CREJ

Page 20 — Office & Industrial Quarterly — December 2021 www.crej.com INDUSTRIAL — MARKET UPDATE T he state of the market around the Denver metro area over the last 12-18 months has been nothing short of noteworthy. From a booming market prior to the COVID-19 pandemic, to the slow- down in activity following the stay- at-home order issued by Gov. Jared Polis affecting individual owners and businesses last year, now to the V-shaped recovery curve that’s led us to the bustling state of the market we see today, it has been quite a ride for both industrial users and investors in the Denver metro area. Over the few years leading up to the COVID-19 pandemic, demand for industrial product made it the second most attractive product type for investors in Denver, just behind multifamily investments, due to increasing population growth driving rental demand from small-business owners for industri- al use properties, as well as secular trends such as e-commerce growth driving demand for warehouse and distribution center capacity. Beyond end users, the market also observed an increased amount of institutional capital flowing into the Denver metro area, which made supply for quality, large-scale assets increasingly scarce, push- ing values up. Cap rates, which for the average credit tenant averaged around 7.5% to 8% in the years prior to the pandemic, are now averaging around 6% and 7% on market transactions observed over the current term. The journey to get to this current point of strength, however, is one worth discussing. From March through June of last year, the Den- ver market expe- rienced the great- est negative local economic impact seen since 2008. In March, the state- wide stay-at-home order issued from Gov. Polis created a unique disruption in the local market. Many businesses deemed “unessential” became unable to operate in person, which made their businesses vulnerable. Fortu- nately, industrial owner-users his- torically represented the majority of industrial property ownership surrounding Denver, and many were deemed essential businesses, which helped enable the industrial market to fare better than other real estate product types. With regard to financial condi- tions, the historically low interest rates entering the pandemic were pushed even lower and remain at highly attractive levels today. Lower borrowing costs played a role in supporting the industrial market when new deal activity slowed dur- ing the depths of the pandemic in 2020, and have since contributed to the rise in property values as buy- ers are able to pay higher amounts for a similar return. In some cases, the competition for deals has driv- en expected returns lower. On the other hand, owners have been able to benefit by selling at all-time-high prices, especially to other owner- users who have few alternatives to paying a premium for the right space for their business. In particu- lar, industrial yard space is current- ly seeing record demand and price per square foot levels in the Denver metro area, exacerbated by a dwin- dling amount of supply. In some cases, industrial property with fenced yard has doubled or even tripled in value due to zoning laws that only allow outdoor storage in specific areas around Denver. A recent example is 8000 E. 96th Ave., a 4,000-square-foot metal building sitting on 17 acres of I-3 Commerce City zoned land, which was bought for $1,750 per sf, or $7 million, at the end of September to be repur- posed into a Class A warehouse State of the market: Industrial activity in Denver M. Chandler Lisle Associate adviser, Pinnacle Real Estate Advisors Please see Lisle, Page 31 Sales volume and sale price per square foot for the Denver area from 2012 to 2021