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Hot industrial market may be turning to ‘murky’

With commercial real estate properties leaking oil across the nation — some say in advance of a catastrophic downturn — Northern Colorado is still showing some bright spots.

Some. Because those bright spots come in terms of fairly specific industrial properties, largely located along the major transportation corridors and featuring industrial users with the need and the where-with-all to get deals done.

“I have a lot going on,” said Jeremy Kroner, senior vice president of Advisory and Transaction Services with CBRE Boulder. “They are bifurcated with a lot of development along the I-25 (U.S. Interstate-25 corridor and on (U.S. Highway) 36.”

Kroner said there are nine industrial buildings being built along the I-25 corridor, with another four having recently been built, with most of the activity between 120th Avenue and Colorado Highway 7. “That’s something we don’t see a lot,” he added.

On the U.S. Highway 36 corridor, he said, the action is largely between southern Broomfield and Boulder. He said the action has been firms expanding west from Broomfield and east from Boulder.

Industrial companies, especially in highly technical industries, “love being close to Boulder, … but their options are really really running low.”

The Colorado Tech Center in Louisville, first developed in the early 1980s, recently built out. Redtail Ridge, a 475-acre parcel of land situated at the intersection of U.S. 36 and Northwest Parkway in Louisville that formerly housed StorageTek, is stalled amid some fairly serious political concerns.

“The future, for me, is a little murky,” Kroner said.

Nationally, a lot of experts are calling that future dark.

A Morgan Stanley research team recently forecasted a 27.4% peak-to-trough price drop for all commercial property types through the end of 2024. Though office real estate led that trend it applied to all three sectors, office, retail and industrial.

Of course, Colorado, especially Northern Colorado, is a different economic environment from most of the nation. But money is money around the world, and so is the price of money, and so when lending gets tight so do the deals.

And that’s the catch where a lot of businesses, at least industrial and retail, are in today, said Jarad Goodman, the managing director at Cushman & Wakefield in Fort Collins. “We’re looking at deals being much more difficult,’ he said about lender hesitancy.

This doesn’t mean that industry and retail businesses aren’t looking to expand in Northern Colorado. But it does mean large segments of those markets are not able to do so, given the lending market conditions.

“It hasn’t affected it as much as you think, and the data is in arrears, but all segments have gone down,” Goodman said. The industrial segment’s sales volume in Larimer County was down year-to-date from $177 million to $113 million, he said. In Boulder County, the year-to-date figures were $118 million, and in Weld County, $65 million, according to CBRE data.

There is still spec building occurring, but up and down Northern Colorado it’s much the same, catering to those businesses that have the where-with-all to expand in a tightening credit market.

Kroner said further south it’s about tenants “who have been able to absorb the rate occupancy costs,” principally advanced high-tech industry in medical fields, or perhaps battery manufacture. This is after a great deal of property previously went to distribution centers in and after the pandemic.

“If you are manufacturing medical devices you can absorb those increases, but maybe not if you manufacture widgets,” Kroner said.

Up north, it still means a lot of distribution centers, highlighted by Amazon’s recent distribution center in Loveland. But other distribution companies, along with other businesses, such as construction companies in need of fleet storage, are also in that mix.

Oil and gas companies have been a strong component of industrial sales, usually requiring outdoor storage, as well. There’s also a rather unusual industrial subset of beer brewers, led of course by Anheuser-Busch, but also supported by a large number of craft brewers and more traditional industries revolving around agriculture.

“If you dissect each product type, it’s really industrial with outdoor storage,” that’s selling, especially in the I-25 corridor, Goodman said. 

But the key is these are companies with a distinct need to expand, and also able to afford higher lease rates.

The problem just doesn’t lie in the interest rates alone, Goodman said. A great deal of the slowdown in sales volume also lies in the expectations from the way the property was originally financed, a concept usually referred to as cap (or capitalization) rates.

In its simplest terms, if an investment firm bought land for $10 million, and it generates $1 million in income every year, then the cap rate is 10%, meaning the firm will get back its original investment in 10 years. 

That’s pretty simple math, and close to the truth when those firms are paying 3% interest on the loans used to buy the property. But when interest rates hit 7% then those investment firms have to rethink their cap rates or continue sitting on the property, as is, effectively removing it from the market.

“The market is going to equalize, and cap rates have to catch up with the interest rate,” Goodman said. “Until that narrows it doesn’t equalize.”

Source: BizWest