Denver industrial assets are achieving record pricing as cap rates compress well below 5 percent for Class A product. As this is happening, developers are taking on hefty projects, signaling that Denver’s industrial real estate cycle is stretching its legs instead of winding down.
Jessica Ostermick, CBRE
Among the headlines:
• Denver’s single largest investment transaction on record occurred in the first quarter of 2018. The Pauls Corporation sold 14 Class A, highly functional assets totaling 1.9 million square feet to Clarion Partners in the Airport submarket.
• The largest speculative build of 701,900 square feet is underway by Majestic Realty. Prologis is building more than 500,000 square feet in the Central submarket, while Hyde Development kicked off the 1.8-million-square-foot 76 Commerce Center project in the “less than proven” I-76 Corridor.
• Industrial land pricing has doubled in recent years to now double-digit pricing as triple-net asking lease rates approach $8 per square foot.
Despite these impressive headlines, here are three reasons we expect further expansion in Denver’s industrial sector into 2019.
Investor Preferences Align
CBRE’s 2018 Americas Investor Intentions Survey revealed a dramatic increase in the popularity of industrial investments compared to years prior. Half of investors in the Americas are seeking industrial investments this year, up from 32 percent in 2017 and 23 percent in 2016. Industrial is also the most preferred property type among investors.
Denver is also raising its stature among investors and attracting new capital sources. Denver stacks up as the seventh most desirable market among investors in 2018 — the highest position on record for the 19th largest market in the U.S.
The convergence of the strong preference for industrial and Denver’s high rank among markets is driving record investor pricing. This is evident at Hub 25, a Class A infill distribution offering that’s recently under contract.
Record pricing and heightened sales activity are also increasing liquidity in the market, which has been a historic critique of some investors who have not yet entered this market. The relative spread in yields — 50 to 75 basis points — between Denver and traditional primary markets is a key driver behind increased investor interest in Denver’s industrial product.
Fundamentally Solid
Positive market fundamentals are at the core of ongoing sector growth. Average per-square-foot asking lease rates have increased sharply to nearly $8 triple net overall and $6.01 triple net in the Airport submarket. Vacancy edged up to 6 percent but is still within historic levels due to responsive development activity. Balance between the construction pipeline and demand is key to maintaining positive rent trends in the near term.
Emerging E-Commerce Supply Chain
Colorado has seen impressive population and job growth since 2010 and is one of the youngest states due to the influx of Millennials. E-commerce companies have increasingly sought out Denver locations to the tune of a 2.7-million-square-foot footprint among a handful of facilities. That footprint is expected to grow significantly as e-commerce users build out their same-day delivery and reverse logistics supply chains.
The outlook for Denver’s industrial sector is bright, with more headlines sure to come this year.
— By Jessica Ostermick, director, CBRE. This article first appeared in the May 2018 issue of Western Real Estate Business magazine.