Denver Industrial Leaders See 'Calmer, More Rational' Market Ahead

After nearly three years of gravity-defying gains, industrial real estate professionals said they see a “calmer, more rational market” forming during Bisnow’s Denver Industrial Update event May 31.

Denver’s industrial market has been resilient in the face of significant economic pressures from issues ranging from supply chain disruptions to employment levels dropping off in trucking and manufacturing following the coronavirus pandemic. Despite these factors, construction activity in Denver’s industrial market has increased from around 7.4M SF in Q1 2021 to more than 9.2M SF in Q1 2023, according to figures from JLL. 

Now, that momentum seems to be cooling as Avison Young’s latest industrial market report showed leasing activity has declined by 55% year-over-year in Q1. While that top-line figure may be startling to some, Triumph Capital Group CEO Paul Ruff framed it as a positive development because it gives businesses an opportunity to find the right space for their operations instead of having to settle for whatever space is available. 

One positive development for business owners is that triple-net asking rents for Denver industrial spaces are declining. In Q1, rents were around $9 per SF instead of around the $10.17 that Lee & Associates measured in Q1 2021. Meanwhile, Denver’s vacancy rate of 6.3% is still about two percentage points higher than the national average, which speaks to the volume of construction activity in the city. 

“I think demand for industrial spaces here in Denver is going to be primarily driven by what’s happening with consumer demand for goods going forward over the next 12 months,” Ruff said, speaking during a panel discussion at the event. “And I think there’s going to be an increase in vacancies. That’s going to benefit a lot of folks, but it’s going to take longer to get spaces leased up.”

Denver’s high-flying industrial market has been a scourge for some businesses in the city. For example, marijuana wholesalers like Curaleaf have moved out of the city because of high industrial rents and lower product sales.

Conversely, logistics companies like DHL Express and R&R Express have expanded their operations in the city as the costs associated with container shipping and trucking continue to decline from their pandemic-driven peak. 

One submarket that has benefited from this activity is Denver International Airport, CBRE Senior Vice President Todd Witty said. Witty described DIA as the “bellwether market” for Denver industrial spaces because the airport consistently accounts for two-thirds of the total net absorption every year, he said. 

“When you look at where institutions want to buy real estate and where tenants want to be, there’s just a lot of velocity there,” Witty said. 

Another submarket that is seeing increased activity is north Denver, especially around Interstate 25 and Washington Street, Witty said. More than 42% of the leasing activity in Denver was from transportation and goods manufacturing companies in Q1, according to figures from CBRE, including a lease by building materials manufacturer Ferguson Enterprises for a 135K SF industrial space on Grant Street.

That activity has also begun to spill over into neighboring areas like Commerce City, Thornton and even as far north as Loveland. For instance, metro Denver’s last standing drive-in movie theater, the 88 Drive-In in Commerce City, was recently shuttered to make way for a new warehouse, the Denver Post reported. Bryant Mazzetti, a principal at Powers Brown Architecture, said that his firm is reviewing about 80 plans per week in Thornton and Loveland as well. 

“These markets have become really active for us, and they’ve really picked up over the past 15 months or so,” Mazzetti said. 

There are design changes coming to Denver industrial properties as well, Mazzetti added. One example is that Denver-area developers are designing spaces that can be expanded over time as a tenant’s business grows. This requires architects to design a minimum space while building the electrical and HVAC units in such a way that they could serve a larger space, if needed. 

Other design changes that developers are asking for include subgrade truck courts to allow for more trucks to come in and out of a specific building. Some others are asking for larger receiving ports to prioritize more shipping. Mazzetti pointed to a project where one of his clients wants a 32-foot door that is 100-foot clear as an example. 

Some developers are also putting a greater focus on sustainability and green energy, Mazzetti added. This includes adding solar panels and achieving various LEED certifications, which industrial landlords have traditionally shied away from, he said. 

Catamount Constructors Vice President Rick Rodman said his company recently put the finishing touches on an industrial space in Texas that was built from 50% recycled materials, includes solar panels, and is located near a mass transit site. These changes have helped reduce the tenant’s electrical and stormwater costs without sacrificing any shipping space, Rodman said. 

“We’re undertaking all these efforts to make these buildings ready for the future,” Rodman said. 

Despite Denver’s positive momentum, the market still faces headwinds from high construction material and land acquisition costs, according to Evergreen Development Vice President of Industrial Real Estate Brian Dietz. 

Data from the Federal Reserve Bank of St. Louis shows that construction material prices are up nearly 40% since February 2020 before the pandemic began. Meanwhile, commercial land prices in Denver remain elevated as available land continues to decrease. Of the 89 commercial land sites listed on LoopNet, the cheapest one is listed for nearly $300K for 0.14 acres. The most expensive property is an 18.68-acre, $15.2M property located just south of Thornton. 

Hyde Development founder Paul Hyde said metro Denver’s expensive land prices are heavily influenced by inflation and high interest rates. Right now, he said it seems like landowners are comfortable waiting to get a good offer for their properties, but that could change as transaction activity slows down. 

“The whole problem is whether we can keep up with our rental rates or not,” Hyde said. “Because that’s the whole shooting match. But I don’t know if we can answer that question yet.”