CREJ

Page 30 — Office & Industrial Quarterly — December 2020 www.crej.com INDUSTRIAL — USER TRENDS T he year 2020 has been one of unprecedented challenges and historic uncertainty. COVID-19, a contentious election year and civil unrest has turned much of the country on its head. Despite the signifi- cant turbulence of the last nine months, Colorado will remain a place of opportunity for industrial real estate, and not just in the tra- ditional sectors. A bright future for manufacturing is emerging, and the well-known adage “trucks leave Denver empty” will become a thing of the past. n The history of industrial demand in metro Denver. Metro Denver has long been regarded as an end-user market, and most of the projects making headlines over the past few years support this. Develop- ers, investors and tenants have focused on warehouse and distribu- tion projects in thriving industrial cores – such as Interstate 70, central Denver and strategic locations that have shaped new submarkets – that offer a direct connection to the pop- ulations they serve. In other words: Goods in, goods out. Manufacturers, on the other hand, have not invest- ed the same interest. For years, one of the most signifi- cant reasons for this has been Den- ver’s lack of robust infrastructure to support manufacturing, specifically, rail and intermodal facilities with the capacity, scale and equipment to handle large amounts of raw goods coming in from ports in ship- ping containers. The main inter- modal sites for the two main rail lines serving Denver, Union Pacific and BNSF, are located adjacent to down- town. Not only are these facilities out- dated, but the sites are landlocked and cannot be expand- ed to handle a modern number of containers. In June 2019, Union Pacific reported that it had to close its main intermodal site for three days due to rail line congestion and the inability to unload inbound trains due to capacity constraints. This unpredictability in the supply chain is a major deterrent to manu- facturing companies that rely on efficient delivery of goods via rail to transform raw goods into finished products. The assumption always has been that Denver is not a rail market because there is no demand. It’s the opposite; rail demand is suppressed because there is no adequate rail infrastructure or capacity to handle modern manufacturing require- ments. n Signs of change. While there is virtually no opportunity to develop a new manufacturing facility any- where close to existing intermodal facilities, several new rail parks are being discussed, constructed or operated from Colorado Springs to Windsor. These parks will be far enough outside of population cen- ters to allow for entire trains to be removed from the main rail lines and the cars to be unloaded, sepa- rated and restacked. New intermodal facilities with development sites adjacent to the rail spurs off the mainline will have an immediate and direct impact on bringing more manufacturing to the Front Range. In addition, these greenfield sites will enable com- panies to construct purpose-built facilities in remarkably close prox- imity to the new rail parks so that further supply chain efficiencies can be achieved. Not only is metro Denver seeing a large investment in rail infrastruc- ture, but significant upgrades also are being made by electricity and gas utility providers to expand their grids to accommodate future indus- try growth. Simultaneously, water and sewer networks are being built out to greenfield sites to the east and north of the Front Range, and major fiber-optic service provid- ers have made significant efforts to expand their service networks to support the high-tech nature of most manufacturing processes. New development sites near intermo- dal facilities and major highways, connected to ample fiber optics and serviced by necessary utilities provides manufacturing firms with the desirable infrastructure for their site selections. n Labor: The final piece of the puzzle. For the past 10 years, Colorado’s steady population growth has been a dominant storyline. In 2020, the state saw a 1.6% population increase over the previous year, and this number is expected to grow to 6.31% by 2025. Of this growth, Colo- rado and metro Denver continue to attract millennials and an increas- ingly educated labor force due to quality of life and relatively low liv- ing costs. The historical presence of aerospace and technology and the state’s high-caliber higher educa- tion institutions also are responsi- ble for attracting and producing the highly skilled workforce desired by manufacturers. Colorado has long been a desir- able destination for companies to locate due to its well-known life- style and ability to attract young, skilled talent, but the infrastructure has not been sufficient to make metro Denver a viable manufactur- ing base. The arrival of new inter- modal facilities, utilities and high- speed fiber optics will provide the necessary fundamentals to attract these companies to relocate and construct new facilities. Thanks to the vision and actions of a few, metro Denver’s indus- trial market is positioned to see major growth in manufacturing in the coming years, and perhaps we’ll soon be hearing a new adage: Trucks only leave Denver full. s Denver offers a bright future for manufacturers Tyler Reed, SIOR Managing director, industrial services, Stream Realty Partners, tyler. reed@streamrealty. com T he COVID-19 pandemic has led to economic damage across the country, and Den- ver’s economy is no differ- ent. Large industries such as hospitality and energy have been impacted and unemployment has risen. The pandemic has changed consumer