Tim D’Angelo, SIOR, Senior Managing
Director for Newmark Grubb Knight Frank,
has been actively engaged in the Denver
market for more than two decades. His
market and client expertise in Industrial
investment and user sales, leasing, build-to-suits, industrial park development and
vacant land sales is a testament of his 29-year
industry track record.
From Equilibrium to
Tightening Secondary Markets Approaching a Stall
By Tim D’Angelo, SIOR, and Mike Wafer, SIOR
For Denver and other second-tier markets, speculative construction has been minimal to non-existent over the past five years. The most recent downcycle as a result of the “Great Recession” as we all have experienced, created deeper fundamental changes to the development industry and our collective market behavior. The lower populated,
mainly inland, markets are the last to recover from the distressed economic environment of the
past few years. As they return to a healthy supply cycle with continued recovery and industrial
space demand on the rise, we are running out of space and an aging real estate asset stock.
Mike Wafer, SIOR, a veteran in the
Commercial Real Estate Industry and a
Denver native, is an Executive Managing
Director for Newmark Grubb Knight Frank.
Mr. Wafer focuses the majority of his efforts
within the Denver metropolitan industrial
market specializing in acquisitions,
dispositions, leasing, build-to-suits and
vacant land sales.
The Sky is Falling
During the Great Recession, many tenants renewed at a voracious pace, pouncing on rate reduction
fueled by market conditions and fear that the sky was falling. Tenants seized this opportunity by
extending lease terms prematurely as many landlords chose to reduce rent under the terms of a lease
renewal rather than risk losing the tenant later should the economy worsen.
Markets experienced a rewriting of rental rates and a flight-to-quality while little space was
given back. This had the net effect of essentially creating artificially low rental rates, leaving
a bitter taste in the mouths of many landlords. While some owners weathered the storm, down
only 10 percent from pre-recession levels, there is lingering evidence of rental comps, estimated 25 percent below rates, needed to justify new construction due to tenants locking in low
rates. As it turned out, the small businesses were much more affected than corporate America
when it came to industrial space, the true vacancies occurred in the smaller blocks of space.
So this was our experience, but in looking at historical reality, the sky never did fall. The
market activity continued while construction all but ceased during the economic crisis. The
demand for class “A” modern buildings continued as tenants locked in less than normal economic rents. Now we are out of product—unless you are seeking an older, nearly functionally
This low rental-rate environment is about to change as rates adapt to the market conditions
upon lease renewal. In the Denver market, we are beginning to see elements foreshadowing a
stalled market: existing price levels, rates rising 10-25 percent upon renewals to reach market
levels, continued absorption and a constrained market with little to no supply-new or old.
Without any new product, market conditions will likely progress to a level where the underserved market moves beyond equilibrium, resulting in a stalled market.