Market Trends
A New Kind of Green
The cannabis industry has transformed Denver's industrial market, according to Avison Young's first quarter 2015 industrial report. The marijuana industry added $700 million in revenue to Denver's economy during 2014, and 2015's projection is approximately $1 billion. The overall vacancy rate for industrial and flex buildings fell to an all-time low of 3.6 percent, down from 5 percent in 1Q 2014. Leasing activity was also up during the first quarter, with 2.6 msf leased during 1Q15, a 13 percent increase over last year's 2.3 msf. In addition, rental rates are up 10 percent YOY, averaging $7.47 psf for 1Q15, the highest recorded industrial rents for the Denver metro. Last year, commercial real estate company Xceligent estimated that marijuana cultivation and manufacturing facilities in Denver occupy at least 4.5 msf of the 256 msf Denver metro market. Several large developers are building an additional 1.6 msf, with about 21 percent preleased at delivery at year-end.
With marijuana legal in 23 states, cultivation and sales created a $2.7 billion economy in 2014. However, the business remains a federal offense, and properties housing marijuana activities are subject to seizure by federal agents. Industry experts estimate the federal ban will fall in 2020.
Tenant Star Legislation Passed
In April President Obama signed into law the Energy Efficiency Improvement Act of 2015, which establishes the voluntary Tenant Star program. Based on the Energy Star program, Tenant Star provides certification and recognition for tenants and landlords of leased commercial spaces that achieve energy efficiency through common-sense measures in the design and construction of their buildings. It's estimated that the Tenant Star program will cut utility bills for landlords and tenants by an estimated $2 billion by 2030.
Briefly Noted
Hospitality - Canada saw nearly $1.2 billion in hotel assets trade last year, with 15 percent bought by foreign investors, according to HotelNewsNow.com. Full-service hotels commanded 52 percent of the total volume, while select service made up 27 percent of the trades. Select service price per key rose 11 percent YOY to $101,800, the highest increase in all Canadian hotel segments.
Industrial - Unlike other property sectors, industrial laughed in the face of 1Q15's severe weather challenge, posting a 38.8 msf absorption rate, a 20.5 percent YOY increase, according to DTZ. What's more, asking rents posted a 4 percent YOY increase - the fastest in this cycle - with seven markets seeing double digit rent growth and 12 others averaging 6 percent or better.
Office - The period 2015 to 2017 should be “the strongest three years of economic growth in the U.S. since 2004-06,” reports Cushman & Wakefield. Office absorption over the next three years is expected to total 175 msf, more than the past eight years combined. Average asking rent growth should post just under 5 percent in 2015 and 2016 and 3.6 percent in 2017, above the 10-year average of 2.8 percent.
Multifamily - Luxury rules the day: 82 percent of the multifamily units built in 54 metros between 2012 and 2014 command rents in the top 20 percent of the market, according to CoStar. What's more, the price premium on new units is 21 percent higher than existing stock; a decade ago that figure was 9 percent, according to MPF Research. Meanwhile the median rent paid by millennials is $925, reports the Urban Land Institute.
Retail - Cap rates for bank ground leases boasted a 205-basis point premium over other retail net leases in 1Q15, according to the Boulder Group. The average bank ground lease cap rate is 4.35 percent compared with the general retail net lease sector cap rate of 6.40 percent. Ninety percent of bank ground lease tenants are investment grade companies, increasing their popularity with investors.
The Digital Retail Divide
“Digital interactions are expected to influence 64 cents of every dollar spent in retail stores by the end of 2015, or $2.2 trillion,” according to the Deloitte report, “Navigating the New Digital Divide.” This figure is considerably higher than the 14 cents of each dollar spent in brick-and-mortar stores in 2012, when Deloitte first measured the digital effect. The report indicates that retailers are using the wrong metric to gauge digital interaction, focusing on e-commerce sales instead of digital-influenced sales. So far, the big winners are smaller companies that are able to influence sales online through social media and other digital formats before shoppers enter the store. “Retailers should focus on designing and building customer experiences that play to how their customers are shopping for their products - rather than direct consumers to the point of purchase,” reports Deloitte.
Airport Hotels Take Off
Maybe you only think of airport hotels when you're stranded and looking for one. But, on average, in airline hotel submarkets, there are only 24 rooms per every 100,000 airline passengers, according to JLL. This includes such busy tourist and business destination markets such as New York, Washington, D.C., Orlando, Fla., and San Diego. With such lopsided supply and demand factors, airport hotels posted a 10 percent increase in revenue per available room in 2014, and topped all other hotel locations for increases in RevPAR, occupancy, and average daily rates, according to STR. Onsite airport hotels have a 110 percent occupancy premiums and 130 percent ADR premiums, according to JLL research; however, half of the 35 busiest U.S. airports lack an onsite hotel. But investors understand the potential, even if developers don't: Nearly $1 billion in U.S. airport hotel assets traded as single-asset deals in 2014.