CBRE Global Research and Consulting

Denver IndustrialMarketView Q4 2013

2013 proved a strong year for Denver’s industrial market, as key real estate fundamentals improved notably year-over-year. Healthy demand supported growth in the market in the first three quarters of 2013, despite lingering global and national economic challenges. The fourth quarter of 2013 (Q4 2013) was no different, posting the 15th consecutive quarter of positive net absorption figure. With 144,924 square feet (sq. ft.) of positive net absorption in the quarter, tenant demand was steady, pushing both vacancy and availability rates lower. Elevated construction in large block Class A space continued, as the availability of quality space was increasingly limited. The small business, third-party logistics, and energy sectors all contributed notably to heightened leasing activity, pushing direct vacancy and total availability rates down to 4.6% and 6.8%, respectively. Additionally, with such limited

Chart 1: Vacancy Rate vs Lease Rate

availability in the market, build-to-suit, build-to-own and speculative development activity increased notably over Q4 2012.

Average direct asking lease rates increased to $6.10 sq. ft. triple net (NNN)—an increase of $0.05 from the previous quarter, largely attributable to heightened leasing activity in Class A space in the quarter. The largest transaction of Q4 2013, was Czarnowski Display Service’s prelease of 258,000 sq. ft. at 9700 E 56th Ave in the Airport/Montbello submarket.

Q4 2013 also recorded an uptick in investment sales volume, with several large transactions finalized. Additionally, increased owner/user sale activity continued as several notable purchases, the largest of which was 54,280 sq. ft. warehouse at the Denver Commerce Center 2 Concord for $4,559,520, or $84.00 per sq. ft. With activity increasing sharply in the second half of 2013, sales volume neared pre-recession levels in Q4 2013, and is on pace to reach or surpass 2007 levels in 2014.

Hot Topics

• UNFI building sells for $46.4 million in the Airport/Montbello submarket

• New construction activity elevates to 2.6 million sq. ft.

• Direct asking Lease rates rise notably

• 15th consecutive quarter of positive net absorption

Quick Stats

Q4 2013 Current Yr.1 Qtr.1

Direct Vacancy 4.6% i i

Total Vacancy 5.2% i i

Lease Rates $6.10 h h

Net Absorption 145k i i

Under Construction 2.6M h h

Q4 Completions 66k i i

CONSTRUCTION ACTIVITY CONTINUES TO RISE IN DENVER’S INDUSTRIAL MARKET

2.5%

3.2%

3.9%

4.6%

5.3%

6.0%

Q4 2013Q3 2013Q2 2013Q1 2013Q4 2012Q3 2012

4.6% Lease Rate $6.10

Direct Vacancy Rate

$4.50

$5.00

$5.50

$6.00

$6.50

$7.00

1The arrows are trend indicators over the specified time period and do not represent a positive or negative value. (e.g., absorption could be negative, but still represent a positive trend over a specified period.)

U.S.GDP4.1% Q3 2013

U.S.UNEMPLOYMENT7.0% November

INDUSTRIALPROD. INDEX101.3 November

US PMI57.3% November

DENVER/BOULDERUNEMPLOYMENT6.1% November

YTDABSORPTION1.7M

*Arrows indicate change from previous year.

Source: CBRE Research, Q4 2013.

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MARKET STATISTICSDENVER INDUSTRIAL

