Strong Fundamentals in the Industrial Market as Construction Surges

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1 Q INDUSTRIAL MINNEAPOLIS-ST. PAUL INDUSTRIAL MARKET REPORT Strong Fundamentals in the Industrial Market as Construction Surges MARKET INDICATORS Q VACANCY NET ABSORPTION RENTAL RATE VACANCY Percent Vacant 20% 15% 13.1% 12.5% 11.5% 10.4% 10.5% 9% 9.4% 9.1% 10% 8.6% 5% Q2 VACANCY AND ABSORPTION TRENDS The vacancy rate in the Minneapolis-St. Paul industrial market continued to lower during the second quarter of 2014, and stands at 9.1 percent, down from 9.4 percent at year-end. Although leasing activity is strong in the core submarkets, leasing has slowed down as a whole over the past six months. Absorption was positive for the quarter at 129,435 square feet compared to first quarter when absorption was 527,103 square feet. There is currently over 2 million square feet of industrial space under construction. Our leasing professionals cautiously optimistic that activity will follow the new development product scheduled for year-end completion dates. Well-located distribution centers will continue to command high rental rates. Brokers and investors alike are still bullish on the flex market, as these spaces are starting to see a slight increase in occupancy. Positive economic factors that continue to drive the market include institutional investors, growth within the manufacturing businesses, and new political policies is an election year for the Minnesota government, which may put leaders into positions to change policies in favor of industrial real estate. Manufacturing growth has been strong, but there is concern as to when this trend will plateau. Overall, the positives outweigh the negatives in this market, making leasing brokers, lenders, and investors optimistic about the Minneapolis-St. Paul industrial market. NET ABSORPTION Q2 ABSORPTION SF Absorbed 3,000,000 2,000,000 1,000,000 0 (1,000,000) (2,000,000) (3,000,000) 1,410,063 1,369,692 1,677,707 1,355,744 1,261, , ,538 (928,872) (2,430,461) YTD SF Absorbed 200, ,000 0 (100,000) (200,000) (49,154) Airport/South of the River 48,586 Minneapolis North (98,524) Southwest 65,675 St. Paul East 162,854 West/ Northwest

2 ST. PAUL EAST & AIRPORT/SOUTH OF THE RIVER The St. Paul East and Airport/South of the River submarkets are the smallest industrial submarkets in our report. However, they have historically performed steadily and currently have vacancy rates of 10.9 percent for the Airport/South of the River submarket and 7.8 percent for St. Paul East submarket. The Airport/South of the River submarket had negative absorption of 49,154 square feet but year-to-date is posting a positive 48,189 square feet. The St. Paul East submarket absorbed 65,673 square feet and has a yearto-date total of 30,142. The Airport/South of the River tends to lack larger users, and brokers within this market state that leasing activity is very strong for spaces less than 50,000 square feet, with 24 ceiling heights, though options are limited. On the flip side, there are several buildings with 32 ceiling heights in the Airport/South of the River with vacancies over 120,000 square feet that are experiencing very slow activity. With certain categories of space difficult to find, developers have several projects in the pipeline. Scannell broke ground on a 71,000-square-foot project in Mendota Heights, and United Properties has plans for a 96,000 square foot project also located within Mendota Heights. In addition, Interstate Partners has a 104,000 square foot project with 28 ceiling heights under construction in South St. Paul, with an October delivery date. Trends in the submarket show that bulk warehouse still has the highest potential for rent growth, as well as quality office warehouse buildings. Free rent is decreasing to one or two months on new leases of three to five years of lease term. Leasing experts say that 75 to 85 percent of renewals are being completed at increased rental rates. Landlords are willing to provide tenant improvements if the tenant has a lease term of five years or more, and they are willing to amortize the specialized improvement costs. Lastly, many cities within this submarket have real estate incentives available. MINNEAPOLIS NORTH The Minneapolis North submarket has seen an increase in activity in the