Denver Industrial Market is Still Climbing

Denver’s industrial market has had an impressive run so far this economic cycle – so much so that the top-of-mind-question is, “Where do we go from here?” Last year was a prolific year, attracting new investors, delivering 4.5 million square feet of Class A space and posting the fifth straight year of sub-5 percent vacancy. But the outlook for 2017 is brighter given Denver’s strong economic foundation, the arrival of e-commerce users and delivery of much-needed warehouse inventory.

Tyler Carner, CBRE Industrial & Logistics Services

Tyler Carner, CBRE Industrial & Logistics Services

E-commerce Arrives in a Big Way
E-commerce arrived in Denver in 2016 but is only just rolling out. Construction began earlier this year on a 1.1-million-square-foot fulfillment center, which will be the market’s largest industrial building upon completion. Several other last-mile e-commerce facilities are opening in the region that are intended to provide same-day or fresh food delivery. The local e-commerce footprint is approaching 3 million square feet in total.

E-commerce companies are actively securing sites in Denver largely in response to the region’s explosive population growth. Colorado was the second-fastest-growing state in 2015, and Colorado’s Front Range communities are home to more than 5 million people. Between 2010 and 2016, Denver added nearly 1,000 new residents a week and ranked 12th in the U.S. for population growth overall.

E-commerce users are also drawn to markets with a significant Millennial presence because this demographic has the highest rate of online purchases. Denver has been a magnet for Millennials — not only drawn to Colorado’s mountains but also its diverse mix of jobs and “cool factor” — throughout the current expansion cycle. Millennials are the largest generational cohort in Denver, representing 24 percent of the population and 32 percent of the workforce.

Build It and They Will Come
Developers are earnestly delivering new product after recognizing deep demand. More than 11 million square feet of new inventory has been added since 2010, but nearly half of that was in 2016 alone. As of early 2017, 5.2 million square feet of space is underway, setting up for another hefty year of deliveries. The majority of construction activity is in the Airport/Northeast submarket, but development is widespread. This includes the Central submarkets, which have seen minimal new supply in the past decade. Construction is largely speculative but, despite that, 44.5 percent is pre-leased.

Leasing activity is particularly strong in urban infill locations where it is rare to find new Class A product. Hub 25, for example, is a 421,000-square-foot project developed by Westfield Company that will deliver in the middle of the second quarter of 2017. It is already 61 percent pre-leased. Tenants have been drawn to the project’s Central-submarket location, highway visibility and Class A features.

With significant new industrial products delivered over the past year, we are expecting 2017 to be a top year for industrial absorption in Denver. Close to 5 million square feet of absorption is likely to occur this year, making this one of the three most active years on record outside of 2000 and 2006.

This not only matches the current construction pipeline but also comes on the heels of 28 consecutive quarters of positive net absorption, five years of sub-5 percent vacancy and a 28 percent increase in the average asking rental rate over the past five years — to $7.62 per square foot triple net. While upward pressure on rental rates is a challenge for some users in the market, it reflects a parallel increase in construction costs for both tenant finish and core and shell projects.

Possible tailwinds for industrial demand include proposed legislation for statewide transportation upgrades to the tune of $11 billion and a resurgence of manufacturing prompted by federal government policies. Assuming population and job growth continue, and that the market is able to remain affordable compared to competitor markets, 2017 will go down in Denver industrial history as a banner year.

— By Tyler Carner, Senior Vice President, CBRE Industrial & Logistics Services. This article first appeared in the May 2017 issue of Western Real Estate Business magazine.

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