Job Growth Encourages Industrial Development
Denver’s economic growth, its reputation as a commercial hub in the Rockies and the growth in e-commerce sales are all factors contributing to the metro’s strong industrial property performance.
Denver employers are on track to add 39,000 new workers to their headcounts by year end, expanding the local workforce by 2.8 percent, with the professional and business services and construction sectors driving employment gains. As household formation and retail spending has increased, demand for industrial space in Denver has followed suit. The city’s strategic position as a Western state commercial hub, along with the rapid rise in e-commerce sales, has attracted retailers and distributors, such as FedEx and Amazon, to the area. These large retailers and distributors are contributing to the high demand for industrial space, especially given the limited number of industrial property deliveries in 2015. The industrial construction pipeline is growing as a result of this demand.
Spurred on by Denver’s positive economic performance, developers have expanded the industrial development pipeline, including higher levels of speculative development. About 3.7 million square feet of industrial space will have come online by the end of the year. About 1 million square feet of space was delivered in 2015. The breakneck pace of this year’s deliveries will have some impact on vacancy, though continued job growth, loss of some older generation buildings to repurposing and the general growth of the economy will keep the vacancy rate well below 5 percent in 2017.
Vacancy has seen a slight uptick due to the large levels of newly constructed industrial assets being delivered to the market this year. By the end of 2016, vacancy will reach 4.3 percent, up 30 basis points from the prior year. That said, rising vacancy will not have a detrimental impact on rent growth, which has kept pace with its projected 8.1 percent annual increase.
Solid rental improvement for industrial assets has generated substantial investor interest, and bidding activity has intensified as new products hit the market. While buyers are targeting all areas of the market, competition for properties is most pronounced in the Montebello, South Santa Fe and Boulder submarkets. Cap rates in these areas range from the low to mid-5 cap range for institutional-grade distribution properties to the mid-6 and low-7 percent range for non-investment grade, local tenancy in B and C buildings. Facilities farther east, where there are new opportunities for development and few barriers to entry, are supporting initial yields that are 50 basis points higher, on average, than those in the aforementioned submarkets.
— By Bob Kaplan, Associate Director, National Office Industrial Property Group, Marcus & Millichap. This article first appeared in the November 2016 issue of Western Real Estate Business magazine.