CREJ

Page 22 — Office & Industrial Quarterly — March 2021 www.crej.com INDUSTRIAL — MARKET UPDATE S imply put, the COVID-19 pan- demic defined 2020. From business decisions to everyday life, the regulations and shut- downs that surround it have impacted our every action and will continue to do so for the foreseeable future. In 2020, Denver’s red-hot real estate market stalled as tenants grew wary of the future, put real estate deci- sions on hold and even watched their businesses fail. But as office and retail product types have struggled, demand for industrial product has remained steady and, despite midyear pandem- ic-related hiccups, it ended the year strong. In this article, we will look at industrial metrics compared to other major commercial real estate product types and what they could mean for the future. Vacancy in industrial product rose 50 basis points over the course of 2020, closing the year at 6.3% on an overall basis.This rise in vacancy was due to the delivery of new product as more than 4.4 million square feet delivered over the course of 2020. Vacancy in office product rose 320 basis points over the course of 2020, closing the year at 17.7% on an overall basis. Contrary to industrial product, this increase was due primarily to the pandemic as sublease space increased by 91.9% over the course of 2020, clos- ing the year with more than 3 million sf of sublease space vacant across the metro area, a figure that does not include anticipated additional shadow space. Only 1 million sf of new office product delivered during 2020, repre- senting the lowest amount since the Great Recession. Retail product, as tracked by our firm, recorded similar rises in vacancy as community neigh- borhood strip prod- uct increased 160 basis points over the course of 2020 despite just 101,000 sf delivering across the metro area. Overall net absorp- tion figures put this comparison in even starker contrast; over the course of 2020, industrial product recorded over 3 million sf of positive absorption while office product recorded negative 3.2 million sf and retail product record- ed just shy of negative 1 million sf. Comparing leasing activity across product types demonstrates similar results. Leasing activity across all industrial product types netted over 9.3 million sf.While activity stumbled in the second quarter, the market quickly recovered and a strong sec- ond half of 2020 brought activity near the 9.5 million-sf average of the prior five years. Leasing in office product recorded just over 5.8 million sf of activity during 2020, compared with a 9 million sf annual average over the prior five years. Retail product recorded a similar drop-off in activity as 1.9 mil- lion sf leased over the course of 2020 compared with a 2.8 million-sf average over the prior five years. Office users reassessed who needed to be in the office versus who could work from home and retail tenants were forced at first to close, then to overhaul how they served their customers. Indus- trial users, on the other hand, found that distribution requirements held steady and even grew as e-commerce surged during the pandemic.While it is impossible to predict the future for office and retail ten- ants, it is clear that, despite new hurdles, industrial users will continue to require space as Denver’s population contin- ues to grow. “We’re keeping a close eye on new construction sup- ply,” said Cushman &Wakefield’s Drew McManus, “but with the continued growth of demo- graphics in Denver along with good market activity, the fundamentals of our market continue to remain sound and Denver’s industrial market is set for another strong year.” These fluctuations in demand were reflected in the development pipeline as well. Roughly 1 million sf of office product delivered during 2020, com- pared with a 1.8 million-sf average over the prior five years, while just over 1.4 million sf of office product remained under construction across the metro area. Just over 101,000 sf of retail prod- uct, as tracked by Cushman, delivered during 2020, compared with a five-year annual average of 430,000 sf, while just 119,000 sf remained under construc- tion at the end of the year. Industrial product delivered over 4.4 million sf over the course of 2020, nearly match- ing the 4.6 million-sf average of the prior five years, while a massive 7.7 million sf remains under construction across the metro today.The develop- ment pipeline should continue to skew toward industrial product for the foreseeable future as demand has held steady while there remains substantial uncertainty surrounding retail and office product. “We are seeing a lot of industrial requirements in other major cities across the country that haven’t shown up in Denver yet and are confident that similar requirements from these companies will be coming to Denver in the next six to 18 months,” said Cush- man’s Tyler Smith. So what does all this mean for inves- tors? Investment activity in industrial product recorded a strong year in 2020 as over $1.7 billion in product changed hands, compared with a $1.3 billion annual average over the prior five years. Office investment activity recorded a more robust $1.9 billion in sales volume during 2020, but this figure represented a decrease from the $2.7 billion annual average for the prior five years. Retail investment similarly dropped off, recording $909.6 million in sales, compared with a $1.2 billion average over the prior five years. “We expect a continued acceleration of investment sales activity for indus- trial product,” said Cushman’sWill Strong. “As the market continues to perform and leasing activity remains strong, more and more investors will start to sell their assets, many of which will hit new records on a cap rate and price-per-square-foot basis.The sec- ondary markets have recovered faster and stronger than the primaries/gate- ways and records seem to be set every time we look up.” s tim.morris@cushwake.com michael.coppola@cushwake.com Market fundamentals show industrial’s strength Tim Morris Senior industrial research analyst, Cushman & Wakefield Michael Coppola Associate market director, Cushman & Wakefield