CREJ - Office & Industrial Quarterly - June 2022
Despite recent macroeconomic uncertainty due to high inflation, rising interest rates, supply chain disruptions and geopolitical events such as the war in Ukraine, the Northern Colorado industrial real estate market (Larimer and Weld counties) remains very strong. Demand for industrial space in this area is being driven by strong population growth, logistical advantages due to transportation infrastructure (Interstate 25, Highway 85, I-76, Highway 34, and relative proximity to I-80 and I-70), along with changes in how consumers are acquiring goods.
The Larimer County submarket is comprised of key cities and towns such as Fort Collins, Loveland and Johnstown. According to CoStar, this market consists of approximately 22.3 million square feet of industrial space. Within the past 12 months, approximately 448,000 sf of industrial space has been delivered and about 520,000 sf was absorbed. Demand currently is outpacing supply, and the market is continuing to absorb new deliveries. The vacancy rate is approximately 3.7%, down slightly from 4.3% over the past 12 months.
Within our firm’s backyard of the I-25 corridor, Larimer County is a hotbed for new development activity, with United Properties, McWhinney, Hines, Amazon and others actively developing new logistics centric buildings. For example, Amazon’s 3.8 million-sf distribution facility is now under construction, and NAI and Newmark’s preleasing of United Properties’ Trade@2534 development has been incredibly strong, with much of the project committed concurrently with the completion of construction. Local, regional and national developers continue to regularly contact us, seeking sites to add additional product to the pipeline.
Much of the tenant demand continues to come from the food and beverage sector (including regional and last-mile distributors as well as manufacturers such as Bobo’s Oat Bars); construction-centric users (e.g., Home Depot and Pods); and, in some cases, technology and bioscience users. Rental growth also has been robust at 6.9% over this time. Within the last 10 years, rents have increased by a total of 55.4%. Market average rents are now $11.40 per sf, with most new Class A industrial distribution space falling in the range of $9 to $10 per sf, prior to amortizing additional tenant improvements or factoring in excess land for outside storage. Interestingly, the amount of flex space in Larimer County is disproportionately large (as a percentage of overall inventory at greater than 27%) in comparison to the Denver metro area and Weld County. Lease rates for flex space may exceed $14 per sf in some cases.
Cap rates in Larimer County tend to be near metro Denver levels, with average cap rates in the 6s and some sales of Class A assets trending as low as 4%. Some of these Class A assets are trending north of $200 per sf.
On the Weld County side of the county line, the market consists of approximately 27 million sf of industrial space. In contrast to Larimer County’s logistics focus, Weld County’s demand largely comes from oil and gas-, Agriculture- and manufacturing-related uses. Just over 80% of the state’s oil production occurs in Weld County, and it is the state’s top producer of dairy, beef cattle, sugar beets and grain, and rail-served industrial sites are more plentiful.
Within the last 12 months, 408,000 sf of industrial space was delivered, and 411,000 sf was absorbed in Weld County, decreasing vacancy rates nominally to 4.8%. Accordingly, rent growth continues in Weld County at an annual rate of 6.1%, with market rents being similar to Larimer County in most cases. From a capital markets perspective, investors also continue to value most assets similarly across county lines.
In wrapping up, the Northern Colorado industrial market continues to grow, while favoring landlords. New tenant demand can be a challenge to forecast given that this hot market continues to absorb more than 100% of the supply increases that we are seeing. In addition to macroeconomic conditions, the absorption of future supply will depend on the timing of new deliveries from the increasing number of developers seeking to capitalize on Northern Colorado’s favorable industrial market