Real estate report: 3Q2019 Denver manufacturing update

By Dawn McCombs | Nov 07, 2019

Even amid federal interest rates cuts and speculation surrounding a national economic slowdown, Colorado's economy shows few signs of slowing. The Colorado Secretary of State has reported that Colorado's economy grew at an annualized rate of 3.6 percent, outpacing the U.S. average of 3.1 percent.

Across the U.S., current tariffs and uncertainties about further changes to U.S. trade policies have put a strain on the manufacturing industry. The Purchasing Managers Index, which is the main metric used to track activity within the manufacturing sector, recorded a contraction in the month of September. However, experts in the field in Colorado have reported they have not seen the same signs of recession that occurring in other U.S. markets. In their 2018 year-end report, consulting firm Manufacturer's Edge suggested that growth remains healthy in the Colorado manufacturing sector, with the state's main challenge being how to properly manage and sustain said growth.

This includes addressing labor scarcity issues by focusing on finding and developing the skilled labor necessary to sustain the sector's expansion. Nonprofits like CareerWise Colorado have begun offering apprenticeship programs across the state which provide young professionals with technical skills to help lessen labor scarcity in the manufacturing industry. There are also programs like Front Range Community College's Center for Integrated Manufacturing in Longmont, which is specifically focused on training students in the technology-based skills that have become increasingly important in the manufacturing field.

In concert with the sector's continuing demand, the manufacturing real estate market remained strong through the third quarter of 2019. Manufacturing vacancy ended the third quarter at 3.4 percent, 1.9 percent below the Denver industrial market at large. This number represented an 80-basis point drop from the second quarter, speaking to the need for manufacturing space. Net absorption remained positive through the third quarter, with 64,076 square feet (sf) recorded. This brought the year-to-date net absorption total to 110,811 sf, up significantly from 2018, which recorded negative net absorption of 422,609 sf.

As of the third quarter, there was 646,000 sf of manufacturing space under construction, including cleaning technology giant Kärcher's new North American headquarters at 24000 E. 64th Ave. in Aurora. The facility, which is equipped with a digital warehouse management system and a new manufacturing execution system, represents where the manufacturing industry is headed, with technology driving both processes and production for increased efficiency. Construction is down year-over-year, in part due to the tight land market in Denver. Tenants are instead looking to optimize their current space, with landlords working to entice new and expanding companies with upgraded facilities.

Manufacturing rental rates experienced a modest 2 percent increase quarter over quarter, ending the third quarter at $7.17. While rents in more saturated submarkets like East I-70/Montbello continued to hover around $6 NNN, tighter submarkets like the North and South Central are rising to $9-$11 NNN. This late in the real estate cycle, substantial rent growth is unlikely, though there are no indications rates will contract in the remainder of 2019, either.

Dawn McCombs is senior vice president of Avison Young's Industrial Group. Reach her at Download Avison Young's 3Q19 Industrial Research Report for Denver here and 3Q19 Manufacturing Report here.