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Page 22 — Office & Industrial Quarterly — December 2021 www.crej.com INDUSTRIAL — MARKET UPDATE BIG is buying Developed: • Dove Valley Business Park I & II • Colorado Logistics Park Development (Commerce City) Working On: • Rustic Hills Industrial Conversion (Colorado Springs) • Centennial Business Center Development (Centennial) • 5170-5280 Fox Street Vacant Buildings (Denver) • 3900 Uvalda Sale-Leaseback (Denver) Looking For: • Development Opportunities • Existing Opportunities With Upside Potential • Sale-Leasebacks & Covered Land Plays • Temperature Controlled Properties Single Building (Minimum $5 Million) & Portfolio Sales BRIAN ROACH Managing Principal m 303-597-6023 broach@brennanllc.com JOHN TORP Vice President m 303-521-8890 jtorp@brennanllc.com Centennial Business Center A s we end 2021, one thing is clear: Investors are will- ing to purchase industrial assets at record low capital- ization rates. Our industrial capital markets team has tracked 30 markets nationwide that have seen capitalization rates go below 4% and four markets – including Denver – that have seen astound- ing sub-3% capitalization rates. Certain trends emerging within the asset class have supported the record-breaking valuations. In Denver, those trends include record absorption, rising costs of con- struction and a lack of dirt avail- able and ready to be put into pro- duction, all applying upward pres- sure on lease rates. This growth environment has allowed investors to accept lower in- place yields. Astute investors are finding oppor- tunities with near- term lease expira- tions and under- writing lease rates 20% or more over contractual lease rates, then trend- ing that market lease rate by 7% or more annually, bringing a stabilized future yield between 4% and 5%. Even leases that were signed a year ago are perceived to have unlocked value with a reset in lease rates at expiration. Denver’s growth trajectory is well documented; it is one of the coun- try’s hottest mar- kets and driven by leading metrics in job growth, popu- lation growth and quality of life. This growth is translat- ing to a signifi- cant demand for Class A industrial space to service the region and impressive growth in lease rates. According to our research, Denver’s average asking rate is $7.71 per square foot triple net, growing over 100% in the last 10 years in select submarkets. Industrial developers and owners are being rewarded with a low 6% vacancy rate. In the third quarter, Denver has hit the highest level of absorption in a single quarter for the past decade at 3 million sf. This brought the total absorp- tion for Denver to 5.86 million sf. The fourth quarter is on track for the same amount of absorption with the delivery of two significant build-to-suits for Lowe’s Home Improvement and Kroger, King Soopers’ parent company. Year to date, Denver has deliv- ered 6.08 million sf of industrial, with 2.97 million delivered in the third quarter alone. The pipeline remains robust at 9.37 million sf under construction, but this num- ber has retreated slightly due to supply chain disruptions and a shortage of skilled labor. The pandemic has accelerated the growth of e-commerce and the need for more warehousing, but also it has disrupted the cost and availability of materials to build industrial assets. It is estimated that costs have increased 40% or more in some instances, requiring higher lease rates from tenants in order to meet development pro formas. Watch for more cap rate com- pression and higher lease rates in pro formas as developers scour the market for the next development site and investors compete for a limited choice of existing assets. s larry.thiel@am.jll.com carmon.hicks@am.jll.com Experts wonder: How low can cap rates go? Larry Thiel Managing director, capital markets, JLL Carmon Hicks Managing director, industrial, JLL Supply and demand (s.f.) Absorption, deliveries and average asking rent rates for Denver industrial assets