2020: A Tale of Diverging Markets in Northern Colorado
2020 was a struggle for most people either physically, financially, psychologically, or some all three. Vaccines are being rolled out nationwide, however slowly. 2021 should deliver a gradual return to normal but, according to our new president, not until Christmas. So, 2021 will still be challenging for individuals and their families and businesses. At least we are not in Texas!
In this article I will detail how the Industrial and Office markets performed in Larimer and Weld Counties in 2020.
The Industrial market in Larimer County was very strong. Vacancy rates increased but are still only 4.4%, Lease rates grew another 2.5% to $10.18. That lease rate is skewed by larger leases at lower rates. If you are looking to lease industrial space under 20,000 square feet, it is difficult to find a base lease rate below $12.00 plus triple net. In 2020, new costruction delivered almost 400,000 square feet to the market. Larimer County had only 63,000 square feet of negative net absorption. An impressive number given the almost complete economic shutdown from mid-March through the end of May and all the new construction. New construction will be just as strong in 2021 and demand does not seem to be slowing.
Larimer County Industrial sales set a record of $160,000,000 for approximately 2,000,000 square feet of improved property for the year. The average sale price for Larimer County reported by CoStar was $83 per square foot. Three notable sales occurred that were significant and skewed the average sale price dramatically.
Building 4 at Centerra Industrial Park in Loveland was completed in 2018. It consists of 122,807 square feet and was leased to Amazon on a 10-year contract in 2020. It sold to an investor for $32,630,00 ($266 per square foot.)
Two other sales were on the opposite end of the spectrum. 815 14th Street SW in Loveland, the former Agilent Campus, now referred to as Rocky Mountain Center for Innovative Technology (RMCIT) and 3800 N Wilson Avenue, the Woodward Governor Loveland Campus. Woodward was purchased by Martin Lind’s Water Valley Development company.
The RMCIT property, a 4-building complex consisting of a total of 811,757 square feet sold for $15,500,000 or $19.09 per square foot. The Woodward building consists of 209,000 square feet and sold for $4,225,000 or $20.22 per square foot.
By removing these three transactions from the calculations the average sale price of industrial sales in 2020 becomes $137.28 per square foot which is much more reflective of the actual market. This average price reflects core and shell delivery with minimal finish.
The Industrial market in Weld County slowed a bit but is still strong and growing again. The vacancy rate of 4.65% grew from 2.5% but is still very good, Lease rates are at an all-time high of $10.54 per square foot. The 2020 market delivered almost 526,000 square feet of new construction. By contrast, the 2019 market delivered over 734,000 square feet. Most of the starts were in Q2 of 2020. Construction activity slowed dramatically in Q3 & Q4. That slowing trend has turned around as 559,000 square feet are now under construction. Weld had only 52,600 of negative absorption in 2020. Industrial Sales volume was $102,000,000 at an average price of $115 per square foot.
Weld County may see an increase in demand for industrial space as oil prices rebound after the disruption to the supply due to the disaster in Texas caused by the cold snap on 2/12/2021 – 2/20/2021. According to CoStar over one-third of Colorado’s oil and gas wells are in Weld County. As of this writing, West Texas Intermediate Crude (WTI) was at $61.03 per barrel. A year ago, pre- pandemic, it traded at $53.88 before dropping to a low of -$37.63 (yes negative) on April 20, 2020.
To summarize, Larimer and Weld industrial markets are very similar in activity. The pace of new construction in Weld County decreased in mid-2020 but has picked back up. Lease rates are historically high and vacancy rates are low in both markets. Larimer County prices tend to be 10 – 15% higher than Weld County.
The office markets began to see struggles as the effects of the Covid-19 pandemic took hold. Most businesses, that are able, have minimized office staff. Companies have transitioned to a work at home environment using Zoom or other online products to hold meetings. That trend is expected to continue for a while, but employers and employees miss the social aspect of seeing an collaborating with colleagues.
The pandemic hit the Office market hard in Larimer County. Vacancy rates have increased to 7.9% almost double from a year ago. Lease rates are down less than 1% to $23.09 but I expect more downward pressure as the year progresses. 2020 delivered only 89,000 square feet of new construction to the market. CoStar is reporting 381,000 square feet of negative net absorption.
The Office market in Weld County mirrors Larimer as you might expect. Vacancy rates have increased to 5.6% double from a year ago. Lease rates are down less than 1% to $19.63. Only 25,000 square feet of new construction was delivered to the market in 2020 and none is under construction. CoStar is reporting 131,000 square feet of negative net absorption over the last 12 months.
So, Office bad, Industrial good. Analytics are moving in the wrong direction for office as you might expect. While things are bad now, we have not completely fallen off a cliff as we did in 2009. If the vaccine is effective and life returns to a semblance of normal, we should recover nicely. Northern Colorado is still one of the most desirable places to live in the country.
'2020: A Tale of Diverging Markets in Northern Colorado', written by: Joe Palieri, CCIM, Advisor, NAI Affinity