Industrial Leasing Activity Outpaces New Construction in Denver
By Tyler Smith, Managing Director, Cushman & Wakefield
While the office and retail sectors in Denver continue to grapple with pandemic-related disruptions, the industrial sector remained the dominant performer within the commercial real estate market through the early part of 2021.
The Denver industrial market recorded more than 718,000 square feet of positive net absorption, and nearly 3.8 million square feet of leasing activity during the first quarter of 2021. However, with metro-wide vacancy trending above the five-year average and 1.8 million square feet of speculative development delivering vacant during the first quarter of 2021, the discussion in the Denver market remains focused on whether industrial supply has begun to outstrip demand.
The maturation of Denver’s industrial market has closely mirrored the city’s population growth over the past decade. Denver experienced a population boom of nearly 20 percent from 2010 to 2020. Fueled by the resulting uptick in consumer demand and increased economic diversification, Denver’s industrial inventory skyrocketed as well, growing by 19.4 percent during the same period. Since 2017 alone, over 22 million square feet of new development has delivered in the market.
Despite robust leasing activity and nearly 10 years of uninterrupted positive net absorption, industrial vacancy in Denver has been on a slow but steady rise since the third quarter of 2019. Many market experts have attributed this increase to the market’s construction pipeline, which currently has 8.6 million square feet under development, about 3.6 million square feet of which is speculative construction.
Even in the face of increased vacancy and slightly lower pre-leasing volume, there is ample evidence to indicate that demand remains on the rise in Denver. From ecommerce to food and beverage distribution, Denver continues to see vigorous build-to-suit activity from tenants either expanding into the market or growing their current footprint. Though spec buildings are delivering with partial or full-building vacancies, even these aren’t remaining vacant for long. One example is Prologis Park 70 in the Northeast submarket, which,
after securing a tenant for the remaining 100,000 square feet in early 2021, achieved fully leased status less than six quarters post-delivery in late 2019.
If leasing activity and absorption rates were not enough to justify Denver’s continued development boom, it’s worth noting that rising material costs have had a less-than-expected impact on new construction starts. Though the price of steel has risen more than $10 per square foot since March 2021, many developers seem determined to forge ahead on both speculative and build-to-suit projects to avoid project delays or future price surges.
Industrial product in Denver continues to attract investors from across the capital stack, steadily driving up property values and creating downward pressure on cap rates. According to Real Capital Analytics, the average industrial sale price per square foot has grown nearly 30 percent since 2016. With several under-contract transactions forecasting actual cap rates of below 4 percent, the market is poised to set a new watermark for values and pricing in 2021.
Overall, the Denver industrial market’s outlook remains positive for the foreseeable future, with leasing activity and pent-up demand promising to offset — if not outpace — new construction vacancy.