Amazon Pullback 'Incredibly Healthy' For Denver Industrial Development
In a time of record-setting transactions, rents, costs and demand, Denver-area industrial developers are confronting higher risks and shifting tenant demands while enjoying an atmosphere with wide-ranging opportunities for those who can navigate the landscape.
Meanwhile, Amazon’s dominance of the industrial development pipeline in recent years has sucked up much-needed lumber, steel, concrete and other resources, extending wait times and jacking up prices as bids expired at a breathtaking pace.
“Amazon slowing down is incredibly healthy,” said Paul Hyde, founder and partner of Hyde Development, during Bisnow’s Denver Industrial Deep Dive event on Tuesday. “If there’s a slowdown in some of this development, including from Amazon, who’s a big player, that makes it easier for the rest of us. All of this is good if it gets us back to some sort of balance.”
Rapidly shifting capital markets conditions and materials shortages coupled with seemingly unyielding demand from a growing population for more and faster delivery of items purchased online have spurred industrial development all over the country. For its part, Denver is in the midst of a record construction pipeline, with more than 12M SF of industrial space under development.
But finding opportunities and ways to make projects work is becoming more difficult, and tenants’ expectations have changed. Plus, because of persistent demand, delivering new product quickly is more important than ever.
“Speed to market is an important competitive advantage,” said Mindy Rietz, vice president of development for United Properties in Denver, during the panel. And tenants today expect more parking, including things like electric vehicle charging stations, which reduces the amount of leasable space and increases costs.
Other new tenant demands include taller clear heights, reinforced concrete flooring capable of supporting autonomous trucks and environmentally friendly elements like solar panels. All of these things increase cost and project complexity on top of the challenging macro market dynamics.
Demand for industrial space in metro Denver is clear, with a 5.5% vacancy rate and 19% rent growth metrowide in the first quarter of 2022, according to CBRE data, despite a whopping year for deliveries in 2021, when nearly 10M SF came online.
As the development community works to keep pace with the demand, however, it’s dealing with a riskier environment thanks to inflation, supply chain woes and rising interest rates that take a bite out of buying and borrowing power.
“We’re taking on more risk than ever before,” said Sean Flanagan, vice president of industrial development at Denver-based Broe Real Estate Group. “We have to press forward and hope that materials arrive and are within a semi-reasonable price range.”
A recent report from Linesight showed that materials costs are expected to continue rising this year. In particular, the price of raw steel, an important facet of industrial development, rose significantly early in 2022, with steel flat rising 8.9% quarter-over-quarter from the end of 2021.
That trend is expected to continue due in part to the Russia-Ukraine War, as the two countries together contribute 60% of the U.S. supply of crude iron, a key ingredient in the production of steel.