Denver Industrial Market
It appears the nation is on the road to recovery. Economic indicators are expected to show the recession is ending this quarter, American household wealth grew for the first time in two years, and the economy appears to be stabilizing. The Denver industrial market is also exhibiting signs that we may have hit bottom and a recovery may be on the horizon. Third quarter 2009 industrial statistics were slightly positive, a good indicator considering the negative absorption experienced over the past three quarters, but the road to recovery may be long as uncertainties within the Denver market remain. The limited effect of distressed properties, the new paradigm of doing business as a result of current legislation coming out of Washington, and the potential for a jobless recovery will undoubtedly affect Colorado’s commercial real estate market. Local economic recovery will be facilitated through Colorado’s diverse industry base with long-term growth potential and this will eventually support growth in industrial commercial real estate.
Positive absorption seen in the third quarter is attributed to the aggressive actions of landlords and stabilization of the market. Landlords continue to reduce asking lease rates as they attempt to increase activity and retain existing tenants to stabilize their assets. Blend and extend, short term, and month-to-month lease deals remain commonplace as landlords do whatever it takes to close a deal. Average asking rental rates this quarter decreased to $5.95 per square foot (sq. ft.). Several large transactions pushed absorption into positive territory this quarter. Subaru took occupancy of 319,587 SF from Lauth, Metech leased 112,653 SF at 500 W. 53rd Place, and the Colorado Distribution Group leased 63,900 SF from Panattoni.
The industrial development pipeline for the Denver market remains stagnant. Currently there are no speculative industrial development projects under construction in the Denver market. Speculative development remains too risky as current economic conditions translate into a difficult operating environment for income producing properties. Planned projects will not break ground in the near future due to the lack of capital available, as investors expect double digit returns on equity to fund speculative projects. New space needs to secure lease rates well above what is currently feasible, applying further pressure on speculative development. Thus, build-to-suit construction will likely be the only development to break ground well into the future.
Investment sales remain limited this quarter. The investment paradigm has shifted from acquisition to a mode of managing and protecting existing assets. The state of the capital markets has not allowed for many transactions to close, thus limiting the amount of comparable transactions upon which to build a price. Distressed CMBS and foreclosed assets, when they will enter the market, and the magnitude of corresponding buying opportunities have been the focus of the well capitalized investor.
Denver Industrial Market Report
3rd Quarter 2009
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