Warehouse Distribution in Northern Colorado Forges On

NAI Affinity
September 26, 2022

CREJ - Industrial Properties Quarterly - September 2022

Prior to 2018, industrial distribution facilities that serviced the Northern Front Range were concentrated in the Denver metro area. Most large industrial construction in Northern Colorado was for a specific  purpose. The Hewlett-Packard facilities in Loveland and Fort Collins, the Waterpik manufacturing facility and the Walmart distribution facility are good examples. Developers weren’t building 50,000-square-foot (or larger) facilities on a speculative basis.

Eventually development of warehouse/distribution facilities expanded into Northern Colorado. Loveland developer McWhinney, once again, “got ahead of the inevitable” and started the trend in 2015 with the construction of the 83,500-sf Building 1 on Aldrin Drive, the first of many distribution warehouses it built in Centerra. Eventually, regional and national developers took notice. The thirst for “last mile” distribution space and lack of suitable facilities started a boom in warehouse/distribution development along the Interstate 25 corridor north of Denver.

The concentration of new industrial development is along the Interstate 25 corridor from Longmont to Fort Collins. There still are special use facilities being built in this area as well. Amazon is under construction on a 3.87 million-sf facility just north of the  Northern Colorado Regional Airport. Smuckers built a 400,000-sf production facility in Longmont, and Federal Express recently completed a 129,387-sf shipping facility in Mead. Distribution and warehousing of consumer products and other materials does not require the unique configuration of special use facilities. Most distribution warehouses have 24- to 32-foot clear height, several dock high and a few drive-in bays, modest power requirements and minimal  office build-out.

We reviewed recent speculative construction of warehouse/distribution facilities in  Larimer, Weld and Boulder counties. The sample set we extrapolated from CoStar in early August  contained 49 properties that have been constructed in the time frame of 2019 to the present and are 50,000 sf or greater.

The average new industrial/distribution facility is a building of around 88,000 sf occupying a 6- to 8-acre site. It has four drive-in doors and 15 dock-high doors with 24- to 32-foot clear height. Most buildings are between 24- and 28-foot clear. The sites will accommodate 128 parking spaces for cars and tractor-trailers. Most developments have larger sites with multiple buildings that share common elements and buildings that vary in size. A good example is Trade at 2534 in Johnstown, which is being developed by United Properties. The plan details a development of three buildings of 73,000,  45,000 and 62,500 sf, respectively, on a 16-acre site.

Northern Colorado currently has 3.1 million sf of distribution warehouse in inventory, with 1.4 million sf under construction. Construction is down 2.9% from the prior period due to increasing construction costs and the time that it takes to develop product in Northern Colorado. Rising interest rates and a looming recession may slow development further in the coming months.

The 12-month net absorption in this sample set was 622,000 sf, up slightly from the previous period, when 620,000 sf were absorbed. The vacancy rate for the existing properties in the sample set is 5.1%, according to CoStar’s published data. Generally, whatever is built is quickly absorbed.

There is little preleasing prior to the building nearing completion, which makes developers nervous. Several factors contribute to this situation. Construction timelines are sometimes unpredictable because many municipalities are understaffed and can take several months to review and approve building  permits; issues related to availability of construction materials and labor; and the nature of the world we live in with a pandemic, regional unrest and a looming recession.

Base market lease rates (excluding triple net expenses) for new construction have increased by 7.8% compared to the previous period and are now estimated to average $12.23 per sf. The average base lease rate in the previous three years was $10.79 per sf. Likewise, the average tenant improvement allowance was $12.67 per sf. Sales prices are up 7.1% compared to the previous period, averaging $199 per sf based on delivery of the building in core-and-shell condition. Sales prices are significantly higher for an investment-grade asset that is fully leased to a quality tenant on a long-lease term.

Warehouse/distribution space is in high demand in Northern Colorado, and all signs point to activity continuing for several more quarters. We anticipate some changes that may help costs both to developers and to tenants. As the increase in construction costs begin to flatten, lease rates will follow suit. With this flattening of lease rates, rental growth rates will be closer to historical norms of 2% to 3% escalations annually instead of the almost 8% in the previous periods. Absorption will remain strong, and vacancy rates will remain low.

"Warehouse Distribution in Northern Colorado Forges On", written by: Joe Palieri, CCIM, and Lauren Larsen, Licensed Real Estate Assistant, NAI Affinity

Source: CREJ - Industrial Properties Quarterly - September 2022 - Page 21 & 35

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