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Despite slowdown, market already picking back up

Tim Morris
Senior industrial research
analyst, Cushman & Wakefield,

The COVID-19 pandemic and its associated shutdowns have had a large impact on the commercial real estate world. Through the first three quarters of 2020, industrial product has experienced a slowdown in activity, while rental rate growth sputtered, and vacancy has steadily risen to the highest figure since 2012. The pandemic interrupted the hottest industrial cycle in Denver’s history, so there is reason to believe the market will rebound. Once there is more clarity and certainty for the future and the ramifications of the pandemic begin to dissipate, Denver’s industrial market is expected to increase back to prepandemic levels during 2021. We already have seen activity pick up in the third quarter with good momentum as we approach year-end.

Michael Coppola
Associate market director,
Cushman & Wakefield,

Overall vacancy in Denver metro industrial product had risen 40 basis points through the end of the third quarter, closing at 6.2% compared with the 5.8% recorded to close 2019. This ended a 30-quarter streak of vacancy below 6%, dating back to the end of 2012. This consistently low vacancy rate has been a testament to the demand for new product across the metro as more than 24.6 million square feet of new product has delivered to the metro since the beginning of 2016. The catalyst for rising vacancy in 2020 has been slowing leasing activity in new spec product due to a slowing economy induced by the pandemic; the 2.5 million sf of speculative product that has delivered year to date was 83% vacant as of the end of the third quarter.

Consistently low vacancy coupled with the influx of new spec product across the metro had led to explosive rental rate growth during this cycle. Rental rates closed 2019 at $8.76 per sf triple net on an overall basis, a figure that represented growth of 23% over the last five years and 16% over the past three years. The robust rental rate growth exhibited in prior years slowed considerably during 2020 as the $9.01 per sf triple net recorded to close the third quarter was a change of just $0.02 from the $9.03 per sf recorded to close the first quarter.

“We have seen rental rates hold firm through the pandemic,” said Cushman’s Drew McManus. “Landlords have been offering other forms of concessions, such as rental abatement and increased TI packages to entice tenants and secure new deals at their projects.”

While demand for industrial product has endured better than all other commercial product types during 2020, activity still has slowed through three quarters of 2020. Year-to-date leasing activity has recorded 6.4 million sf, down about 17% from the 7.7 million sf average for the prior five years through three quarters. This is not surprising given the significant impact COVID-19 had in the second and third quarters.

“We’ve seen a steady increase in marketwide activity since June 1, with things feeling ‘back to normal’ since Sept. 1,” said Cushman’s Tyler Smith. “We expect that Q4 will post strong results, making 2020 more of an average year statistically, and we expect this momentum to continue into 2021.”

Recent build-to-suit projects for Lowe’s and Subaru, totaling over 1.5 million sf and signed over the past four months, are evidence that large tenants still need to have their supply chains operating efficiently in order to better serve their customers and retain or grow their market share.

Overall net absorption has slowed substantially during 2020. While the 2.1 million sf of absorption recorded through three quarters of 2020 is comparable to the 2.2 million sf average recorded through the first three quarters of the past four years, 848,000 sf of 2020 absorption can be attributed to BTS completions that were started in 2019 and another 1.3 million sf can be attributed to a single rapidly expanding e-commerce user. This is indicative of a number of tenants relocating within the market as opposed to corporate relocations from out of town.

“We expect trends experienced prior to COVID to be enhanced post-pandemic,” said Cushman’s Joe Krahn “For example, Denver’s strong population growth and position as a receiver of growth from states like California should only continue to improve occupier activity in our industrial market.”

As mentioned, construction activity has been robust during this cycle, and 2020 has continued that trend. Despite project timelines getting pushed around the metro, over 3.3 million sf of industrial product has delivered through three quarters while 5.9 million sf remains under construction, split between 1.6 million sf of BTS product and 4.3 million sf of speculative product.

“While some Denver landlords are becoming slightly more cautious of supply, we expect continued strong performance in well-located and well-developed sites, which should continue to drive development,” said Cushman’s Steve Hager. “Capital for new industrial development is at historically high levels resulting in a large number of developers seeking opportunities.”

Industrial investment sale activity has remained strong through three quarters of 2020 as $918.7 million has transacted. This trails the $1.1 billion average of the prior two years through three quarters, but the past two years represent the strongest on record for investment in the Denver metro industrial market. Investment sale activity should comfortably surpass the $1 billion mark once again in 2020 and, with several large portfolios for sale around the metro, could increase substantially before year’s end.

“Appetite for Denver industrial real estate is picking up right where it left off prior to the pandemic,” said Cushman’s Will Strong. “We are rolling out new opportunities that we expect to price as or more aggressively than the first quarter, as well as tracking investment sales that will close with cap rates reminiscent of early 2020, and with more compression in some instances.”

This article is a result of collaboration across the Cushman & Wakefield Denver Industrial Group.

Featured in CREJ’s December 2020 issue of Office & Industrial Quarterly

Edited by the Colorado Real Estate Journal staff.