Real Estate Report: 4Q19 Denver manufacturing update

By Dawn McCombs | Feb 04, 2020

Denver ended the decade with continually strong economic fundamentals, including an unemployment rate of just 2.5 percent and an estimated GDP growth of 2.3 percent year-over-year. The commercial real estate market -- and the industrial and manufacturing sectors in particular -- continue to reap the benefits of the city's diverse economy and booming population. Although tariffs and uncertainty surrounding future changes to U.S. trade policies have caused national slowdowns within the manufacturing sector, the industry continues to see growth in Denver heading into 2020.

According to the 2020 Colorado Business Economic Outlook produced by the University of Colorado's Leeds School of Business, manufacturing employment is set to expand for the tenth consecutive year in 2020, driven by the increase in the food/beverage, chemical, and machinery subsectors.

However, the industry's growth could be hampered by labor shortages, which persist in Colorado despite the influx of new residents over the last ten years. Across the state, manufacturing companies have identified labor as the top impediment to growth, a problem which has been aggravated by new immigration restrictions. The immigration policy changes have had the greatest effect on the food and beverage subsector. For more technical subsectors like chemical and biomedical, the emphasis remains on finding labor with the proper expertise. With technology playing an increasingly important part in both manufacturing processes, programs like Front Range Community College's Center for Integrated Manufacturing will continue to play a pivotal role in sourcing and training the skilled labor needed to sustain growth.

Demand for manufacturing space remained strong through the end of 2019, and the sector concluded the fourth quarter with 3.4 percent vacancy, 2.3 percent below the industrial vacancy at-large. There was no change in the vacancy rate from the third quarter of 2019 to the fourth, but strong net absorption in the fourth quarter could suggest the figure will drop in 2020. The manufacturing sector recorded 629,845 square feet (sf) of positive net absorption in 2019, up from the 2018 year-end total of negative 181,457 sf. Manufacturing rates continue to grow given the subsector's low vacancy rate, through the rate at which rents are growing has leveled off somewhat since the peak of the cycle in 2016-2017. Whether they will continue to escalate in 2020 will depend on whether the manufacturing industry continues to expand or if tariffs, labor shortages, and economic slowdowns curtail demand.

On the investment side, manufacturing remains white-hot with investors, who are drawn to the industry's promising growth trajectory and the sector's low vacancy rate and comparably higher rents. With a growing emphasis on fresh foods within the American diet, cold storage in particular has become a popular target for investors, benefiting from greater clear heights which translate to higher rents. With the tight labor market and tariffs affecting the construction industry as well, developers seeking to break into the cold-storage subsector are increasingly electing to retrofit existing buildings with the necessary refrigeration capabilities, particularly in the dense urban submarkets. Cannabis tenants are also putting upward pressure on property values, with investors eager to capitalize on the boom of the CBD oil industry.

Dawn McCombs is principal at Avison Young. Reach her at Download Avison Young's 4Q19 Industrial Research Report for Denver here.