Supply Constraints Drive Industrial Rent Growth in Twin Cities Amid Construction Pause
“Our market’s very healthy, but vacancy rate is low, and rents will continue to rise, and that just creates more demand for building,” explains Maxx Schindel, Associate Broker at CBRE specializing in industrial properties in the Minneapolis market. This assessment captures the current state of the Twin Cities industrial real estate landscape – a market defined by limited supply, increasing rents, and cautious optimism about future development.
Market Fundamentals Remain Strong Despite Construction Slowdown
The Twin Cities industrial market has experienced a significant reduction in new construction activity, primarily due to high interest rates impacting development economics. According to Schindel, the market saw “nearly 9 million square feet of new construction including build-to-suit and spec in 2023,” but that number plummeted to just “3.2 [million] in 2024.” This dramatic 65% decrease in completed construction isn’t due to weakening demand but rather to financial constraints on the development side.
“As interest rates increase, cap rates increase, and that makes buildings not able to pencil,” Schindel explains, highlighting the challenge developers face in making new projects financially viable in the current economic environment.
Landlord-Favorable Market Conditions
The constrained supply has created decidedly landlord-favorable conditions across most of the Twin Cities industrial market. Despite some modest softening in late 2023 where “landlords were maybe giving a few months extra in free rent,” Schindel notes that property owners have generally maintained their asking rates.
“No one really wants to be the one that’s dropping their rates, because then you get comps out in the market that are showing lower rates,” he explains, pointing to the strategic considerations that keep landlords holding firm on pricing despite occasional demand fluctuations.
This market dynamic has created challenges for tenants, who now face significantly fewer options than just a few years ago. “A property report a while back might have had 20 options on it… when I started a couple years back, we had 30 or 40 vacancies, and now that number is probably down to 15,” Schindel notes, illustrating the shrinking pool of available spaces.
Northwest Metro Leads the Market
Not all submarkets are experiencing identical conditions. Schindel highlights the Northwest Metro market as consistently leading “in absorption by 30, 40% over every other market,” making it the most active and compelling area from his perspective.
The area encompassing Brooklyn Park, Maple Grove, and Arbor Lakes continues to see strong demand, with development pushing “further and further out, up 94 and into Dayton and Rogers and Albertville area.”
In contrast, some tertiary markets, like Shakopee, are experiencing higher vacancy rates and may take longer to lease up. According to Schindel, “developers in these areas have been holding strong on their deals, which has contributed to slower absorption.”
Evolving Tenant Requirements in Industrial Space
While industrial properties don’t require the extensive amenity packages seen in office buildings—”We’re not the pretty office that has to have the weight room and the restaurant,” as Schindel puts it when comparing what clients are looking for in industrial versus office space—certain specifications have become standardized in modern industrial development.
The 32-foot clear height has emerged as an industry standard, with Schindel noting that “no new building being built is going to be less than 32 feet,” allowing tenants to “take advantage of cubic square footage.” Traditional logistics considerations like highway proximity remain crucial, while visibility is “big sometimes” depending on the tenant’s needs.
Location remains the most significant factor in site selection. “If you can find land that’s closer in, that’s going to be your biggest amenity,” Schindel explains, though he adds that “the price of that land has skyrocketed as well.”
Data Centers and Power Infrastructure: The Next Challenge
Looking forward, Schindel identifies an emerging trend that could significantly impact industrial real estate in the Twin Cities: the growing demand for power-intensive facilities such as data centers and manufacturing operations.
I’ve had a few groups looking to either build a data center or have a high demand for power,” he notes, referencing Amazon’s plans to develop a data center on approximately 350 acres near St. Cloud and Becker, directly connected to an Xcel Energy power source.
This trend is being amplified by reshoring initiatives, with Schindel mentioning “two groups that we’re [searching for sites] that are directly associated with the onshore and manufacturing. They had a facility slated to go in in Mexico, and now they kick the requirement into Minnesota or the US, because of the uncertain tariffs.”
The common denominator among these projects is substantial power requirements, leading Schindel to pose a critical question: “We want to have the data centers. We want to have the manufacturing. But where the heck is this power going to come from?”
Looking Ahead: Cautious Optimism for 2025-2026
Despite the current construction slowdown, Schindel expresses optimism about future development activity. “We anticipate quite a bit more construction in the coming years,” he states, noting there is “one or two spec buildings under construction right now” with the expectation that ground-breaking on new projects will “double or more this year” compared to last year.
The fundamentals driving this expected increase in development activity remain strong. With steady demand and rental rates that have consistently increased by “8 to 10% year over year in the last four years,” the financial calculus for developers could become more favorable as the market adjusts to current economic conditions.
Schindel is particularly interested in redevelopment opportunities, expressing enthusiasm about identifying “pockets that people can kind of redevelop, or maybe they knock down an old office building and build industrial because there’s demand for industrial.”
As 2025 unfolds, the Twin Cities industrial sector stands on solid fundamentals while adapting to emerging challenges in power infrastructure and capitalizing on reshoring opportunities – positioning key submarkets for continued growth despite the current construction pause.