habits, including com- pressing 10 years of e-commerce growth into the last six months. Technology has become a larger part of our lives through the pandemic. While we all expect life to return to some normalcy when the pandemic is behind us, certain habits will remain. The growth of technology adop- tion bodes well for the metro Denver economy. Denver continues to out- perform the U.S. in generating jobs and specifically technology-related jobs. Over the last decade, Colorado’s technology workforce has grown 57%. Denver ranks No. 5 behind Bos- ton, Washington, D.C., the Bay Area and New York City for the largest proportion of millennials. Accord- ing to Costar, technology-related employment in metro Denver grew by more than 7% annually in 2019, one of the fastest growth rates in the U.S. Tech companies have expanded to metro Denver because of its rela- tive cost compared to the expensive coastal markets. The region offers a high quality of life and a young, well- educated workforce. Technology job growth has pri- marily impacted real estate by driv- ing up rents on well-located offices and residential. This was a result of companies hiring well compen- sated software engineers to build the infrastructure underpinning many of these advancements. E-commerce was the one excep- tion as it drove historic demand for warehouse space and reduced demand for tra- ditional retail space. Software advancements have transformed shopping, finan- cial services and news, and these advancements now are having a large impact on old-line industries like agriculture and oil and gas. However, capital also is being invested in technologies well beyond software including robot- ics, devices, life sciences, renewable energy, 3D printing, batteries and autonomous vehicles. These new technologies involve engineering and physical development beyond software and developing these types of products requires a different type of real estate footprint. These companies require testing areas, production space, distribution capac- ity and offices for research. In some cases, large-scale manufacturing is required. They require access to both a well-educated, technical workforce, as well as a broader workforce for production and distribution. In addition, certain technology industries are diversifying their sup- ply chains to secure their technol- ogy infrastructure in the wake of COVID-19. Life science companies increasingly are looking to complete early stage production or ongoing storage in facilities closer to their headquarters to avoid supply chain issues. The semi- conductor industry is diversifying its supply chain to secure production capabilities amidst rising tensions with China. Large tech businesses such as Apple, Amazon, Google, Intel and Microsoft are all looking to have better control over their hardware and chip supplies with more customization and vertical integration. Increasing demand in chip tech- nology over the last 24 months has led to a race for these companies to develop customized hardware to support ever-changing software technology. Apple leads in verti- cal integration of its supply chain, but other major companies also are pushing for more control. National defense, which increasingly has become reliant on software, needs to ensure the security of its hardware, given it is used for sensitive items such as weapons guidance, logistics and communication. The sustainable energy industry is in a race to create the most-efficient battery/storage systems, as automakers spend bil- lions to roll out electric car fleets. The types of companies innovat- ing in industries such as robotics, energy or life sciences tend to cluster around major universities or centers for innovation such as Silicon Valley, Denver, Cambridge or Austin. They need to be able to recruit the right talent to maintain their innovative edge. A disproportionate amount of the capital being invested in these new industries will benefit a few metropolitan areas. These new industries will need industrial space for research and development, test- ing and production. This space will need to be proximate to these inno- vation clusters. Metro Denver is starting to see industrial leasing activity from these types of companies. Hardware man- ufacturing companies occupy about 2 million square feet, or 14% of tech- occupied space in metro Denver, according to CBRE. This makes hard- ware manufacturing the third-largest subindustry in metro Denver in terms of square footage. A few exam- ples of tech-oriented industrial leas- ing include AMP Robotics, a robotics company in the recycling sector, which leased approximately 50,000 sf for high-tech manufacturing; a com- pany involved with autonomous yard operations just leased over 150,000 sf; and an auto industry technology business just leased 40,000 sf for commercial production. We are start- ing to see leasing from these new industries in industrial real estate. While the last decade saw a trans- formation of logistics real estate, culminating in the COVID-19 pan- demic, new types of industrial may be positioned to benefit from changing technology trends in the decade ahead. Logistics space also is being built rapidly, while more infill production-driven industrial has limited new supply. As we think about the industries of the future, advancements outside software and the securing of our technology infra- structure could drive new forms of real estate demand. s Tech-oriented industrial users are on the rise Andrew Holmberg Principal, Berkeley Partners, aholmberg@ berkeleypartners. com Hannah Cope Associate, Berkeley Partners, hcope@ berkeleypartners. com

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