In the industrial sector, we’ve seen 45 consecutive quarters of positive net absorption and vacancies in the high sixes. Triple net rents have been in the mid-sevens to low eights, on average, depending on the sub-market. There’s also 10 million square feet under construction right now in Denver. For context, that number was at 4 million square feet just two years ago.*
These numbers have endured even as COVID, the Colonial Pipeline, Suez Canal, and Texas deep freeze wreaked havoc nationally and internationally. Now, let’s throw in rising material costs and supply chain challenges, as well as land price increases. Where does that leave the industrial sector, specifically in Denver? What will we see in the future?
Jeff Meissner, Principal at ARCO/Murray, moderated an August 2021 Bisnow panel with John Comunale (President, Comunale Properties), Andrea Karp (Managing Director, Head of Due Diligence, Black Creek Group), and Bryant Mazzetti (Principal, Powers Brown Architecture) to discuss these very topics.
Here are 5 key takeaways from the panel.
1. Construction and design teams are being combined on the front-end with a mix of technology to minimize schedule delays and material cost escalations.
It’s important for the industry to combine design and construction teams earlier in the process. As a national design-builder with in-house architectural design and engineering, ARCO has used this strategy to give owners and developers live feedback while dollarizing their decisions. By the time design is completed, materials can already be ordered – reducing potential delays and compressing the overall design and construction process. A national procurement strategy can also help with rising costs, especially when working in smaller submarkets. Last, but not least, add in a suite of construction technology that provides everything from real-time access to project information to unit cost data for more accurate pricing.
2. Local jurisdictions are impacting project timelines now more than ever.
Speed to market is everything, but most jurisdictions are not operating at pre-pandemic levels. Developers are coming into the Denver market, oftentimes from out-of-state, and are not always prepared for the timelines they’re being given. Denver also now has what’s called LDR, which is an additional review for a site that’s over four acres. This is adding to the overall timeline. In some cases, you could be looking at up to 18 months on a site deemed ‘shovel ready’ – depending on the municipality. To circumvent that, owners and developers should seek transparent partners who know the local market, effectively manage risk and can proactively communicate potential roadblocks.
3. New capital is entering the market and developers are diversifying their portfolios.
There are more buyers on every deal, and these buyers are willing to pay a little bit more, especially if it’s their first entry into the industrial sector. Good developers have a lot of capital to choose from – whether it’s from private equity, investment managers…etc. In coastal areas where rent and land costs are higher, companies are looking to push into second tier markets, like Denver, which is driving some of the growth increases mentioned earlier.
4. Rent growth is outpacing pro forma rents…to some degree.
You hear in the industry about developers trying to capture the rent growth, but it also depends on the type of building. For some spec buildings, developers still want leases to be long-term, secured cash flow. Other business parks can execute short-term leases and capture rent growth within reason.
5. Industrial design is becoming more hyper-focused on sustainability and last-mile shipping trends.
When designing an industrial facility, sustainability is at the top of the list. Jurisdictions want to know how these buildings can be more sustainable and have less negative environmental impact. Solar and solar-ready buildings are a large component of that. You can also get even more granular with the type of lights, toilets, sinks, windows and appliances in the building. Additionally, you’re seeing more infill facilities, making the parking lot almost worth more than the actual building. We’re seeing more creative designs for the influx of smaller box trucks and service and delivery vans versus the 53-foot trailer.
*Data provided by JLL and CBRE’s Second Quarter Industrial Market Reports
Did you know ARCO is the #1 contractor for warehouse & distribution facilities in the U.S., according to ENR? If you have a question on the industrial sector or a potential project either in Denver or nationally, contact Jeff today.