Colorado Real Estate Journal - August 19, 2015
We had a client tell us recently, “I made one mistake during the Great Recession and that is that I actually underwrote the deals and did not buy everything I could.” Since the depths of the Great Recession, the Denver industrial market has experienced 21 quarters of positive absorption, 7.6 percent rent growth year over year and vacancy has reached a historic low. While this statement is meant with a little sarcasm, it also begs the question, “Where are we in the cycle?” Past the halfway point of 2015, the Denver industrial market continues to fire on all cylinders with both continued improving property fundamentals and equally strong capital markets results. The list of positive statistics for the Denver industrial market could read like the announcement of a future champion boxer entering a ring. “In the Denver corner, coming off 21 winning quarters of absorption, k n o c k i n g down 628,434 square feet of space this quarter alone, delivering fully leased speculative buildings at ease and with a metro unemployment rate of 4.2 percent, the future is bright for this rising star that PricewaterhouseCoopers rated a top five city to invest in nationally.” We are all aware that the market is strong and that Denver is receiving a lot of national notoriety. There is a recognized pulse and energy that is being observed and this is making everyone act a bit differently. Predicting exactly where we are at is not something that we have the courage to put in writing, but we do see that there is opportunity for both sellers and buyers in the Denver industrial market. The case for Denver is intriguing as the average cap rate nationally for Class A industrial space is 5.9 percent with an average rental increase last year nationally of 4.8 percent. In comparison, Denver has only experienced one sub-6 percent trade (partially due to not one multitenant Class A trophy asset trading this cycle in Denver) and has experienced rental rate increases of 7.6 percent year over year and over 20 percent in some markets. If you couple these attractive real estate statistics with the 4.2 percent Denver unemployment rate, the 61,300 expected new jobs in 2015, a population increase of 84,000 people last year alone and the story for capital being in Denver, the case becomes clear. Capital is increasingly aggressive in our market and coming from an increasingly diverse set of buyers. Foreign capital accounted for 20 percent of the industrial asset volume last year, up from an average over the 6 percent from the years prior. We have witnessed foreign groups purchasing and bidding on assets from the likes of Germany, Canada, Mexico and Singapore. Further, private capital has been the most active buyer type, accounting for 43 percent of activity nationally. There is a trend of institutional groups assembling smaller assets piece by piece and combining them into a portfolio. The most significant transaction of the first half of 2015 was the GLP (Government of Singapore) purchase of the Indcor portfolio. This was a national portfolio sale that we were involved in, of which the Denver piece was eight buildings representing about 1.4 million sf in this market. Also significant was the sale of the W.W. Reynolds Fort Collins portfolio, which consisted of 20 buildings and 507,112 sf for $53 million and with which we also were involved. The market has opportunity for buyers to capitalize on the strong market trends and for sellers to realize strong gains. Heading toward 2016, industrial drivers continue to be a bright spot in the widespread economic recovery taking place here in the United States, and capital continues to flood into U.S. Treasurys, driving down interest rates and making growth markets like Denver great targets for buyers of industrial real estate of all sizes. Despite this, we expect the imbalance of sellers to buyers to continue.