Denver sees record amount of industrial real estate growth amid pandemic

Denver sees record amount of industrial real estate growth amid pandemic

One real estate transaction in 2020, in particular, gave Jessica Ostermick confidence the COVID-19 pandemic would not derail industrial real estate in Denver like it has the city’s office market.

In April, Ostermick, a director with real estate firm CBRE, and four colleagues represented the seller in an $85.7 million deal for an occupied 647,500-square-foot warehouse and distribution building in Denver’s Central Park neighborhood. The sale closed on May 21.

The Denver-metro office vacancy rate hit 15.6{911ea05452e114f1778c76ca86733b6032c246f8f651bb1f01d12abf04b54efb} at the end of the year, the highest level since the end of 2011, according to CBRE research. An estimated 2.2 million square feet of sublease space hit the market just since the pandemic began, an 86.1{911ea05452e114f1778c76ca86733b6032c246f8f651bb1f01d12abf04b54efb} increase.

The industrial market saw a lull in activity in the early part of the year. Most of the deals that closed then — aside from the big Central Park sale — were short-term lease renewals, Ostermick said, while many investors and would-be tenants took a step back amid the economic uncertainly. All that did, in Ostermick’s view, was create pent-up demand.

By the end of 2020, more than 3.4 million square feet of warehouse, manufacturing and other industrial space was absorbed by new tenants, a 14.9{911ea05452e114f1778c76ca86733b6032c246f8f651bb1f01d12abf04b54efb} increase over 2019. Another 8.2 million square feet is under construction now, breaking a record set in 1997.

“If the Denver industrial market can perform like it did in 2020, it seems to be unstoppable,” Ostermick said.

Record construction at a time when the economic recovery is still uncertain may seem risky, but Ostermick noted roughly half of the industrial space underway is preleased. That includes a 1 million-square-foot building being built for Lowe’s Home Improvement.

“It’s not just Amazon,” she said of the companies taking on big chunks of space in the Denver area. “It’s Lowe’s and Costco and Wayfair. Just about everybody you know is in the market or wants to be in the market.”

If there is one concern Ostermick has it’s that most projects are in the 100,000- to 200,000-square-foot range. Big operators are in need of bigger spaces, 500,000-square-feet and above.

“We need more big space,” she said.

The enduring industrial boom is a stark contrast to the sudden office market crash. CRBE’s fourth-quarter research shows that 1.1 million square feet of new or existing office space hit the market last year that was not taken on by tenants, the first time in a decade the city’s office market experienced negative absorption.

More than 3 million square feet of office space was under construction at the end of 2020. Most of it, 2.4 million square feet, was being built on a speculative basis, without tenants attached. Big spec office projects underway downtown — among them McGregor Square, Market Station and Block 162 — are slowly securing tenants. About 40{911ea05452e114f1778c76ca86733b6032c246f8f651bb1f01d12abf04b54efb} of downtown spec projects pre-leased by the end of the year, according to CBRE.

Through November, office-using employers had shed 8,400 jobs in Denver compared to the same period in 2019, according to CBRE’s research. That doesn’t account for people working from home and not using their office space.

On the industrial side, employers added 1,800 jobs in Denver through November 2020 compared to the same time frame in 2019, CBRE said.

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