Denver’s Industrial Market Remains Strong But Challenges Lie Ahead

Denver’s industrial market showed signs of strength in Q2 2023 as strong absorption caused the city’s vacancy rate to fall to 7.6%, the first decline in vacancy the market has seen since Q1 2021, JLL data shows. 

But that momentum may soon come to an end because of decreased leasing activity from large occupiers and high property taxes, JLL Managing Director for Industrial and Logistics Real Estate Jason White told Bisnow in an interview. 

“People need to remember that Denver is a consumer-based market and we are not on the national supply chain,” White said, adding that truckers can reach just under 5% of the nation’s population from Denver. “We don’t have that regional distribution or national supply chain capability like Dallas or Phoenix that can reach 20% of the population.” 

Industry leaders told Bisnow in June that they expect to see a “calmer, more rational” market in the months ahead because of the city’s construction pipeline for industrial properties. JLL found there are more than 9.4M SF of industrial space under construction in Denver as of Q2, about 200K SF below the pace the market set a year ago. This activity could help stabilize rents going forward, although White said there are still some headwinds the market needs to get past.

White pointed to property taxes being one issue that could depress industrial activity in Denver throughout the remainder of 2023. Industrial properties in Colorado pay 29% property taxes, which White said are “almost double” what operators pay for comparable properties in Arizona and Nevada. 

“When you have property taxes that are nearly reaching your cost of rent, that’s an imbalance that could cause some issues,” White said. “It really gives tenants concerns about locating here.” 

Industrial properties were one of the more resilient commercial asset classes in Denver during the pandemic as e-commerce activity boomed and retail operations struggled to stay afloat. Data from Avison Young showed that leasing activity in the city surged from around 3M SF in Q1 2020 to around 6M SF midway through Q1 2021. 

That surge of activity helped increase Denver’s triple-net rents for industrial properties from $8.21 per SF in Q2 2022 to around $9 per SF in Q2 2023, but other experts have said they see signs of what they described as “market normalization.”

The so-called normalization has two elements. First, Denver is seeing a decline in leasing transactions for industrial spaces that are 1M SF and larger, especially near Denver International Airport, which White said is primarily driven by a changing tenant mix in the market.

Denver also isn’t attracting as many large, build-to-suit e-commerce projects as other metropolitan areas, he added. Instead, Denver is seeing an influx of food and beverage or solar assembly projects that can serve the local population and take less square footage. 

That declining leasing activity is also causing some landlords to offer concessions to attract tenants to their spaces, White said. For instance, he said some landlords have allowed tenants to occupy a full 250K SF to 300K SF industrial space but only pay for 30% to 40% of the space upfront for the first year. This speaks to the slow demand for industrial space that Denver saw in the first half of 2023, White added. 

One submarket that seems to be benefiting from the changing tenant mix is the North Central Denver submarket, White said. JLL measured the submarket’s direct asking rent at $11.41 in Q2, which is $2.43 per SF higher than the citywide average.

Hines also broke ground on an 868K SF industrial development in the North Central submarket on Aug. 9. The first phase of the project, which includes three buildings and more than 530K SF, is expected to be delivered in Q2 2024. 

“North Central Denver is a fast-growing submarket, and occupier demand for Class-A industrial space continues to outpace existing supply,” Hines Director Courtney Schneider said in a press release.