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July 1-July 14, 2015 — COLORADO REAL ESTATE JOURNAL — Page 9B
MARKET UPDATE & FORECAST
W ith the industrial
market firing on
all cylinders, and
after 20 quarters of positive net
absorption and seven quarters of
healthy year-over-year lease rate
increases, it is timely to consider
where the Denver industrial
market is in the current cycle.
Marketwide lease rates sur-
passed prerecession levels and
the current pipeline of 2.7
million square feet of new sup-
ply underway will help relieve
further upward pressure on
rents. Vacancies are low and
net absorption remains posi-
tive, however, preleasing activity
has lessened in recent months,
which is a potential sign of
changes ahead.
The near- and long-term
outlook for Denver’s industrial
market is one of a controlled
delivery of space with moder-
ate absorption and lease rate
appreciation, tied to increasing
construction costs. The overall
vacancy rate will stabilize over
the next few quarters and will
remain well below the prior
peak of 7.9 percent in first-
quarter 2010, due to sustained
demand and prudent construc-
tion activity that was responsive
to demand.
Look for a handful of criti-
cal factors to shape the outlook
for Denver’s industrial market.
Heightened merger and acquisi-
tion activity across the U.S. based
on strong equity markets, low
interest rates and a positive out-
look for economic growth in the
near term will
impact the
local market,
resulting in
user consoli-
dations and
dispositions of
functionally
obsolete facili-
ties. Mergers
and acquisi-
tions among
national food
distributors,
beverage
distributors
and various
manufactur-
ers are recent
examples of potential company
moves altering the Denver ten-
ant base.
A future potential bright spot
will be the emergence of e-com-
merce facilities in the Denver
market. Other major markets
have seen e-commerce enter
the market in recent years and
Denver will be added to the list
over the next four quarters, with
an estimated 1 million sf of dedi-
cated e-commerce warehouse
and distribution space in the air-
port/Montbello submarket.
Another potential boost to
the market is the resurgence of
the housing market. Pent-up
demand in the local single-
family new construction segment
should materialize, which could
boost demand for showroom,
warehouse and production
space. According to data from
the U.S. Census Bureau, the
Denver market saw over-the-year
increases in March of 6.6 per-
cent and 16.7 percent for single-
family detached and attached
permits, respectively.
Denver’s healthy market fun-
damentals will stay the course
in the near term with sustained
user demand and rational levels
of new deliveries. However, I
expect the pace of absorption
and rent growth to downshift a
gear or two. The market soon
will welcome e-commerce users
that will bolster an already
strong demand base and we will
see increasing demand from
users involved in single-family
home construction. I expect to
see solid fundamentals through
2016.
C olorado’s favorable
business environment,
quality of life and entre-
preneurial spirit contribute to
the vitality of retail expansion
throughout the Denver metro
area. With ample opportunity for
diverse retail clients, including
big box stores, restaurants and
specialty shops, grocery-anchored
centers and mixed-use proper-
ties will be the main focal point
of new retail developments. The
presence of health care services
in retail centers throughout the
state is on the rise and current
drugstore retailers are expanding
aggressively, while new entrants to
the market are increasing as well.
Market statistics from 2014
provide evidence to support
retail growth remaining strong.
The Denver metro area added
48,100 jobs and Colorado
unemployment now stands at
4.2 percent; and Colorado retail
sales increased 5.8 percent at
the end of second-quarter 2014.
Consumer confidence in the
mountain region was up 15.9
percent by the end of the year,
and new retail construction for
the Denver metro area totaled
636,714 square feet in 2014.
Overall the retail market in
Colorado is strong, but the pos-
sibility of a correction is looming.
Absorption in 2014 was 603,338 sf
in the Denver
metro area,
greatly dimin-
ishing supply.
Rents have
increased
significantly
since the
Great
Recession.
Today average
rents for high-
profile retail
corridors such
as Colorado
Boulevard,
Park Meadows
and Cherry
Creek North can exceed $70
per sf triple net in some cases.
Construction costs have risen
dramatically over the past two
years – more than 25 percent in
some areas. New city ordinances
regarding zoning, setbacks, park-
ing ratios and transit districts
can affect retail clients’ abilities
to test-fit in various metro and
mountain corridors.
Moving forward, we predict
that strategically located retail
sites will hold their value. Areas
like Lower Highland, River North
and the Union Station periphery
will see continued growth, mostly
with non-chain users. There will
be a rent correction in second-
ary markets, as overall occupancy
costs, including high property
taxes, will reduce demand.
