Q2 2012 Denver, Colorado Industrial Market Trends

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Q2 2012 Denver, Colorado Industrial Market Trends

If at a slower pace than in past expansion cycles, “the industrial market continues to gain traction,” in the words of local firm Newmark Knight Frank Frederick Ross in a second-quarter report. The marked prudence shown by developers in the period preceding the recession, meanwhile, made for a relatively smooth passage through the downturn that followed. Absorption in the 117.9-million-square-foot local warehouse/distribution space market has run positive since 2010, with a slowdown in 2011 resulting chiefly from a shortage of large quality spaces. Vacancy, notably below the same-product national rate, has been descending, and substantial positive growth returned to average rents this year. While conditions that would support a new cycle of speculative development are not yet in place, build-to-suit activity has been substantial.

The local Flex/R&D sector, counted by Reis at 24.8-million square feet and rooted in the southeastern and northwestern suburbs, also enjoys a positive demand profile, vacancy below the national Flex/R&D rate, and the return of positive rent growth. Development in this sector also remains subdued.


The downward movement in the warehouse/ distribution market vacancy rate continues. Reis puts the second-quarter number at 11.0%, down 30 basis points for the period, down 80 year-over-year. The second-quarter national rate for this product type, for the sake of comparison, was 12.7%. By the end of July, 10 additional points had been subtracted; 10 more should be shed by year-end as the pace of the decline eases up and net absorption slows (see the Supply and Demand section following).

Vacancy in the Flex/R&D market has shown less recent movement, although the direction here also is downward. Reis puts the second-quarter rate in this sector at 14.2%, down 30 basis points from the quarter before, down 40 year-over-year. While 20 points were subtracted in July, a return to 14.2% currently is projected for year-end. Reporting on 175.4 million square feet of industrial space of all types, locally based Newmark Knight Frank Frederick Ross puts second-quarter overall vacancy at 8.01%, down from 8.30% and 9.05% a quarter and a year earlier. Reporting on 261.4 million square feet of industrial product, Cassidy Turley Commercial Real Estate Services puts second-quarter vacancy at 7.0%, down 40 basis points from the quarter preceding.


“Amid global concerns,” notes Cassidy Turley, “Denver’s recovery continues to gain momentum.” By Reis’ count, net absorption of warehouse/ distribution space through the first half of 2012 was 547,000 square feet. Alongside no new supply deliveries, this seems an impressive performance. The total for all of 2011 was 416,000 square feet. And while net absorption for 2010 was reckoned at more than 1.1-million square feet, it exceeded same-year new supply by just 430,000. While July 2012 followed with 115,000 more on the positive side, a slowdown should soon follow: Reis’ forecast calls for net absorption at about 200,000 square feet over the year’s five remaining months.

Supply additions, meanwhile, have been minimal. No warehouse/ distribution space has completed construction since 691,000 square feet came online in 2010. According to Reis’ September 10 report on individual construction projects, no competitive properties in this category will complete this year, and none was under construction per the date of the report. Only one warehouse/distribution project, a large build-to-suit for United Natural Foods, Inc., is presently under way. Meanwhile, an abundance of developable sites in relatively new business parks awaits construction in Denver’s east-side suburbs (focused on the I-70/E-470 interchange). Large volumes remain in planning and proposal phases. According to Cassidy Turley, “There have been early signs of future speculative development as well, with two owners committing to build if they are able to pre-lease at least 40% of the development property. If Denver continues to maintain its positive momentum, 2013 will be a strong year for industrial developers.” However, explains Jones Lang LaSalle, other factors act as impediments: rental rates must increase by approximately 10% to 20% to offset rising construction costs, states this source. And a growing shortage of quality space has been reported, which could be a positive factor for rents.

The Flex/R&D sector suffered a modest setback in 2011 as alternating positive and negative net absorption totals throughout the year resulted in a year-end sum of negative 23,000 square feet—alongside no new supply deliveries. The first quarter of 2012 neutralized that loss with a positive net of 32,000—again with no new supply coming online—and second quarter’s 80,000 square feet added to the market’s progress, as did the positive 44,000 square feet accumulated in July. No space of this type was under construction per the date of this report, and none has delivered year-to-date in 2012. A 30,000-square-foot facility in the Flex/R&D category, however, is scheduled to break ground in November. In addition, two manufacturing facilities with a combined total of 190,000 square feet completed construction during the third quarter of 2012 (see Submarkets).


A spotty performance in the warehouse/ distribution sector in 2011 has been followed by consistent rent growth in 2012 to date. At $4.55 psf and $4.30 psf, second-quarter asking and effective average lease rates were up 0.4% and 0.5% for the period following identical rates of gain the quarter before. July followed with a flat performance for the asking mean and a 0.2% increase on the effective side. A mild acceleration of growth over the second half of the year should yield respective 2012 increases of 1.8% and 1.9%. As indicated, the tightening of the market, in particular the growing shortage of Class A space, is expected to exert upward pressure on rental prices.

At $7.50 psf and $6.96 psf, second-quarter asking and effective averages for Flex/R&D space were unchanged for the quarter and were up 0.3% and 0.4% since year-end. No change and a gain of a penny, respectively, followed in July. Growth at about 1.0% is expected for both rates for the year as a whole.