first half of There was 48,586 square feet of absorption in the 2nd quarter for a total of 108,620 square feet year-to-date. Vacancy stands at eight percent. Currently, larger users such as Life Fitness, Savers, Bunzl, WESTCO, and American Carton are all in the market looking for at least 100,000 square feet. The number of active users increases significantly when the requirement drops down below 50,000 square feet, which is why developers have zeroed in on potential development sites over the past 18 months. Our market experts have continued to see limited availability among quality product types, as many existing options that could accommodate a larger user are likely crossed off the list due to functional obsolescence. This fact, together with steady user activity, has gotten the attention of developers. In the first quarter of 2014, St. Jude Medical leased 185,000 square feet in a spec building developed by Trammel Crow, which set the standard of new development within the Minneapolis North submarket. Developers are aiming at building properties with a minimum of 32 ceiling heights that can accommodate a number of users with different size requirements. Most recently, Hyde Development broke ground on a 213,000 square foot speculative building at the Northern Stacks in Fridley. In addition, Meritex is expecting to complete a 130,000 square foot speculative building at Highcrest Distribution Center in Roseville by the end of IRET began construction on their redevelopment of 3075 Long Lake Road with a 192,000 square foot front loading distribution center with 32 ceiling heights. In Blaine, CSM and United Properties have land that could accommodate most build-to-suit opportunities in the market. In addition to increased leasing activity, brokers in this submarket are seeing rent concessions decrease compared to 18 months ago. For example, free rent on new deals is diminishing rapidly. On an average five-year lease, landlords only need to give about two months of free rent to be competitive within the submarket. Our experts are seeing about 80 percent of lease renewals get done at or above existing rates and asking rents on many functional properties have recently increased.

3 SOUTHWEST The Southwest submarket has an overall vacancy rate of 11.7 percent and absorbed 100,643 square feet year-to-date The submarket continues to show signs of growth. Overall demand for spaces of 100,000 square feet or more is still low. Bayer and Deli Express are two users in this size range that have been seeking space in the submarket. Bayer is moving forward with a build-to-suit with Ryan Companies in Shakopee. Buildings that are 18-foot-clear and higher with vacancies over 25,000 square feet are seeing good activity and are leasing faster and at higher rates than they were 18 months ago. Showroom space has seen little improvement in occupancy in the Southwest market with a vacancy rate of 14.2 percent. We continue to see the market stabilizing with steady rental increases on renewals. However, showroom space still has more supply than demand and is still taking extended periods of time to lease. In addition to increased leasing activity, our industrial brokers in the Southwest are seeing rent concessions decrease compared to 18 months ago. Free rent on new deals is diminishing, with an average three-year lease receiving one month of free rent, and five-year leases receiving two or three months of free rent. Another notable trend in the Southwest is the increase in rental rates on renewals. Approximately 50% of lease renewals include rental rates that are at or above current asking rates. The overall health of the Southwest submarket seems to be moving in a positive direction, but it remains to be seen if activity will continue at a level to sustain development plans. United Properties recently completed a 140,000 square foot, 24 foot clear building in Chanhassen. Opus is planning stages for Chaska Creek Business Park and Scannell would move forward on a build-to-suit basis with a 249,000 square foot project in Shakopee. There has been a shift in recent quarters as more tenants that begin a space search end up having the confidence in their businesses to move rather than renewing at their existing location. Shutterfly s 217,000-squarefoot facility in Shakopee will open during the third quarter.

