CREJ

December 2020 — Office & Industrial Quarterly — Page 37 www.crej.com with sparks from welders illuminat- ing the auto production. The current reality is far different. Corrugated box manufacturing and food processing are serving the demand of the con- sumer. Fabricated cardboard boxes cannot be shipped economically more than 400-500 miles from the ultimate user and perishable food needs to be close to the consumer, creating a con- tinued demand for distribution and manufacturing buildings near the den- sity of population centers. The major- ity of heavy and light manufacturing occurs in nations with far lower labor costs and subsequently distributed to the domestic markets via ship, rail and roads. Contemporary industrial build- ing designs are evolving rapidly as demand for infill urban sites have pushed land economics to the point of increased density. Multilevel industrial buildings are now being developed in the urban areas of NewYork, Seattle and San Francisco. Suburban locations are experiencing an increased demand for employee parking. One of the many Amazon concepts calls for a building of approximately 150,000 sf with the ability to park 1,500 cars and vans. Never before has an industrial require- ment dictated this level of parking. The capital markets also are evolv- ing as investment interest in industrial properties has achieved an unprec- edented level. Once the “stepchild” of the commercial real estate investment community, industrial distribution has evolved into the product of preference. Private capital investors, institutional investors and foreign investors all have focused on investment in industrial distribution and manufacturing prop- erties. This trend is expected to con- tinue through the near future. The evolution of the industrial mar- ket has had a negative impact on one specific commercial real estate sector – big-box retail. Can big-box retail, which became functionally obsolete, become the new repurposed industrial build- ing? In a limited number of locations, abandoned big-box retail may have some potential to provide a last-mile distribution location but, for the most part, the functional requirements of an efficient industrial distribution build- ing cannot be satisfied by vacated big- box retail locations. With the U.S. and the global econo- my experiencing a new paradigm for day-to-day business transactions, the contemporary industrial distribution market is evolving and adjusting to the new business environment. The new business paradigm is driven by a variety of components. Some of the components are Amazon, progres- sive building designs, intense capital market investment interest and, fun- damentally, the evolution is a result of what the consumers direct and demand. To paraphrase a quote from the Back to the Future cinematic trilogy … “I guess you guys aren’t ready for that yet. But your kids are gonna love it.” The future will be very interesting for all who are involved in the industrial distribution and manufacturing mar- ket. s Continued from Page 19 INDUSTRIAL — TRENDS developments, we have the potential for an oversupply of space.We are starting to see far too many projects in various stages of planning throughout the region, and some involve com- mercial real estate developers without much prior industrial development experience. n Assessing the submarkets. The most attractive submarkets in Denver for new industrial development are along the Interstate 70 corridor and the northwest market. The I-70 cor- ridor east of Denver represents 40% of the region’s 250 million square feet of industrial space. A majority of the large-scale industrial buildings are situated along I-70 because this is where the big distributors and large e-commerce tenants want to locate. In the northwest market (i.e., Boulder County), we see healthy demand from tenants in medical manufacturing, natural sciences, natural foods and outdoor equipment. In addition, there is a lack of zoned industrial sites in the northwest, so the supply should continue to lag demand in this sub- market for the foreseeable future. The southeast submarket (south and east of Interstate 25), in contrast, is oversupplied with industrial space. The tenants here are different than those looking along the I-70 corridor. Amazon and a few other e-commerce companies have located smaller dis- tribution or last-mile facilities in this corridor, but most of the southeast tenants are regional distribution, manufacturers, research and develop- ment, or related to retail businesses. The buildings are designed to cater to users who typically need 25,000 to 50,000 sf of space; these tenants still are feeling the effects of the downturn and are reluctant to expand. The other area of concern is the cen- tral market at the intersection of I-25 and I-70, north of downtown. Demand for industrial development has lagged the supply that was planned and built, as the recession has dampened the demand from the typical tenant that locates in this submarket. n Navigating growth in 2021. Given the backdrop of 2020’s effect on the Denver market, the outlook for industrial development in 2021 looks promising. The recent vaccine news is a plus, and we are hopeful that it will save lives and, in the process, help unleash pent-up demand as the economy recovers. We’re cautiously optimistic that growth opportunities and investor demand for industrial development will continue into the new year. As a result, values will continue to grow, and we likely will see cap rates con- tinue to compress even more for the right product. The key for industrial development in 2021 will be to locate strategically. While some submarkets are overbuilt, others offer growth potential. It will be important for developers to apply our commercial real estate expertise at every turn, approaching decisions with a healthy dose of caution and a diver- sified development portfolio. Here’s to a healthier, stronger 2021 for us all. s Kelley Continued from Page 24