Table 1: Market Statistics

Market Rentable AreaDirect Vacancy

Rate %Net

Absorption SFUnder

Construction SFAverage Asking Lease

Rate -$ SF/YRAvailability

Rate %Total Vacancy

Rate %

Airport/Montbello 62,921,872 6.1% 136,369 1,438,363 $3.92 9.0% 6.4%

Aurora 6,646,449 5.1% 33,008 250,000 $8.00 8.9% 5.1%

Boulder 14,213,699 5.3% (290) $9.22 9.9% 8.5%

Central 12,963,466 1.0% (10,334) $5.77 1.4% 1.0%

Commerce City 15,811,307 1.7% 60,111 $5.89 2.3% 1.7%

Longmont 6,028,875 10.2% 65,651 $7.53 20.5% 17.6%

Midtown 581,357 0.0% - $- 0.0% 0.0%

North 10,066,534 7.8% (301,051) $4.05 8.0% 7.8%

North Central 23,037,756 2.4% (21,620) $4.96 3.0% 2.4%

Northwest 23,466,041 3.6% 43,898 534,142 $6.91 5.8% 4.5%

Southeast 16,188,385 6.4% 121,488 360,932 $8.80 7.3% 6.4%

Southwest 21,743,711 4.0% (1,946) $6.88 5.1% 4.0%

West 10,535,057 3.1% 19,640 $6.85 7.2% 3.1%

Denver 224,204,509 4.6% 144,924 2,583,437 $6.10 6.8% 5.2%

ECONOMIC/UNEMPLOYMENT Economic indicators improved notably throughout 2013. In particular, Q3 2013 recorded annualized GDP growth of 4.1%, the strongest pace since Q4 2011. Additionally, the Mountain States Consumer Confidence index increased to 80.7 in November, up 11.1% from October and a notable 18.5% year-over-year. In large part, optimism has returned, as many of the lingering near-term macro concerns relating to political gridlock and monetary policy have subsided. Although gains in national and regional indicators don’t always reflect local economic health, they serve as evidence of an overall shift in the pace of growth. The combined Denver and Boulder metro areas’ seasonally adjusted unemployment rate again decreased to 6.1% for November, well below the state and national rates of 6.5% and 7.0%, respectively. CONSTRUCTION ACTIVITYConstruction activity in 2013 increased notably over 2012 levels, with 2.6 million sq. ft. is under construction at end the year. A steady increase of industrial supply hit the market during the second half of 2013, with more expected to deliver in early 2014. 2013 saw a rise in speculative development as tenant demand strengthened across the market. With speculative development looming on the horizon, rent growth will increase as deliveries continue in 2014. One of the larger projects that broke ground in the quarter is a 175,841 sq. ft. warehouse in the Southeast submarket. Park 12Hundred, a ±500,000 sq. ft. warehouse building in the Northwest submarket, is well underway and expected to deliver in Q3 2014. The most notable delivery in the quarter was the 66,910 sq. ft., Flex R&D Class A, Concord Business Center Building Three in the Southeast submarket.

Chart 2: Unemployment Rate

Chart 3: Construction Activity vs Absorption

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Denver

CO

US

YTD 2013y2012y2011y2010y2009y2008

7.0% Colorado 6.5%

Denver/Boulder 6.1%

U.S.

SF Under Construction 2.6M sq. ft. Absorption YTD 1.7M sq. ft.

-1.0M

0

1.0M

2.0M

3.0M

4.0M

5.0M

201320122011201020092008

Source: U.S. Bureau of Labor Statistics, November 2013

Source: CBRE Research, Q4 2013.

Source: CBRE Research, Q4 2013.

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VACANCY/AVAILABILITY/ABSORPTIONDenver’s economic growth, and subsequent increase in tenant demand, in 2013 propelled the industrial market to positive net absorption and declining vacancy. Shrinking availability and falling vacancy levels in Q4 2013 marked the 15th consecutive quarterly increased occupied space. Year-to-date net absorption figures posted positive 1.7 million sq. ft., with the final quarter of the year contributing positive 144,924 sq. ft. to this total. Vacancy fell to 4.6% down 4 basis points from Q3 and 38 basis points year-over-year, while availability rested at 6.8%, down from 7.5% a year ago. As the market again constricted year-over-year and quality space remained scarce, vacancy will likely continue to decrease even with the surplus of construction activity in the pipeline. One noteworthy example of 2013’s preleasing trend was the Czarnowski Display Service prelease of 258,000 sq. ft. at 9700 E 56th Ave in the Airport/Montbello submarket. The driving industries behind tenant demand, remained consistent with food production & distribution, construction, and third party logistics leading the way.

