Minneapolis-St. Paul industrial market report

Q3 2023

The Twin Cities industrial market was strong in the third quarter but continued to slow down a bit from its recent hot streak. Sales volume and leasing activity in Q3 declined as occupiers and investors are increasingly becoming more patient due to higher interest rates. New construction starts declined, while cap rates and available space grew due to large vacant industrial deliveries. These signs may have been reason for concern in the past, but the slowdown was largely anticipated given the astounding pace of construction, sales, and leasing in recent years. As leasing volume in the market continues to decline, an increase in concession packages and/or slower rental rate growth is likely, as tenants become more selective of which spaces to occupy. Landlords are trending more in favor of the stability that comes with long-term leases, as opposed to the recent trend of short-term leases and frequent rent increases. Ultimately, the industrial market will continue to correct but remain strong for the foreseeable future. 

Vacancy rises despite strong absorption in Q3

Despite strong positive absorption of approximately 1.5 msf of industrial space observed in Q3, direct vacancy rates continued to increase by 80 bps due to new deliveries of large industrial spaces. This rise in vacancy is most prevalent in the fringe suburban areas that have seen significant new industrial construction, as over 29.5 msf of industrial product has delivered in the market since the end of 2020. The market continues to show strong demand from industrial users


Increase in big-box vacancy from 2022 quarterly average

The vacancy rate for big-box properties larger than 250,000 sf has increased to 6.6% from the 2022 average quarterly vacancy rate of 3.7% for big-box properties. This surge demonstrates the recent lack of demand for large product as well as the historical theme of developing an oversupply of big-box inventory, leading to an imbalance within the market. Meanwhile, a vacancy rate decrease of (1.5%) from the 2022 quarterly average to a vacancy rate of 3.1% is seen in industrial properties under 100,000 sf while properties between 100,000 and 250,000 sf saw a decrease of (3.5%) to a vacancy rate of 4.8%.


Industrial sales activity down in Q3

Industrial sales volume totaled $262.8 million in Q3. This was a 27.5% decrease year-over-year, and a decrease of 25.7% from Q2 2023. The average price per square foot experienced a slight decrease in Q3, with a 2.7% decrease year-over-year and a 1.9% decrease from the previous quarter. High interest rates, an uncertain economic environment, and supply-chain delays have all contributed to the decline in sales activity, leading to longer transaction times.

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