants are searching for large showroom spaces, which are difficult to find in this submarket. Other users continue to look at build-to-suit options for lease.
• Because the Southwest is becoming tighter, the submarket is beginning to see the end of very attractive leasing deals, including free rent and concessions.
• Net rental rates were flat at $8.23 for office and $4.63 for warehouse.
• In new speculative development, OPUS is building the 122,912-sq.-ft. Eagle Creek Commerce III at Eagle Creek Parkway in Savage. Construction on the office warehouse building started in September. A first-quarter 2006 opening is planned. The project’s first two phases are fully leased.
• Land prices are at a record high in the Southwest due to the limited supply in certain segments of the submarket. Speculative development in the Southwest likely will move forward on land that was purchased at a lower cost and the developer has owned for awhile in order to make the numbers work.
• Chicago-based First Industrial Realty Trust is making headlines in the industrial market. A joint venture between First Industrial and the California State Teachers Retirement System (CalSTRS) recently purchased a portfolio of 20 Minnesota industrial properties totaling in excess of 2 million square feet from Duke Realty Corporation. First Industrial is now managing all of the properties, which are mostly office warehouse buildings spread throughout the metro. This transaction was part of a larger national purchase in which the joint venture paid Duke $1.01 billion for a 14-million-square-foot portfolio. The purchase also included properties in Nashville, Atlanta and other cities. Following this transaction, First Industrial has ownership interest in 8.7 million square feet of property in Minnesota.
• In addition, First Industrial recently purchased three industrial buildings in Shakopee from Principal Real Estate Advisors. They are the 120,000-sq.-ft. Valley Green Business Park, the 201,600-sq.-ft. Continental Distribution Center and the 183,110-sq.-ft. Valley Oak Distribution Center. The purchase of these properties was part of a larger transaction in which First Industrial acquired 18 buildings, totaling 2.4 million square feet. In addition to the Shakopee buildings, the REIT acquired properties in Dallas, Chicago, Kansas City and San Antonio, Texas.

Outlook
The Southwest could see 700,000 sq. ft. of positive absorption in the next 12 months, primarily in markets like Eden Prairie and Shakopee. The Shakopee market, for example, should see activity simply because of the product type it has available, which includes large, 100,000-sq.-ft. bulk spaces with higher clear ceilings, which are in high demand. Shakopee has three options available.

A solid number of users will continue to look at the Southwest.

In the next six months, leasing concessions will continue to dwindle.

There is a limited supply of user sale buildings available, but there is still strong interest. Sale prices of remaining user buildings will likely remain high.

In preliminary development in the Southwest, there are 10 projects totaling 963,461 sq. ft. Many developers are requiring significant pre-leasing before pulling the trigger.