Colorado Real Estate Journal - July 6, 2016
The Denver industrial market is positioned for continued growth in 2016, entering the fifth year of expansion. With low levels of new space added before and during the recession years, combined with record absorption over the last few years, tenants have been relying on new construction to find suitable space within the current constrained supply. This has positioned the market to start 2016 with historically low vacancy and lease rates continuing to rise past prerecession levels. New construction was largely preleased throughout 2015, and large blocks of vacant space in existing buildings typically are leased within one or two quarters. Looking ahead, further expansion is forecasted throughout 2016, although at a slightly slower pace, with new deliveries driving growth. Lease rates will begin to level off for new construction after significant increases the past five years. In first-quarter 2016, the Denver industrial market posted another consecutive quarter of growth with net absorption of 234,797 square feet. Overall vacancy achieved a record low of 3.4 percent and plummeted 590 basis points from the cycle’s high, posted in 2009. Without new deliveries providing room to expand for the tight industrial/warehouse sector, the research-and-development/ flex sector was the driving force behind industrial market expansion, absorbing 199,504 sf in the first quarter. Vacancy for R&D/ flex space decreased year over year from 9.7 to 7.4 percent. Absorption in the industrial/ warehouse sector was 35,293 sf in the first quarter, hampered by an already historically low vacancy rate of 2.8 percent, largely unchanged year over year from 2.7 percent in first-quarter 2015. Rental rates continued to increase in the first quarter, but we believe lease rates may be nearing their peak for certain types of assets. The northeast, west and east submarkets have enjoyed the greatest increases in industrial rates since the cycle’s lows at year-end 2010, posting increases of 85, 60 and 50 percent, respectively, while the central, northwest and southeast submarkets logged increases between 30 and 40 percent during the same time period. As we enter mid-2016, these rental rate increases are starting to impact demand; in fact, sticker shock is causing some users to delay decision-making. Looking Forward Future supply will not outpace demand due to a dearth of developable sites and the fact that a few active developers in the market control most of the remaining parcels ready for development. Small- to medium-size projects will be constrained due to the high cost of construction. New construction, in general, still is being held in check by high construction costs. The planned expansions of both Interstate 70 and the National Western Complex will lead to loss of industrial space in the central submarket. With little vacant space available, the displaced tenants of those buildings will either have to move east, where the majority of the new construction is underway, or pay a premium to remain in the central submarket. Look for activity to pick up in the second half of 2016 with: • In-demand new projects delivering later this year, • Continued organic growth and • Several large users in the market committing to leases or build-to-suits. The Denver industrial market will remain healthy moving forward despite election year uncertainties and concerns about global, national and local economies, which have contributed to a slight slowdown in activity for the first part of this year. Amazon’s recent commitment to Denver is exciting news and just the tip of the iceberg as e-commerce continues to command increased market share. We have a healthy amount of new product, but the market still is not overbuilt, and demand for new product remains strong.