CREJ

December 2021 — Office & Industrial Quarterly — Page 29 www.crej.com INDUSTRIAL — OUTLOOK Y ou say you want a revolution / well, you know / we all want to change the world,” sang the Beatles as they revolutionized the music industry. Merriam- Webster defines revolution as “a sud- den, radical or complete change” and the industrial revolution of the late 18th century and well into the 19th century was a true societal revolution. Just as society needed a revolution to adapt to growing production needs several centuries ago, Denver is in the midst of adapting to rapidly changing and growing logistics needs, and as such, we are witnessing a true revolu- tion in Denver industrial. It’s no secret how vital Denver’s role in the industrial market has become. Denver’s location as a geo- graphic island of sorts in the middle of the country, without a major metro for over 400 miles in any direction, makes it an essential location in the distribution chain. This is especially true for those distributors looking to supply Denver’s booming population. n Population growth. The Denver metro area population has grown 19% since 2010, surpassing the 3 mil- lion mark, and is expected to grow another 7.5% over the next five years, according to ESRI. The pandemic hit Denver as hard as any major metro, but as of the end of September, unemployment had contracted 220 basis points since the beginning of the year to 4.8%, while employment levels had returned to 2019 figures, according to the U.S. Bureau of Labor Statistics. Denver’s idyllic natural set- ting and business climate have led to continued strong net migration figures, and as company relocations and remote workers continue to choose Denver, distribu- tion needs have increased propor- tionately. n Leasing activ- ity and absorption. “You tell me that it’s evolution / well, you know / we all want to change the world.” So how has Den- ver evolved? The metro area’s indus- trial leasing activity had averaged over 15.3 million square feet annually over the past five years headed into the pandemic and surpassed 11.4 million sf year to date as of the end of the third quarter. This is a steady increase over the 13.8 million sf the market averaged the five years prior and has corresponded closely with the growth of e-commerce, which accounted for 7.8% of total retail sales five years ago, compared with 13.3% now, according to FRED Economic Data. Developers have shifted to larger site plans as the construction pipeline continues to swell. Absorption figures have been strong as this new space has leased up, averaging 3.7 million sf over the past five years and blowing past the year-to-date figure as absorp- tion reached 4.8 million sf through three quarters of 2021. The market is on pace to set a record for absorption this year with an additional 3 million sf forecasted for the fourth quarter. n Construction. “You say you got a real solution / well, you know / we’d all love to see the plan.” How is Denver adapting to this growth? In order to accommodate this increasing demand, the market deliv- ered over 26.3 million sf of industrial product over the past five years, in addition to the more than 6.3 million sf that already had delivered through three quarters of 2021.The primary driver for 2021’s massive absorption figure has been build-to-suit occupan- cies, which have amplified around the area, namely with Shamrock, Amazon and Lowe’s all occupying buildings over 900,000 sf this year. Subaru and Fergu- son will combine to occupy another 1 million sf of BTS product before year’s end. As requirements have grown in size around the Denver metro area, developers have adapted.The average building size delivered this year is over 217,200 sf, a number that is 75% larger than the average building delivered five years ago, and will increase with sev- eral of the aforementioned large BTS projects set to deliver during the fourth quarter. It hasn’t just been BTS growth, though; 19% of Denver’s industrial buildings over 100,000 sf have delivered since the end of 2015. n Industrial investment: The product of preference. Investors have been quick to take notice of Denver’s industrial market growth, and that interest only intensified with industrial product enjoying much more stability com- pared to office and retail product since the onset of the pandemic. Industrial and flex investment volume already had surpassed $1.4 billion as of the end of the third quarter, marking the fifth consecutive year of sales volume north of $1 billion, a figure the metro area had never reached before 2017. The average price per square foot was $180 through three quarters of this year, more than doubling the $76 per sf recorded during 2015. As cap rates have continued to compress, including Denver’s first sub-4% cap sale, investors are becoming increasingly aggressive in their pursuit of Denver industrial product. n Market challenges: Construction cost, entitlements and labor. Headwinds do exist in the market that are worth noting.With lease-up typically taking six to 18 months for new spec product, vacancy has risen in the short term and closed the third quarter at 6.8% on an overall basis.While this can give investors pause, it is important to consider the sheer momentum in the Denver market as well as the record absorption we are seeing this year. Construction costs have skyrocketed coming out of the pandemic, but many believe we are nearing a plateau, with stabilization expected by mid-2022. Labor shortages continue to plague industrial tenants and construction, but Denver’s ever-growing employment base promises an increasing return to work in the year to come. Land costs have steadily risen around the metro area, but rent growth and cap rate compression have made this easier to stomach among investors and devel- opers. As Denver’s industrial revolu- tion forges on, with capital becoming increasingly aggressive and tenants continuing to flock, “don’t you know it’s gonna be all right”? Revolution, evolution, solution … 2021 marks the new industrial revolu- tion. s tim.morris@colliers.com 2021’s industrial revolution brings about evolution Tim Morris Director, research & analytics, Colliers “