Colorado-Real-Estate-Journal_465854

Page 22 — Office & Industrial Quarterly — June 2025 www.crej.com INDUSTRIAL — MARKET UPDATE Hybrid Structural Systems Integration Pre-Engineered Metal Buildings Site-Cast Tilt Construction Build-to-Suit Pre-Construction Services Planning & Entitlements Building Across Colorado Since 1964 dcb Construction Company, Inc dcb1.com 303.287.5525 Design-Build . Site Planning . Architecture . Construction B e fearful when others are greedy, and greedy when others are fearful.” That timeless advice from War- ren Buffett is echoing through Denver’s industrial real estate market today. At a time when many investors are anxious – even fearful – about market head- winds, those willing to be “greedy” in the face of uncertainty may find outsized long-term opportunities. This article explores why today’s tough climate could set the stage for some of the best industrial real estate buys of the decade. Market headwinds and buyer pullback It’s no secret that buyers are hesitant right now. A confluence of challenges have given buyers pause: n High interest rates and nega- tive leverage. After years of cheap debt, interest rates are at heights not seen in over a decade. Mort- gage rates on commercial prop- erties have risen and tightened the spread with cap rates, creat- ing “negative leverage” scenarios where borrowing can actually reduce returns. This interest-rate spike has cooled investor enthusi- asm. n Looming tariffs. Tenants and owner-users face significant hesi- tancy around making commercial real estate decisions due to the likelihood of tariffs directly affect- ing their business. If their costs go up by say, 25%, can they simply pass those costs along to their cus- tomers? It’s a real concern. n Economic uncertainty. From whispers of recession to global trade ten- sions, uncertainty abounds. Industri- al real estate faces questions around future demand for warehouses and distribution space if the economy slows. Faced with these headwinds – higher costs, pricier debt and an uncertain outlook – many buyers are understandably cautious. But history suggests that these very conditions often sow the seeds of the best deals. Construction slowdown sets stage for tightening market One of the strongest arguments for buying now is what’s not being built. Last year’s construction starts totaled a measly 1.8 million square feet, a fraction of the prior five years, which saw typical construc- tion starts in the 7 million-sf range. Commercial construction costs are 40% (or more) above pre-2020 levels. Combine that with higher interest rates for construction loans, higher exit cap rates and a softer leasing market, and it’s easy to see why the development pipe- line has thinned out. For investors, this construction pullback is criti- cal. Fewer new warehouses coming on line over the next one to three years means less future competi- tion for existing properties. Elevated vacancies – but not for long Denver’s industrial vacancy rate has ticked up from its ultratight lows, offering buyers more lever- age to negotiate. CoStar data show vacancy around 8.9% recently, well above the 10-year Denver average of roughly 5%. Absorption has been steadily positive but has not been able to keep up with the robust construction pipeline. With con- struction slowing, that is poised to change. The current vacancy rate (about 8%-9%) is a cushion – it means buyers can underwrite acquisitions with a historically conservative vacancy rate and leave room for vacancy rate com- pression over the term of owner- ship. Plateaued prices and motivated sellers The industrial market’s mete- oric price growth has leveled off – and in many cases even pulled back – which spells opportunity for buyers. After years of double-digit annual price increases, prices per sf have dipped slightly from recent peaks. CoStar’s Denver index shows that industrial values cooled from about $182 per sf in 2022 to $166 today. While this is only an 8.8% decline, if you account for cumulative inflation of over 14% during that period, the cost basis for your average Denver industrial property has decreased 20.6% in inflation-adjusted dollars. So you are buying at a cost basis that is more attractive than it may appear at first glance. Equally important, sellers have become more realistic. Gone are the days when every seller expect- ed yesterday’s sky-high price. With the market cooling, many own- ers have adjusted expectations, especially after their property sits on the market for several months. Properties that just a few years ago were extremely desirable, such as single-tenant industrial build- ings in the 20,000- to 50,000-sf range, are now experiencing soft buyer demand, resulting in still high asking prices, but with sellers ultimately accepting lower, more realistic prices. This relative lack of buyer competition shifts leverage to the purchaser – a dynamic that smart investors can use to their advantage to lock in better pricing for properties that are still expect- ed to have favorable long-term supply and demand fundamentals. A once-in-a-cycle buying window Pulling it all together, the current climate for Denver industrial real estate may be as good as it gets for buyers. All the ingredients of a great buying opportunity are in Now is a great time to buy Denver industrial Jeff Heine Principal, industrial brokerage, Lee & Associates “ Please see Heine, Page 30