4 WEST/NORTHWEST The West/Northwest submarket has consistently been one of the most robust submarkets in the Minneapolis industrial market. There was 162,854 square feet of absorption in the second quarter, bringing the year-to-date total to 368,944 square feet the highest of the submarkets we track. The vacancy rate stands at 8.1 percent. It comes as no surprise that our submarket experts are seeing rent concessions diminish in both office warehouse and office showroom product. They are noticing that roughly 70 percent of all renewals in either product type include higher net rates with landlords contunuing to increase asking rates and decrease concessions for new vacancies coming to the market. In the first half of 2014, the West/Northwest submarket has seen a number of large buildto-suit developments. At Gateway North Business Center in Otsego, Duke Realty is building a 300,000 square foot facility for Ruan Transportation, 70,000 square feet for Perbix, and a 486,000 square foot building for Room and Board. United Properties is constructing a 180,000 square foot office warehouse facility for Wurth Adams off Highway 610 in Brooklyn Park, and Scannell is building 315,000 square feet for FedEx in Rogers. Additionally, CSM, First Industrial, Opus, and United Properties all have plans to build buildings with 32 ceiling heights in this submarket. CSM has a 270,000 square foot development located in Rogers, and a 200,000 square foot building in Brooklyn Park. First Industrial is also under construction in Brooklyn Park. Amazon, Nilfisk, and FedEx are all searching for large requirements in the West/Northwest submarket. This strong demand from users continues to encourage more speculative development in the market. In addition, our professionals suggest that office warehouse rents in the West/Northwest still have room to grow. For now, the future is still looking bright. Altus Properties purchased Northland Interstate Business Center III, IV, and V for $26.65 million. There was strong interest from investors in this Brooklyn Park property.

5 Industrial Sale/Lease Activity MARKET REPORT Q INDUSTRIAL MINNEAPOLIS-ST. PAUL Sales Activity Date Property Buyer Seller Age Size Jun-14 Apr-14 Apr-14 Apr-14 Mar-14 Crosstown North Business Center II & VI West Broadway Avenue, Brooklyn Park, MN 6601 Parkway Circle Minneapolis, MN 1200 Northdale Boulevard Coon Rapids, MN Roseville Industrial Center 2265 Country Road C West, Roseville, MN 524 5th Street North Minneapolis, MN 3501 State Hwy 100 South St. Louis Park, MN Hines Global REIT Eden Prairie, St. Paul, Hopkins, MN Medina Parks 4375 Willow Drive Medina, MN Northland Interstate III, IV, V Brooklyn Park, MN Stag Capital Portfolio St. Louis Park, Coon Rapids, Osseo, MN, Milwaukee, WI Hampshire Technology Center Hampshire Ave South, Minneapolis, MN Artis REIT Interstate Partners The Reserve Group RP Mallory Group LLC United Properties Duke Realty Office Finish Price $/SF Clear Height Occupancy 140,856 70% $8,750,000 $ % Sunlite III LLP ,903 12% $3,500,000 $ ' 100% Modern Tool Inc - Grover Wollston Stanley Management Co Shapiro Enterprises Limited Partnership ,550 0% $5,466,077 $ ' 100% ,087 8% $5,400,000 $ ' 95% ,500 5% $6,980,000 $ n/a Opitz Outlet Dick Nelson ,492 20% $3,900,000 $ ' n/a Greenfield River's End Trading Co Altus Properties Brennan Investment Group Onward Investors Hines Global REIT ,681 82% $40,602,754 $ % AIC Ventures ,920 8% $3,974,937 $ ' 100% ASB Capital Management Stag Capital Partners ,176 49% $25,650,000 $ % 336,592 23% $20,000,000 $ % STAG Capital Partners ,441 50% $8,100,000 $ % Lease Activity Tenant Building Name Address City Submarket SF Lease Ruan Transportation Management Systems Graco Inc. Gateway North Business Center Liberty Industrial Park at Diamond Lake Highway 101 & County Rd Brockton Lane North Otsego West/Northwest 300,000 Rogers West/Northwest 227,054 Wurth Adams Northcrest Highway 610 & 169 Brooklyn Park