Population growth has slowed in Denver in recent years, just as inflation and economic uncertainties have accelerated, which is beginning to weigh on the once booming industrial market. Denver’s industrial leasing activity remains elevated but has moderated from the highs experienced in 2021 and early 2022. Vacancy has consistently risen here since mid-2022, as elevated new deliveries have coincided with slowing absorption. At 6.2% as of 23Q2, Denver has one of the highest industrial vacancy rates among the 30 largest U.S. markets.
There is still a significant amount of space available in new construction as preleasing rates are lower than in most major markets. As a result, the market’s vacancy rate looks likely to rise further in 2023.
The impact of newly built industrial space will vary across the market. Areas with already high availability rates and a slew of new construction project deliveries on the horizon, like North and Northeast Denver, could see leasing timelines extend further as tenants have more options to choose from. As a result of the recent highway project along I-70 West completing, big box availability should remain tighter in the East I-70 submarket as tenants return to Denver’s traditional industrial node. The small bay market, particularly in West Denver, remains exceptionally tight with little in the pipeline, indicating that availability will remain scarce in this segment of the market in the near term.
Rent growth is already decelerating, a trend that is expected to continue in 2023 due to projected rising vacancies. The 2023 forecast has rents falling below the 1 0-year average for annual rent growth. The robust pipeline will have an outsized impact on big box fundamentals, and those properties will likely see the most downward pressure on rent growth. However, nationally there is a pullback in construction starts. If that takes hold in Denver, the market could begin to tighten and therefore support a reacceleration in rent growth by late 2024.
Investment volume slowed in the first quarter, falling to the lowest level recorded in more than five years. The rapid increase in the cost of debt is weighing heavily on overall industrial deal flow as the gap between buyer and seller expectations widens. Transaction pricing growth has leveled off in the last six months after accelerating during the booming 2021 and early 2022. As credit markets continue to tighten, there could be additional pressure on deals in 2023.
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