WEST INDUSTRIAL MARKET
DENVER
Denver’s industrial market posted positive net absorption during the second quarter. That follows a positive performance during the first quarter.
This is an encouraging sign since the market has been fluctuating between positive and negative trends since 2002. These are the first two positive, consecutive quarters since year-end 2001 and may indicate that the market is entering into the next stage of the real estate cycle.
Other positive signs: a majority of Denver areas are still reporting single-digit vacancy levels and only two areas posted vacancy rate increases this quarter.
But rental rates still are slipping, though not as significantly as in more recent quarters.
Denver’s average asking rental rate lost more than 3.3% and rates are expected to remain soft until the market consistently posts positive gains.
Beyond positive statistical performance, notable transactions continue to occur in the industrial sector.
This quarter saw Whirlpool Corp. move into its 171,000-square-foot build-to-suit project in the Stapleton Business Center, while Core-Mark Distributors leased 140,000 square feet for 10 years at Majestic Commercenter.
Denver remains a significant regional location for many companies.
While the industrial market is not “blazing trails” as it had been, it does remain a stable force in Denver’s commercial real estate market and is well positioned for a steady recovery.
Market Assessment
After recording only minimal positive net absorption during the first quarter, Denver’s industrial market improved considerably this period, absorbing more than 724,000 square feet.
Unfortunately, in a market of more than 183 million square feet of space, the activity barely registered a change in the overall vacancy rate.
Nonetheless, the vacancy rate did decline by 30 basis points to 8.6%. Only two Denver markets saw vacancy rate increases,East and North Denver,and neither increase was particularly significant.
East Denver continues to report the highest vacancy rate in the city at 21.4%, while the southwest remains the tightest submarket with just 2% of its industrial inventory available.
After oscillating between positive and negative trends throughout 2002, the past two quarters represent the first consecutive quarters that the industrial market has posted positive performances, which may mark the beginning of the long-awaited recovery.
Despite modestly improving vacancy levels, Denver’s industrial rental rates declined further in the quarter. But the decreases were not as steep as in past quarters and rental rates should begin to stabilize if market conditions continue to improve.
Denver’s overall industrial average dropped to $6.18 per square foot triple-net, a 3.3% decline. Every building type, with the exception of incubator space, recorded rental rate declines.
The warehouse and distribution rate dropped eight cents per square foot; research and development fell by
32 cents per square foot; and general industrial projects declined by 12 cents per square foot.
Incubator space gained 10 cents per square foot, ending the quarter with a $6.78 per square foot triple-net average.
A majority of Denver’s markets also posted declines in their asking rental rates.
Until tenant demand is clearly improves and the market begins to consistently post positive gains, rental rates will remain soft.
A trend that continues to dominate Denver’s industrial market is user-buying of real estate. Historically low interest rates have enabled numerous companies to get financing and have allowed users of 10,000 to 20,000 square feet of space to buy their own buildings.
This trend is expected to continue, though it’s quite difficult to find these types of properties as competition among buyers is fierce.
The relative stability of Denver’s industrial market will continue throughout the remainder of this year and will not post big gains until both the local and national economies have posted notable improvements.
But the industrial sector is poised for a sustained recovery as the market responded quickly and appropriately to changing market conditions and did not burden itself with significant new inventory. Occupancy levels will continue to slowly rise and rental rates will begin to follow by early 2004.
PHOENIX
The Phoenix industrial market fared well during the second quarter. And the forecast looks much brighter as the war in Iraq came to an end, easing unrest in the local economy.
Overall net absorption increased substantially from the previous quarter, and the overall vacancy rate decreased for the first time in four quarters.
Additionally, the amount of new construction increased throughout the second quarter as build-to-suit and owner-built activity remained strong.
Developers also regained confidence in the local industrial market. This was evidenced by an increased interest in parcels of vacant land for potential speculative projects.
Interest rates were at historic lows during the second quarter resulting in a high level of sales activity from owner-users, which accounted for 64% of all sales transactions in 2003.
Small-to-midsize users paved the path in setting this trend. Rental rates continued to decline during the quarter and increased concessions remained a standard part of lease negotiations, which allowed tenants to obtain value leases and landlords to fill long-held vacancies.
Economic indicators also supported some positive trends but remained mixed. The ISM manufacturing index revealed shrinkage in manufacturing activity during the second quarter, though it was still stronger than economists had predicted and created some optimism for the near future.
Consumer confidence increased from 63 points at the end of the first quarter to nearly 84 points at the end of the second, but low employment growth continued to slow the recovery of the industrial market.
Market Assessment
The overall industrial vacancy slightly decreased during the second quarter, refreshing the local industrial market after a year-long bout of steady vacancy increases.
At the close of the second quarter the vacancy rate was 11.1%, down from 11.7% in the first quarter.
Incubator space recorded the lowest vacancy rate while research and development/flex recorded the highest.
Seven of the 10 Phoenix submarkets saw a decline in vacancy, with West Central posting the biggest decrease of 1.8%. Glendale continued to remain the healthiest market with its vacancy at 4.3%, an all-time low there.
Southwest Phoenix retained the highest vacancy rate at 16.8%.
Demand for industrial real estate shifted momentum during the second quarter as the market posted positive net absorption of nearly 2.3 million square feet, bringing the year-to-date net absorption totals into positive range.
It has been more than a year since the Phoenix industrial market experienced this volume of absorption during a quarter. Every submarket ended the second quarter with positive net absorption. West Central Phoenix absorbed the most with 579,000 square feet.
Construction activity also showed signs of strength as the mid-year number for properties being build reached more than 2.6 million square feet.
New space that came online this year totals 842,000 square feet in 24 buildings.
Heavy competition for tenants continued to be prevalent everywhere.
The overall weighted average asking rate fell by three pennies to 54 cents. Most of the Phoenix’s areas reported a decline in rental rates during the quarter, with the biggest fluctuation occurring in Northeast Phoenix/Scottsdale with an eight-cent decrease.
Available sublease space at the close of the second quarter was about 2.4 million square feet,10% of the total available space in the market. That was lower than previous quarters, but continued to cause softening in the market.
Forecast
The short-term forecast for the industrial market is filled with cautious optimism, as concerns of the war in Iraq dissipated and consumer confidence improved.
Industrial real estate indicators support a recovery, with positive net absorption, decreased vacancy rates and new construction activity in the works.
Another highlight for the Phoenix industrial market: the availability of workers as the housing market is predicted to forge ahead at a record pace through the remainder of this year. n