West/Northwest 180,000 Citi-Cargo & Storage 3703 Kennebec Dr 3703 Kennebec Dr Eagan Airport/South of the River Shapco Printing Inc Zane Ave N 1109 Zane Ave N Golden Valley West/Northwest 123,500 Goodwill Interstate Distribution Center II - III West Broadway Ave & Winnetnka Ave North Data Bank Former Taystee Building 3255 Neil Armstrong Blvd Eagan Nippon Express USA Enterprise Industrial Center 2444 Enterprise Drive Mendota Heights 150,000 Brooklyn Park West/Northwest 96,000 Airport/South of the River Airport/South of the River Restwell Mattress Company Prairieview II th Street Eden Prairie Southwest 36,051 90,000 76,000

6 INDUSTRIAL UNDER CONSTRUCTION AIRPORT/SOUTH OF THE RIVER > UNDER CONSTRUCTION: 72,000 SF > 1 PROJECTS MINNEAPOLIS NORTH > UNDER CONSTRUCTION: 217,000 SF > 3 PROJECTS SOUTHWEST > UNDER CONSTRUCTION: 1,019,000 SF > 1 PROJECT ST. PAUL EAST > UNDER CONSTRUCTION: 104,000 SF > 1 PROJECT WEST/NORTHWEST > UNDER CONSTRUCTION: 1,034,000 SF > 5 PROJECTS INDUSTRIAL UNDER CONSTRUCTION PROPERTY NAME ADDRESS/INTERSECTION CITY SUBMARKET SF DEVELOPER Mendota Heights Industrial 1475 Commerce Dr Mendota Heights Airport/South of the River 72,000 Scannell Properties Northern Stacks 4800 E. River Road Fridley Minneapolis North 213,000 Hyde Development 3075 Long Lake Rd 3075 Long Lake Rd Roseville Minneapolis North 192,000 IRET Highcrest Distribution Center 2400 Terminal Rd W Roseville Minneapolis North 130,000 Meritex Dean Lakes Business Park Highway 169 & Canterbury Rd Shakopee Southwest 217,000 Ryan Companies Bridgepointe II Concord Street & Bridgepoint Drive South St. Paul St. Paul East 104,000 Interstate Partners Fedex Distribution Center Brockton Ln N Rogers West/Northwest 315,000 Scannell Properties Gateway North Business Park Hwy. 101 & I-94 Otsego West/Northwest 300,000 Duke Realty Olympus Surgical Technologies America 9600 Louisiana Ave Brooklyn Park West/Northwest 181,000 Ryan Companies Interstate North III 6973 West Broadway Ave Brooklyn Park West/Northwest 142,000 First Industrial Interstate North II 6973 West Broadway Ave Brooklyn Park West/Northwest 96,000 First Industrial

7 Market Statistics SUBMARKET TOTAL SF DIRECT VACANT SF % VACANT DIRECT SUBLEASE VACANT SF % VACANT W/SUBLEASE LOW-HIGH QUOTED RATES Q ABSORPTION YTD ABSORPTION AIRPORT/SOUTH OF THE RIVER Bulk Warehouse 5,365, , % 0 8.1% $4.50-$ , ,316 Office Showroom 3,450, , % % $4.68-$8.80 4,723 4,300 Office Warehouse 9,183, , % 12, % $4.72-$8.71 (97,654) (135,427) Totals: 18,000,016 1,965, % 12, % $4.67-$8.73 (49,154) 48,189 MINNEAPOLIS NORTH Bulk Warehouse 5,170, , % 20, % $4.00-$ ,442 70,294 Office Showroom 4,345, , % 7, % $4.93-$ , ,357 Office Warehouse 17,186,581 1,273, % 0 7.4% $4.40-$8.60 (61,037) (110,031) Totals: 26,702,680 2,134, % 28, % $4.52-$ , ,620 SOUTHWEST Bulk Warehouse 5,792, , % 25, % $4.42-$9.18 (100,153) (111,091) Office Showroom 7,171, , % 33, % $4.79-$ , ,156 Office Warehouse 15,132,934 1,520, % 9, % $4.62-$9.24 (65,548) 20,578 Totals: 28,097,082 3,288, % 68, % $4.66-$9.36 (98,524) 100,643 ST. PAUL EAST Bulk Warehouse 9,041, , % 0 4.7% $4.14-$ , ,370 Office Showroom 2,480, , % 10, % $5.10-$ ,120 43,595 Office Warehouse 12,259,580 1,108, % 123, % $4.56-$9.28 (8,349) (135,823) Totals: 23,781,029 1,845, % 133, % $4.60-$ ,673 30,142 WEST/NORTHWEST Bulk Warehouse 13,170,237 1,395, % 90, % $4.41-$ ,564 55,002 Office Showroom 5,654, , % 23, % $4.70-$ , ,565 Office Warehouse 21,600,554 1,277, % 28, % $4.50-$8.93 (5,718) 174,377 Totals: 40,425,382 3,263, % 142, % $4.53-$ , ,944 TOTAL ALL MARKETS Bulk Warehouse 38,540,019 3,522, % 135, % $4.36-$ , ,891 Office Showroom 23,103,142 2,865, % 76, % $4.80-$ , ,973 Office Warehouse 75,363,028 6,109, % 173, % $4.54-$8.95 (238,306) (186,326) Totals: 137,006,189 12,496, % 385, % $4.59-$ , ,538 The above table is summarized data on multi-tenant industrial buildings greater than 20,000 square feet. Not included are single-tenant or owner-occupied buildings.

