Denver continues to see fantastic industrial growth and development as more than 900,000 square feet of construction has delivered in 12 of the last 13 quarters, a period during which nearly 17.6 MSF has delivered. That’s according to Cushman & Wakefield’s newly released Industrial Research Report. Additionally, The Mile High City’s Industrial market’s sale activity is off to a strong first half of the year with over $830M in investment sales which is on pace to surpass even a red hot 2018.
Rental Rates Up
Overall rental rates across all industrial product types fell slightly during the second quarter 2019, closing the quarter at $8.61 per square foot (psf) on a triple net (NNN) basis. This was a marginal decrease of 1.1% from the first quarter 2019, but still represented an 8.7% increase year-over-year from the second quarter 2018 when overall rental rates were $7.92 psf NNN. Rates in manufacturing product were the primary driver for the quarter-over-quarter rental rate decrease as they fell 2.4% to $8.68 psf NNN during the second quarter 2019. Conversely, warehouse/distribution product has driven the surge in rental rates seen over the past year as they have risen 10.6% year-over-year to $7.17 psf NNN, from $6.48 psf NNN, a year ago. New product continues to drive rates higher and, despite the increased competition, landlords of older product have proven resistant to lowering rates. Rental rates may fluctuate over the next several quarters, but expect slower growth compared to the unsustainable pace seen over the past several years; rents have grown 22.3% since the second quarter 2016.
The Northeast submarket continues to dominate industrial leasing activity as 44.3% of all activity for the quarter took place there. This trend can be expected to continue as more than 3.3 msf remains under construction in the Northeast submarket. Expect leasing activity to remain solid throughout the next several quarters, though it will likely trail the strong totals of 10.9 msf and 9.4 msf seen in 2017 and 2018, respectively.
Strong Absorption
Absorption was strong during the second quarter 2019, as metro-wide 785,800 sf was absorbed. This was more than double the 388,200 sf absorbed during the fi rst quarter 2019 and also exceeded the 690,500 sf absorbed during the second quarter 2018, one year ago. The largest driver for this positive absorption was New Age Beverage backfi lling Gold Bug’s 156,000 sf former space at 18245 East 40th Avenue. Other notable move-ins were Bunzl occupying 148,000 sf at Eastpark 70’s Building 2 and Howard Logistics taking occupancy of 126,000 sf at 13331 East 37th Avenue.
Construction
As mentioned earlier, construction activity continues its remarkable pace around the Denver metro area as over 911,000 sf delivered during the second quarter 2019. The largest project to deliver during the second quarter 2019 was Prologis Park 70’s 509,600 sf spec Building 15, which delivered 60.1% pre-leased to Safi lo, and is expected to occupy during the third quarter 2019. Other notable deliveries included Gateway Park’s 184,000 sf spec Building 23 and Broomfield Commerce Center’s 140,000 sf spec Building 1 which both delivered fully vacant. More than 4.5 msf of industrial product remains under construction across the
Denver metro, nearly 3.9 msf of which is expected to deliver over the remainder of 2019. Approximately 2.7 msf of the
product expected to deliver this year is spec and is collectively only 5.2% pre-leased. Expect vacancy to continue to fluctuate quarterly as a result of this product delivering largely vacant but likely seeing strong activity once delivered, if recent trends continue. Spec product has defined this development cycle, but as competition amongst spec developments intensifies and rising development costs reach a point where BTS projects are more financially feasible for many tenants, expect future development to skew more towards BTS product.
Sales Activity
Building off of 2018’s record year for investment sales, investment offerings continue to trade hands at a rapid pace and are well on pace to surpass last year’s figures. The Mile High City’s Industrial market’s sale activity is off to a strong first half of the year with more than $830M in investment sales which is on pace to surpass even a red hot 2018. More than $400M of which closed during the second quarter 2019. This total for the year is primarily driven by Berkeley Partners’ acquisition of the Etkin Johnson portfolio during the first quarter, but several notable deals closed this quarter as well. Clarion Partners acquired the two buildings comprising 603,000 sf at 18100-18300 East 40th Avenue from Pauls Real Estate Investments for $57.5M and EastGroup Properties purchased Airways Business Center’s Buildings 2, 4, 5 & 6 from Principal Financial Group for $48.3M.