AVERAGE ASKING LEASE RATESThroughout 2013, weighted average direct asking lease rates lagged compared to other real estate fundamentals. However, Q4 2013 posted an increase in response to the impressive growth in demand during the past several quarters. Direct asking lease rates increased by $0.05, to $6.10 per sq. ft. NNN in the quarter and were up $0.12 from Q4 2012. Although rates still remain below pre-recession highs, leasing activity increased in the quarter, and 2013 proved a strong year for the market. The highest asking rates in the Denver Market fell in the Boulder submarket at $9.22 per sq. ft. NNN, while the Airport Montebello submarket was home to the lowest at $3.92 per sq. ft. NNN. Flex R&D space continued to demonstrate strong demand through elevated lease rates, ending 2013 at $8.75 per sq. ft. NNN up $0.21 quarter-over-quarter. With confidence amongst landlords in the market and new developments set to deliver in the coming year, lease rates in Class A space are likely to elevate notably in 2014.

INVESTMENT TRENDSInvestment activity in 2013 increased as Metro Denver saw a consistent flow of interested capital throughout the year. This capital inflow also drove down cap rates notably, to pre-recession levels. Year-to-date sales volume elevated over 2012, thanks to improved year-end activity. While institutional investment opportunities were still few in number, over 15 private capital transactions closed in Q4 2013, and a steady flow of prospects remained active. The largest sale of Q4 2013, and for all of 2013, was the purchase of the United Natural Foods Inc. building by industrial Income Trust, Inc. for $46.4 million, or $83.70 per sq. ft. Heightened demand, coupled with constricted availability, has made the market attractive to investors and developers, as evidenced by the arrival of speculative development and the sharply increased level of investment activity in Q4 2013. In 2013, Denver firmly rooted itself on national investors’ radar, and 2014 should continue to see elevated activity with investors taking advantage of competitive pricing and robust fundamentals.

Chart 4: Vacancy/Availability/Absorption

Chart 5: Average Asking Leasing Rate

Chart 6: Investment Trends

145k sq. ft.Direct Vacancy 4.6%

Availability 6.8%

Absorption

2.00%

3.25%

4.50%

5.75%

7.00%

8.25%

0k

200k

400k

600k

800k

100k

120k

Q4 2013Q3 2013Q2 2013Q1 2013Q4 2013Q3 2012

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

Flex/R&DWarehouse/Distribution

Manufacturing

Q4 2013Q3 2013Q2 2013Q1 2013Q4 2012Q3 2012

$5.28$4.87 Overall

$8.75$6.10

$225MAverage PPF $59.87Volume by $

$0M

$100M

$200M

$300M

$400M

$500M

$600M

$30

$40

$50

$60

$70

$80

$90

201320122011201020092008

Source: CBRE Research, Q4 2013.

Source: CBRE Research, Q4 2013.

Source: CBRE Research, Q4 2013.

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U.S. RESEARCH

Daniel Clark Regional Research Operations Manager Denver Research CBRE 8390 E. Crescent Parkway, Suite 300 Greenwood Village, CO 80111 t: +1 720 528 6300 e: daniel.clark@cbre.com

CONTACTSFor more information about this Denver MarketView, please contact:

GLOBAL RESEARCH AND CONSULTING This report was prepared by the CBRE U.S. Research Team which forms part of CBRE Global Research and Consulting – a network of preeminent researchers and consultants who collaborate to provide real estate market research, econometric forecasting and consulting solutions to real estate investors and occupiers around the globe.

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MARKET OUTLOOKThroughout 2013, Denver’s industrial market continued to tighten, despite the challenges of a recovering global and local economy. Positive net absorption figures, shrinking occupancy rates, and elevated construction defined the market in the face of questions surrounding the fragility of underlying economic fundamentals in 2013, as tenant demand outweighed uncertainty. While increased activity has led to a historically tight market and elevated lease rates, Denver remains attractive to tenants relative to many other markets in large part due to its highly educated labor force and business friendly environment. Additionally, Metro Denver’s industrial market will continue to benefit from businesses relocating operations to Colorado for its central location and high standard of living. Additionally, with several consecutive quarters of positive fundamentals, there is great reason for continued optimism. Considering its strong underlying growth, Denver’s industrial market continues to be attractive to developers and investors as the national economy’s recovery accelerates.