Colorado Real Estate Journal - February 18, 2015

Industrial firing on all cylinders

Denver’s industrial real estate market is firing on all cylinders, with rental rates climbing 12 percent beyond their previous peak and tenants leasing space faster than developers can deliver it.

“There is not enough product for all the tenants that are out there,” said CBRE First Vice President Paul Kluck, who said 2014 marked the first time in his career that tenants preleased industrial space in Denver.

“Preleasing of industrial buildings before completion is almost unheard of in the Denver market, and it’s becoming the norm, ”concurred Newmark Grubb Knight Frank Executive Managing Director Mike Wafer.

Prices for industrial properties are near their peak, and rental rates have spiked. Rates for industrial space along the Interstate 70 corridor in the northeast industrial submarket, Denver’s dominant industrial area, jumped from $3.90 per square foot triple net in 2013 to $4.82 per sf last year, compared with a previous high of $4.62 per sf in 2007, according to CBRE First Vice President Bill Thompson.

That’s better than the national industrial vacancy rate of 4.51 percent, according to Ann Sperling, senior director of Trammell Crow Co.

Rental rate increases will moderate this year, yet, “Landlords will continue to rule,” said Kluck.

Industrial real estate experts gave their takes on the market at the Colorado Real Estate Journal’s 2015 Industrial & Data Center Summit and Expo at the Inverness Hotel & Conference Center Feb. 3. News was positive from Northern Colorado to Colorado Springs, which is attracting Denver buyers chasing higher cap rates, according to Randy Churchill Dowis of NAI Highland LLC.

The north Interstate 25/ northwest corridor between Denver and Boulder – typically a small-tenant market – saw seven transactions greater than 50,000 sf and two over 100,000 sf last year. “That seems to be an ongoing trend that landlords are very, very excited about that we haven’t seen before,” said CBRE Vice President Jeremy Kroner.

Boulder’s inventory of industrial space is shrinking as properties are converted to multifamily or office use, and within 15 minutes of Boulder, along I-25 north, “I think you’re going to see some spec development,” said Kroner.

Etkin Johnson Real Estate Partners is set to announce 180,000 sf of new office/flex construction in two buildings in Broomfield and is finishing up about 200,000 sf of spec industrial/flex space at the Colorado Tech Center in Louisville that it expects to be 100 percent leased this month. It’s also starting on another 60,000 sf in CTC and will break ground in September on an additional 130,000 sf, said Ryan Good, Etkin Johnson vice president and partner.

For the first time in a decade, spec construction also will occur in the heart of Denver, with Trammell Crow Co. planning to break ground in June on the first phase of its 1 million-sf Crossroads Commerce Park near 51st Avenue and Washington Street.

“What is e x c i t i n g about this project it that there really is something for everyone,” said Sperling, who noted there will be a range of industrial product types and sizes.

Along I-70 to the east, United Properties is building on its success at Enterprise Business Center with another 466,000 sf of spec space, 100,000 sf of which is spoken for. United Properties Vice President Kevin Kelley, whose company was among the first two out of the ground with new product this development cycle and was wildly successful with its product, said he’d be “shocked” if the remaining space isn’t leased by the time it delivers in April.

Across I-70 at Stapleton Business Center North, Prologis plans to start construction of a 250,000-sf building. Prologis also is beginning infrastructure for development on land it owns at the southwest quadrant of I-70 and E-470, which will connect to its Prologis Park 70 on E-470’s east side. Majestic Commercenter at I-70 and Tower Road in Aurora has a new 500,000-sf building – the largest spec building ever built in Denver – about 25 percent leased and hopes to break ground in April on an additional 450,000 sf.

Mark Bowen, vice president and regional director of Denver-based DCT Industrial, which owns 1 million sf in the Denver market that is 100 percent leased, said DCT is looking for development sites in Denver. “The hardest part is finding a piece of dirt that make sense,” he said. Also, DCT expects to acquire a five-building portfolio in the northeast submarket by early March. The project has 25,000 to 30,000 sf of vacancy, and Bowen said tenants are “knocking down my doors to lease it before we even close.” From an investment standpoint, “We’ve seen more deals than we’ve ever seen in this market,” said CBRE Senior Vice President Jim Bolt. “There’s overwhelming demand, very little product being offered, very little product being built.” There is some price resistance with certain asset types, however; “Smaller offerings above replacement cost are a tough deal to get done today,” said Bolt.

Nationally, an abundance of foreign capital is chasing industrial deals, said Colliers International principal T.J. Smith.

Gross domestic product is projected to increase 3.5 percent this year, and, “That’s a huge driver for industrial real estate,” he commented.

Panelists said they don’t foresee dropping oil prices negatively impacting the industrial market to a large degree, although Bolt cautioned, “It’s something to watch.” Oil and gas companies are heavily invested in Weld County, where the industrial vacancy rate is 4.37 percent and lease rates have climbed to $7.12 per sf triple net, according to Mark Bradley of Realtec-Greeley.

Bradley said the sweet spot in the market is for 10,000- to 12,000-sf industrial buildings with yard, which are highly sought after by oil and gas service companies. “If we had a dozen business parks full of those buildings, they would have all been absorbed last year,” he said, adding there is very little new construction.

Larimer County’s industrial vacancy rate is 1.9 percent, owing in part to absorption of Class B and C buildings by marijuana growers.

In Denver, marijuana growers account for around 3.5 million of the Denver metro market’s approximately 22 million sf of industrial space, according to Chad Brue, managing partner of Brue Capital Partners LLC.

Brue, who through various entities owns 11 Denver industrial buildings, or 415,000 sf, that is leased to growers, said 500,000 to a million sf of industrial tenant improvements are under way in the market, yet, “I think we’re going to see a dearth of space coming on the market in the next 12 months.” Tenant sizes are growing, and with the huge cost of improvements going into buildings, tenants will readily take over any improved space that comes to market, he said. When word seeped into the market that a 17,000-sf tenant that is paying $15 per sf triple net might default, Brue said he received an unsolicited offer for same space at $25 per sf triple net.