Colorado Real Estate Journal - November 19, 2014
The Denver industrial real estate market is forecasted to remain strong in the foreseeable future, with continued positive trends in vacancy, absorption and rental rates. The overall market has shown dramatic improvement coming out of the downturn, and demand for industrial space remains robust with an average vacancy rate of 5.1 percent*, down from 5.4 percent in the previous quarter and from 5.9 percent at the end of 2013. Low vacancy, combined with nearly 3.8 million square feet of net absorption year to date and rising rental rates, tells us the greater Denver industrial real estate market is poised to continue to perform well in the coming year. Like all real estate, Denver’s industrial market is one of submarkets and various product types, from state-of-the-art, high-bay distribution facilities, to the much smaller, owner occupied flex office/warehouse space. As of the end of the third quarter, Denver’s total industrial inventory consisted of 10,231 buildings totaling approximately 287 million sf. This i n v e n t o r y can be further broken into flex and w a r e h o u s e c a t e g o r i e s , with approximately 238 million sf of w a r e h o u s e and 49 million sf of flex space. Denver’s industrial market consists of approximately 22 submarkets, the largest of which is the East I-70/Montbello market, consisting of more than 73 million rentable sf. The above referenced 5.1 percent vacancy rate reflects an average warehouse vacancy of 3.7 percent and a flex vacancy of 11.5 percent. Through the second quarter of 2014, demand for industrial space was greater than Denver had seen in years and was closing in on the historic peaks in demand of 2006, according to CoStar. As a result, developers are scrambling to meet this demand, with approximately 2.5 million sf of new space delivered to the market YTD and another 2.5 million sf currently under construction. Deliveries of new space are well above the levels seen over the past five years, but continue to lag the prerecession high of 4.7 million sf and the 25-year historic average of approximately 4.1 million sf. For the near future, demand is projected to outpace deliveries, keeping the strong market fundamentals intact. That uptick will not last indefinitely. As deliveries continue to grow, rent increases will slow with vacancy reverting toward its historic average of approximately 7 percent. Denver’s impressive industrial market performance is being fueled by a state and local economy that continues to be one of the strongest nationally, adding jobs and increases in population at a rate well in excess of the national average. As a result, Denver, once considered only of regional interest to investors, has become one of the hottest markets nationally. Demonstrative of this trend is the fact that Pricewaterhousecoopers and Urban Land Institute recently ranked Denver fourth nationally, behind only Houston, Austin, Texas, and San Francisco for commercial real estate investment in 2015. The report cites the state’s emerging technology and energy industries are sparking more interest by investors. Additionally, of significant interest, will be the longer-term impact that Colorado’s recent legalization of recreation marijuana will have on industrial demand. With the requirement that dispensaries actually grow a large percentage of the marijuana they sell, the Denver market has seen approximately 1 million sf of space absorbed by growing operations in the past year. Most of these operations are smaller in nature, but as that industry matures and consolidates, increased demand of larger spaces is one potential outcome. The financing of this property type remains problematic for bank lenders. The good news has limitations. Denver’s industrial market is somewhat limited by its geographical location. Denver has struggled to be viewed as a major hub of corporate headquarters and, similarly, is not viewed as a major distribution center for national and international companies. As a result, despite the increased investment appetite from national investors, international investment and large-scale distribution operations remain less attractive than coastal markets. With the strengthening of the industrial market, and the overall Denver and Colorado economy, financing options for developers and owners have become more attractive and aggressive. Compared with five years ago, large projects are being financed speculatively, with attractive recourse structures. These loan structures, along with the historically low interest rate environment, compressed cap rates and abundance of capital, make Denver’s industrial market ripe for continued future development. Vectra Bank Colorado remains bullish on industrial financing opportunities. Over the past year, the bank has financed in excess of 2.5 million sf of space, both in local and national markets. Of primary interest are high-clear projects; however, flex and manufacturing projects also have been closed. Typical loan terms require a minimum of 25 percent equity, with loan term sufficient to cover construction through stabilization. *Industrial real estate statistics pulled from CoStar reports.