Industrial Market Poised for Comeback

The industrial market, according to Trammell Crow, will benefit from an expanding economy and the subsequent rebuilding of inventories. That should lead to increased demand for industrial space later this year.

Net absorption through the first two quarters stood at 309,674 sf. The Montbello/I-70 submarkets 641,814 sf. of absorption led the market in the second quarter, while the Northeast submarket's 425,660 sf of negative absorption was the lowest. And despite the loss of 69,000 jobs in 2002 and 2003, metro Denver's industrial vacancy has not exceeded 10% since the recession began in 2001.

Direct vacancy inched upward by just one-tenth of a percentage point to 9.6% in the second quarter. With the 2.4 million sf of sublease availabilities added in, the overall rate was 10.9%. The Montbello/I-70's direct vacancy dropped 50 basis points to 8.5% during the quarter, but its overall rate rose 60 basis points to 11.0% as sublease availabilities jumped 77% percent to 1.34 million sf.

Rental rates remain soft, which is not surprising given the relatively high vacancy rates, the report notes. Asking prices have dropped 19% in the past four years. The trend continued in the second quarter, as the average asking rental rate dropped from $6 per sf to $5.90 per sf, triple net. Boding well for an improved vacancy rate, construction activity has been relatively conservative through the current cycle. This will hasten the market's recovery once the economy gains traction, according to the report.

In 2003, 1.6 million sf was added to the market, and another 1.7 million sf is on tap for this year. The vast majority of development activity is in the dominant Montbello/I-70 submarket, which saw 506,700 sf. of new construction in the first half of the year.

In addition to relatively few new buildings springing up, the market should benefit from the 34,700 new jobs added to the metro Denver's economy from March through May. This is the largest three-month employment gain since 2000. The local economy, however, still has some ground to make up, as year-to-date average employment is down by 10,900 jobs, or 0.8%.

The report notes that "many tech and telecom companies continue to shed jobs, albeit at a declining rate, leaving little near term hope for improving conditions in the flex market. On the other hand, the natural resources, transportation and warehousing sectors are adding to their payrolls, paving the way for increased warehouse demand.