Colorado Real Estate Journal - April 6, 2016
The party may be winding down for Denver’s industrial market. The vacancy rate for industrial space increased for the first time in six years in the last quarter of 2015, and around 3.5 million square feet of speculative industrial space is being built – a million sf more than was delivered last year. “One-off” players are developing much of that space, while large, long-term industrial developers are being more cautious. “We are flirting with being a little bit overbuilt,” commented CBRE First Vice President Paul Kluck, who said it’s hard to imagine rental rates and building prices – which exceed the previous peak – continuing to escalate as they have over the last several years. “We feel like we’re at the top of – a little bit past the top in – the industrial cycle,” said Kluck, who along with CBRE First Vice President Murray Platt, has collected 40 years worth of data on the Denver industrial market. That information, coupled with their experience through four Denver real estate cycles, leads them to believe the market could go down through 2020 or 2021. “How steep that is or how shallow that is we don’t know. It may be very shallow,” said Platt, adding Denver industrial has become a tale of two markets. There is the bulk distribution market, which revolves around users 50,000 sf and larger, and the more typical industrial user, which averages 31,000 sf. The latter already is suffering from a lack of supply, and it’s only going to get worse, they believe. “The market will experience a crisis of supply,” said Kluck. Platt said developers are able to command rental rates needed to justify bulk distribution product, but costs generally do not justify buildings for smaller tenants that make up most of the industrial market. “It’s the smaller tenant in this market that is really struggling. There aren’t a lot of options. Nobody is building anything in the 10,000- to 20,000-square-foot range,” he said. The lack of supply comes at a time when tenants that weathered the recession are looking to expand, prices and rental rates are higher than ever, and supply is dwindling. Some 200,000 to 300,000 sf of inventory has disappeared because of redevelopment in the River North area and throughout the city, according to Platt. That will continue with reconstruction of Interstate 70 and redevelopment of the National Western Stock Show complex in north Denver. Many users in that vicinity have outside storage, which already is in exceedingly short supply, noted Daniel Close, CBRE senior associate. Close said difficulty finding spaces for tenants “is an everyday story.” “We’re working with two clients right now that need 30,000 to 50,000 square feet for purchase and we have two choices for them,” neither of which is ideal, he said. “They end up settling for space that doesn't have all the features they’re looking for and they end up paying more for space that doesn’t fit their business,” said Kluck. “A lot of compromise is going on in this market,” Platt added. Rental rates have increased as much as 17 to 20 percent in the course of three years, and that also will slow activity among the numerous smaller users. “It’s going to slow because it’s going to become unaffordable,” Platt said. Other factors weighing on Denver’s industrial market include a slowdown in the energy industry and completion of public spending on projects including FasTracks, Interstate 225, the Veterans Affairs hospital in Aurora and others. “That ripples through the economy and it ripples through the industrial market,” Platt said. Newmark Grubb Knight Frank Senior Managing Director Tim D’Angelo agreed that Class B and C industrial product has peaked, but he believes the Class A market still has legs because of scarcity of and demand for that product type. Rates for Class B and C buildings escalated quickly over the last couple of years. “I think there’s a ceiling on that, but I think the ceiling on Class A rates still has room to go,” he said.