Denver’s industrial real estate market continues to fire on all cylinders with 37 consecutive quarters of positive net absorption, record amounts of new supply and record-low cap rates for investment properties. The region’s industrial product has benefitted greatly from a strong and diversified economy, significant population growth both locally and regionally and the continued trend by companies to modify their supply chain to accommodate same-day deliveries. Demand has come from existing businesses that have grown organically and are now serving a larger market and carrying increased inventories. It has also come from new companies that hadn’t previously had distribution centers here but now need to serve the Colorado Front Range and the Rocky Mountain region.
Mike Wafer, Newmark Knight Frank
A new phenomenon that impacted the market recently is increased demand by tenants and users seeking build-to-suits rather than leasing or purchasing speculative buildings. One reason has been affordability, as some new developers and their capital partners have accepted significantly lower yields on cost in order to “build into” the market, compared to existing local developers that have historically commanded higher yields for speculative product. An example of this was a project built by Becknell/UBS that contained a 541,000-square-foot, cross-dock building. Haier (GE) Appliances pre-leased 352,000 square feet at a rate that was roughly 15 percent lower than competing speculative properties. However, occupiers aren’t seeking build-to-suits solely due to cost. We have seen a few other large users in the market that are also motivated to own rather than lease. Many require specialized features, such as a freezer or cooler, manufacturing improvements or excessive office space. This was the case for Shamrock Foods, which took 850,000 square feet; Smuckers, which nabbed 380,000 square feet; and Karcher USA, which absorbed 380,000 square feet. This activity has slowed the absorption of speculative buildings, which had been leasing quicker earlier this cycle.
Despite this trend, developers continue to construct speculative industrial product throughout the entire market, the largest of which are in the East I-70/Airport submarket. In addition to recently completed buildings by Majestic Realty, First Industrial and Clarion, NorthPoint Development has just broken ground on a 598,500-square-foot building. Hyde Development, Brennan and Prologis are also constructing or have recently completed distribution buildings of more than 300,000 square feet in the I-76 corridor and central submarket. While we are experiencing this surge in supply, which has pushed the current vacancy rate up to 5.5 percent, demand for quality Class A product remains steady. This rate should level off through the end of the year. The largest new lease so far this year was 289,000 square feet to Sealy Manufacturing Co., though there are several new requirements between 300,000 and 1 million square feet currently touring the market.
The final segment of the market that has been extremely active is industrial investment sales. This is because tremendous buyer demand has driven cap rates downward to record-low levels near 4 percent for modern Class A assets. This pricing has tempted many landlords to now consider selling, thus providing an increase in sales volume. Many institutional buyers who previously focused on coastal markets or major port cities now desire the Denver market where they can obtain slightly higher yields. These low cap rates and high prices have contributed to the increased amount of new construction, as developers have more confidence in achieving their pro forma returns.
— By Mike Wafer, executive managing director, Newmark Knight Frank. This article first appeared in the October 2019 issue of Western Real Estate Business magazine.