Industrial Real Estate: The Preferred Investment Type

Denver recently ranked top 10 in a CBRE survey that asked investors which metro was the most attractive for investment properties in the Americas (CBRE’s 2018 Americas Investor Intentions Survey). Denver ranked No. 7, up from No. 8 in 2017. When asked about preferred asset types, 50 percent of respondents chose industrial as the most attractive investment property type in 2018, up from 38 percent in 2017.

With the collection of cranes in downtown Denver building office space and apartments, how did industrial real estate become the favored investment type? Short answer, demand.

INDUSTRIAL REAL ESTATE + POPULATION GROWTH

From 2010-2016 Colorado was the 4^th fastest growing state in the U.S. according to census data. With a metro population north of 3 million people now (including Boulder), Denver has emerged as a major, self-serving, distribution hub.

How does that relate to industrial real estate?

Think about it, when you order something online or go to a store to pick something up, that item was most likely in a distribution center at some point. When population growth is strong, it translates to more consumers looking to get products quickly, which in turn drives demand for industrial space to house those products nearby.  

This graph shows how closely industrial construction and year-over-year population growth have aligned since the mid 90s. However, construction after the financial crisis in 08/09 literally stopped; but this time population growth stayed elevated. People continued to move to the Denver metro area, demand for industrial space was increasing, and yet the industrial supply stayed stagnant. Developers are now trying to catch up with demand as new construction nears highs Denver hasn’t seen for the past 15 years.

WHY INVESTORS PREFER INDUSTRIAL

Investors like security.

Denver industrial real estate has seen positive net absorption for 30 consecutive quarters; there aren’t many metro areas that can say that. That’s 30 straight quarters of industrial users moving into more space than moving out.

So why did industrial investment sales only account for 7.7 percent of the total Denver investment sales volume in 2017?

The main reason is due to a lack of supply. Investors have a heavy appetite for investment-grade industrial real estate, and developers are still trying to catch up with that demand. If more industrial properties were available for sale, we would see industrial taking a larger share of overall investment sales volume in Denver.  

From an ownership standpoint, industrial real estate is also attractive because it is often low maintenance compared to other commercial real estate sectors. A single industrial tenant can easily occupy well more than 100,000 square feet, whereas in other types of properties you could be managing five, 10 or over 50 different tenants within the same-sized footprint. Not to mention warehouses are typically large, open space with less upkeep than other buildings. Couple that with increasing rent rates driven by the high levels of demand for industrial space in Denver, investors have an attractive opportunity.

Sam Dragan with CBRE Industrial & Logistics Services in Denver