Industrial Expert Sees Market Stabilizing

In his mid-year forecast, Hager says the metro-area warehouse and distribution space vacancy was 8.9% in the second quarter, compared with 9.2% in the first quarter of 2004 and 7.1% in the second quarter of 2003. The average rental rate in the second quarter fell to $4.06 per sf from $.26 per sf in the first quarter and $4.96 per sf in the second quarter of 2002.

For flex space, the direct vacancy rate is 12.4% compared with 12.7% in the first quarter and 12.5% in the first three months of 2003. The average rental rate for flex space is $7.55, unsightly from the $7.45 in the prior quarter, but down from $7.84 per sf a year earlier.

"Lease rates continue to deteriorate, but are stabilizing," Hager says. "Leasing activity is healthy with slight increase. And we still had good, positive absorption in the second quarter."

Hager says tenant retention remains the No.1 priority of landlords. Indeed, tenants continue to enjoy strong negotiating power, Hager notes.

"Tenants will remain in control of negotiations for the remainder of 2004," Hager says. "Vacancy rates will begin to fall and will decline gradually. But rental will remain flat with limited rental rate growth until 2004."

However, Hager says the year will end with positive absorption, and user and investment sales will remain strong until interest rates rise. He says that there is 1.2 million sf of spec development on tap this year, a moderate amount. The spec space will provide the class A warehouse product with high ceilings, state-of-the-art sprinkler systems and multiple docks, Hager says. Class A warehouse space will outperform older products, as the flight to quality will continue, according to Hager.

"Denver is emerging as a regional distribution hub that needs larger warehouse requirements," he says. He notes that under "just in time" delivery systems, products are expected to be delivered within a day or two after they are ordered. Local demand drivers will include suppliers to residential and commercial developments; vendors to public improvement projects; and consumer spending along the Front Range.

The key to recovery, Hager says, will be continued growth in national and local economies; increased consumer confidence; and an increase in manufacturing.