Colorado-Real-Estate-Journal_405916

Page 30 — Office & Industrial Quarterly — June 2024 www.crej.com INDUSTRIAL — MARKET OUTLOOK T he industrial real estate mar- ket in Denver is experiencing a significant transformation. For the past four quarters, industrial construction has been in decline, reaching its lowest levels since the onset of the COVID- 19 pandemic in early 2020. This trend mirrors national patterns, where higher interest rates and stricter lending criteria have made it increasingly difficult for develop- ers to secure construction loans. Consequently, fewer projects are being initiated, setting the stage for a notable reduction in completions by 2025, which should help address oversupply concerns. n Current construction landscape. As of now, approximately 6.4 mil- lion square feet of industrial space is under construc- tion in the Denver market, a sharp decrease from the 11.1 million sf recorded at the same time last year, according to CoStar data. This decline follows a period of prolific development, during which Den- ver’s industrial inventory expanded by nearly 29 million sf over the past four years, reflecting a substantial 11.4% growth in the total market inventory. The boom in development, how- ever, has contrib- uted to a rise in vacancy rates. At the end of May, Denver’s industrial vacancy rate stood at 8.2%, the high- est in a decade and 220 basis points above the national average. Only 2.7 million sf of new space has com- menced construction since early 2023, a stark contrast to previous years. n Projected slowdown in comple- tions. The window for obtaining traditional construction loans for unleased projects largely closed in late 2022, leading to a significant slowdown in new starts. CoStar projects that completions will drop from 6.5 million sf in 2024 to just 2.8 million sf in 2025. If current demand trends persist, this reduc- tion in new construction should begin to tighten vacancy levels starting in 2025. n Challenges in 2024. Despite the anticipated improvement in 2025, 2024 is expected to be a relatively challenging year for leasing. The vacancy rate is projected to top out around current levels at 8.2%, one of the highest among major U.S. markets, as the final wave of projects from the recent building boom comes to market. Meanwhile, tenant demand has shown signs of acceleration, particularly in the east Interstate 70 corridor, which offers strategic access to major highways, rail, Denver International Airport, and a skilled labor force. This sub- market is credited for the majority of new leases over 50,000 sf signed since fourth-quarter 2023, inking 19 out of the 31 leases in that time frame, per CoStar. Despite this uptick in demand, a total of 5.4 million sf is still under construction, with most of this space expected to be completed within the year. The new supply is projected to outpace demand through the fourth quarter of 2024, particularly impacting the big box segment, which comprises approxi- mately 85% of the current pipeline. n Impact of higher interest rates and tighter lending. Higher interest rates and tighter lending require- ments have significantly impacted the industrial real estate market. Over the past four quarters, local industrial construction starts have totaled only 2.8 million sf, a 76% decrease from peak levels in 2022 and 47% below the pre-pandemic five-year average. This reduction is setting the stage for fewer comple- tions beginning in 2025, potentially stabilizing Denver’s vacancy rate. The market will need to contend with the remaining supply pipeline before rent growth can recover to pre-pandemic levels. With vacan- cies expected to remain high in the short term, rent growth is pro- jected to decelerate to 2.1% in 2024, the weakest since 2011. However, the pullback in construction starts should limit additional supply pres- Denver’s industrial construction market & outlook 88 TH & R OSEMARY BUILDING EXCELLENCE SINCE 1966 6.9 acres of industrial property at 8705 Rosemary Street in Commerce City was rezoned with plans to construct a 54,600 -square-foot grade-level industrial building with a three-acre outdoor storage yard. The project is set to be completed in December 2024. 5120 Osage St., Suite 100, Denver, CO 80221 Phone (303) 420-0234 Fax (303) 420-7666 www.murrayandstafford.com Jeff Heine Senior adviser, SVN Corey Murray Senior adviser, SVN Please see Heine, Page 33