Build Projects Fast Before Economy Turns, Experts Say

As uncertainty mounts over when the economy will slow down, commercial real estate professionals in the industrial sector are looking at deals they can get in and out of quickly rather than those that will take several years to complete.

While fundamentals have remained strong, with the metro Denver industrial market ending the fourth quarter of 2018 with 2.6M SF of positive absorption and a vacancy rate that declined to 4.5%, panelists at the Bisnow State of Denver Industrial event last week said they have seen activity drop off in recent months and don’t expect the market to remain as robust as it has been in the last few years.

That means developers are looking for infill properties that already have the zoning in place to allow for industrial development so that construction can begin sooner rather than later.

“When you reach this point in the cycle, a lot of investors want quick plays,” Trammell Crow Vice President David Smith said. “People are worried about a long lead time project."

Metro Denver’s low unemployment rate makes attracting and retaining employees challenging, so many tenants are finding that infill locations in central Denver are a more attractive option than locations on the city’s outskirts.

“The central market has always been strong,” JLL Vice President of Industrial and Logistic Services Jason White said. “Land is a finite resource. Tenants want to be in infill sites in central Denver. Central market users concerned about losing employees by going out east are willing to pay a little more to stay central.”

Even companies like Prologis, whose bread and butter are big-box distribution centers along Interstate 70, have been looking at infill projects lately, Prologis Vice President and Market Officer Wayne Barrett said.

United Properties Executive Vice President Kevin Kelley said most large users of industrial product pre-lease their space, but he hasn’t seen many 500K SF users looking for space.

“I’ve seen activity drop off in 2018 and seen very few leases done,” Kelley said. “I’m a little nervous about the space we have coming on.”

Brue Baukol Capital Partners CEO Chad Brue said he is seeing many investors increasing their allocation to real estate in their investment portfolios and that many of them are looking at Denver as a good market to be in.

“The Denver market continues to be a place that people want to have in their portfolio,” Brue said. “It will continue to be a strong market regardless of what happens in the rest of the country. Forty-five percent of investors who don’t live in Denver want to have exposure in Denver because they believe it will continue to be a healthy market.”