8 Market Statistics (EXPANDED MARKET) SUBMARKET TOTAL SF DIRECT VACANT SF % VACANT DIRECT SUBLEASE VACANT SF % VACANT W/SUBLEASE LOW-HIGH QUOTED RATES Q ABSORPTION YTD ABSORPTION AIRPORT/SOUTH OF THE RIVER Bulk Warehouse 17,171,021 1,139, % 91, % $4.57-$ ,470 82,247 Office Showroom 4,691, , % % $4.65-$8.88 4,723 7,986 Office Warehouse 10,824, , % 38, % $4.69-$9.02 (95,016) (114,779) Totals: 32,686,363 2,686, % 129, % $4.65-$8.84 (24,823) (24,546) MINNEAPOLIS NORTH Bulk Warehouse 20,426, , % 60, % $4.38-$ ,439 67,614 Office Showroom 6,119, , % 9, % $4.87-$ , ,524 Office Warehouse 19,494,939 1,276, % 0 6.5% $4.41-$8.54 (61,037) (110,031) Totals: 46,041,692 2,535, % 69, % $4.52-$ , ,107 SOUTHWEST Bulk Warehouse 23,329,231 2,840, % 187, % $4.07-$9.23 (308,056) (339,245) Office Showroom 8,709,040 1,036, % 33, % $4.80-$ , ,156 Office Warehouse 18,033,132 1,631, % 9, % $4.58-$9.15 (70,221) 12,045 Totals: 50,071,403 5,507, % 230, % $4.54-$9.34 (311,100) (138,044) ST. PAUL EAST Bulk Warehouse 19,680, , % 0 2.6% $4.20-$ , ,656 Office Showroom 4,026, , % 10, % $4.94-$ ,505 85,550 Office Warehouse 20,536,557 1,128, % 123, % $4.48-$9.28 (11,349) (130,823) Totals: 44,243,344 1,990, % 133, % $4.52-$ , ,383 WEST/NORTHWEST Bulk Warehouse 36,831,212 2,590, % 467, % $4.34-$ , ,048 Office Showroom 8,056, , % 23, % $4.68-$ , ,550 Office Warehouse 25,647,833 1,445, % 28, % $4.51-$ , ,681 Totals: 70,535,838 4,641, % 520, % $4.48-$ , ,279 TOTAL ALL MARKETS Bulk Warehouse 117,438,702 7,859, % 806, % $4.32-$8.66 (50,628) 99,320 Office Showroom 31,603,389 3,083, % 77, % $4.77-$ , ,766 Office Warehouse 94,536,549 6,418, % 199, % $4.52-$8.95 (203,809) (154,907) Totals: 243,578,640 17,361, % 1,083, % $4.53-$ , ,179 The above table is summarized data on multi- and single-tenant industrial buildings greater than 10,000 square feet. Owner-occupied properties are also included. 485 offices in 63 countries $2.1 billion USD in annual revenue 15,800 professionals and staff 1.46 billion* square feet under management $75 billion USD in total transaction value * Square footage includes office, industrial and retail property under management. Residential property is excluded from this total. All statistics are for Minneapolis-St. Paul 4350 Baker Road, Suite 400 Minnetonka, MN DIRECT Accelerating success.