WESTERN SNAPSHOT, FEBRUARY 2010

Colorado Front Range Industrial Market

The Denver industrial real estate market stopped its 2008 free-fall and stabilized in the second half of 2009. A recipe of back-to-back quarters of positive absorption and no new speculative construction caused the vacancy rate to hold steady at 8.6 percent. Tenants are still vacating blocks of space as leases expire, and the weak economy continues to take its toll, but statistically this has been somewhat offset by the lack of new product coming to market and a handful of tenants relocating or expanding.

The renewable energy sector had a dramatic impact on the Denver industrial market in 2009 as solar-panel and wind-turbine manufacturers continued to make large investments in the Front Range. As a result, the area is experiencing a ripple effect as smaller tenants are entering the market to fulfill the raw-material requirements and installation needs of these manufacturers. In addition, the U.S. Department of Energy recently awarded more than $75 million in advanced energy manufacturing funds through the Recovery Act to six Colorado clean-tech companies. Hopefully these tax credits will be the foundation for continued job creation and reinforce the Colorado manufacturing industry in 2010-2011.

Several of the largest lease deals of the year were by SMA Solartech, Anheuser Busch, MBM Corporation and Metech. These deals, all exceeding 100,000 square feet, helped end the year at an 8.6 percent industrial vacancy rate with a negative 2009 absorption total of nearly 350,00 square feet. Quoted lease rates are trending higher since third quarter 2009 and should continue to increase through 2010 as the availability of quality space diminishes.

The major development projects currently underway are two buildings totaling 660,000 square feet for Vestas Wind Systems just north of Denver in Brighton, Colorado. All new speculative construction remains on hold, while the only new buildings getting the green light are build-to-suit projects for solid credit users. As a result the Denver market delivered the least amount of new industrial product in much more than 30 years at only 535,000 square feet. By comparison, 4 million square feet were developed in 2008.

User and investment sales activity was off by at least 75 percent in the Denver metro area during 2009, with two investment transactions closing in December that are hopefully a sign of things to come this year. The largest investment transaction of the year was ProLogis selling a 498,000-square-foot, three-building, multi-tenant portfolio to Dallas-based Cobalt Capital Partners for $18.53 million ($37.25 per square foot). The largest single-tenant investment transaction was First Industrial Realty Trust’s more than $10 million sale of the 126,000-square-foot Abound Solar manufacturing facility to Boulder, Colorado-based W.W. Reynolds Companies.

The northern sector of Colorado’s Front Range experienced a rough 2009 as industrial development projects were put on hold awaiting stability in the housing market and for job creation to show signs that the Colorado economy is on the path to recovery. The Longmont and Fort Collins industrial market vacancy rates ended the year higher at 14.7 percent and 13 percent, respectively, with average lease rates in the $7 range. The Abound Solar investment transaction in Longmont demonstrates confidence in the market and is another indicator that the renewable energy sector will help lead the Colorado economy to recovery.

The Colorado Springs industrial market is showing signs of stabilization as 2010 gets rolling, but still finished the year with a total negative absorption of 381,700 square feet and a total vacancy rate of 14.6 percent. The majority of that negative absorption came in the first and third quarters with flex space having the highest vacancy rate at 16.5 percent. Almost all new construction has come to a halt in the Colorado Springs market, and as quoted lease rates continue to decrease expect the vacancy rate to stabilize in all sectors.

Vestas Wind Systems is also making a significant investment in southern Colorado. The company is currently under construction on a wind-turbine tower manufacturing facility in Pueblo, which when completed should create a significant number of jobs.

After a challenging 2009, the latest numbers show that Colorado’s Front Range industrial market is poised for a steady recovery in 2010 and 2011.

Brady Welsh is in the Industrial Properties Group of Bitzer Real Estate Partners/CORFAC International in Denver.

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