Food users will continue to lead
retail transactions in the market.
National quick-serve restaurants,
sit-down restaurants and fast-food
users will aggressively expand
throughout Denver. Some finan-
cial users slowed their expansion
while others are still pursuing
new sites. Medical and dental
users are becoming a larger part
of the merchandise mix of retail
centers. Finally, the Interstate 70
corridor, the Western Slope and
ski towns will experience renewed
growth as more people move to
Colorado to enjoy all that this
great state has to offer.
N early halfway through
2015, Denver’s
investment sales mar-
ket is proving to be robust.
Continuing on the heels of
2014’s $4 billion in sales vol-
ume, 2015 already has pro-
duced $1.6 billion in invest-
ment sales volume (office,
retail and industrial transac-
tions over $5 million as report-
ed by Real Capital Analytics).
Denver’s total investment sales
activity in 2015 is projected to
eclipse 2014’s total, as invest-
ment sales activity typically is
much stronger in the third and
fourth quarters than in the first
and second quarters.
With more than $1 billion in
office sales year to date in 2015,
compared with $2.3 billion in
all of 2014, Denver is proving
to be an attractive investment
market globally. The largest
2015 office transaction thus
far is the $171.9 million sale
of 1515 Wynkoop in Denver’s
Lower Downtown micromarket
in the central business district
during the first quarter. The
306,791-square-foot project was
developed in 2009, is 95 per-
cent leased and was purchased
by Invesco Realty Advisors from
American Realty Advisors.
The largest suburban sale
thus far is the $91.5 million sale
of Greenwood Corporate Plaza
in Denver’s southeast suburban
submarket, which occurred
in January. The six-building,
620,797-sf office campus
located in Greenwood Village
is 85 percent leased and was
purchased from Broadreach
Capital Partners/Equity
West by Goldman Sachs/
ScanlanKemperBard.
Another significant 2015
sale is the record-setting pur-
chase of Village Center Station
by KBS Realty Advisors from
Principal Global Investors/
Shea Properties in May. The
234,915-sf property was 99 per-
cent leased and sits adjacent to
a light-rail station. The $76.7
million, or
$327-per-sf,
price tag is
the highest
price per
foot paid for
a multiten-
ant subur-
ban asset in
Denver’s his-
tory.
The strong
capital flows
in the U.S.
real estate
market com-
bined with limited high-quality
properties available nationally
in the top 12 to 15 markets
have led to continued cap rate
compression throughout the
country and in Denver over the
last 24 months. Many investors
that typically focus on gateway
cities (New York, San Francisco,
Los Angeles, Washington, D.C.,
Boston and Seattle) continue
to be frustrated by the lack of
properties available and the
tremendous
competition
for Class AA
assets. These
investors are
turning their
sights to cities
like Denver
and Dallas
for oppor-
tunities. As
evidence
of strong
capital flows
into Denver
and the void
of Denver CBD office oppor-
tunities, two suburban office
buildings were purchased
by Canadian and German
investors while another four
suburban office buildings
were purchased by Canadian,
Norwegian, Mexican and South
American investors in the last
12 months.
Large retail and industrial
sales were limited through
the first half of the year in the
Denver market due to limited
offerings. Although office sales
have dominated, we expect to
see a sampling of large core
transactions in the retail and
industrial sectors in the second
half of 2015. CBD and transit-
oriented projects throughout
the region will continue to be
the most sought-after invest-
ment opportunities in 2015 and
beyond as Union Station and
the overall mass transportation
project near completion.
Following a slight pause
related to a pullback in the oil
and gas sector fundamentals
(east side of CBD only), we
expect investment sales velocity
to remain strong throughout
the year and into 2016. Denver
will remain a top 10 investment
market with CBD office, subur-
ban office near light rail, gro-
cery-anchored retail and high-
cube industrial remaining the
most sought after by domestic
and international investors.
Jim Bolt
Executive vice
president,
Brokerage |
Industrial Services,
CBRE, Greenwood
Village
Daniel M.
Miller
Senior vice
president,
Brokerage | Retail
Services, CBRE
Mike Winn
Vice chairman, The
Winn Richey Team,
CBRE, Denver
Tim Richey
Vice chairman, The
Winn Richey Team,
CBRE, Denver