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Page 26 — Office & Industrial Quarterly — September 2021 www.crej.com INDUSTRIAL — MARKET UPDATE T he explosion of the Denver industrial market has seen a continuation of its nearly 10-year run in 2021, as both a rebuttal of the global pan- demic and as a further cementation of Denver as a top-tier industrial investment target market. Denver’s unique geography in the center of the United States, combined with its attraction as a top live-work destination, has continued to boost industrial development and invest- ment. There are really two main drivers that we can point to that explain the reason Denver not only sur- vived the pandemic but thrived. The first is population growth: Colorado gained roughly 50,000 people between July 2019 and July 2020, according to the U.S. Census Bureau. Additionally, relocation ser- vices provider Updater cited Den- ver as a top five city for inbound growth during 2020. The second is job creation: Den- ver is expected to add 95,000 jobs in 2021, equating to a 6.6% rate of annual employment growth. This hiring activity enables the metro area to recoup 91% of the positions lost last year. This strong job recov- ery will support additional reloca- tions and household formation that will lift demand for essential and nonessential goods. These two driv- ers explain everything about how Denver’s economy as a whole has thrived, but let’s look at the way Denver’s industrial developers and investors have been able to main- tain this growth through solid fun- damentals and disciplined devel- opment. Industrial devel- opers completed nearly 2.8 million sf of industrial space from Janu- ary through June of this year, the largest first-half delivery total since 2000. Another 2.3 million sf is slated for delivery dur- ing the final six months of 2021, highlighted by a 900,000-sf distribu- tion center in Aurora for Shamrock Foods, along with several Amazon developments over the past few years. The furtherance of large block building leases being signed is another data point for investors that Denver is not a fluke; it is an industrial powerhouse in the mak- ing. Total supply additions this year will surpass 5 million sf for the first time in more than two decades, increasing the metro area’s indus- trial inventory by 2.5%. At the onset of July, construction was under- way on an additional 3.1 million sf pegged for 2022 completion. Most of these projects are speculative and have yet to secure a tenant. The fact that developers have made the switch from historically build-to- suit and less speculative develop- ments to fully speculative develop- ments has signaled to the national and international capital markets that Denver is a safe place to invest speculative capital. But this development spree, although disciplined, can create its own headwinds. All Denver submar- kets with at least 10 million sf of inventory recorded an increase in vacancy during the past 12 months ended in June. These widespread increases contributed to metro area vacancy elevating 170 basis points to 7.2%, the highest rate since the first quarter of 2012. At 12.4%, vacancy is highest in north Denver, with availability tightest in west Denver at 1.8%. Accounting for 40% of Denver’s industrial inventory, the east Interstate 70/Montbello sub- market recorded a 30-basis-point increase in vacancy over the past year ended in the second quarter. The absorption of more than 1 mil- lion sf of space prevented a larger rise from occurring and enabled local vacancy to remain in the 7% range, which is a tolerable vacancy rate in most analyses. Development activity should nat- urally see a bit of a plateau in the remainder of this year and into next as developments deliver and ten- ancy is established. Supply driven pressure will be minimal during the second half of this year as, outside of a 526,000-sf speculative ware- house, most of the space slated for near-term finalization has a tenant in tow. Still, vacancy is expected to rise by triple-digit basis points dur- ing 2021, ending the year at 7.4%. This increase will represent a sixth consecutive year of rising vacancy for the metro area. Since July 2020, nearly 60 leases have been executed for spaces larger than 50,000 sf. Roughly one-fourth of these agree- ments have been for floor plans that exceed 100,000 sf. The rise in vacancy should be a welcome relief to prospective ten- ants looking at the Denver market, hoping for the plateau of lease rate appreciation rates given the large amount of planned deliver- ies. But despite widespread vacancy increases, the metro area’s aver- age asking rent has consistently risen since the third quarter of last year. At $8.71 per sf entering July, the mean marketed rate was up 5.8% on an annual basis, somehow coinciding with a rise in deliveries, pointing largely to demand from outside companies and expanding companies as the main driving fac- tor. Every submarket with at least 10 million sf of space recorded positive rent growth over the past year, except for northwest Den- ver. Double-digit rent growth was notched in northeast Denver, where local vacancy is 130 basis points below the metrowide average. The demand for industrial will be met with supply additions and posi- tive absorption during the second half of the year, which will support continued rent growth, allowing the area to register a nearly 7% increase Denver’s hot industrial market continues its streak Brandon Kramer First vice president investments, national office and industrial properties group, Kramer Group, Marcus & Millichap Please see Kramer, Page 33