Gateway Park Trade 'Resets Pricing Expectations' for Metro Denver
$206 Million Sale Indicates Strength of Market, Quality of Asset
Pictured: Bldg. 21 within Gateway Park.
As it barrels through its fifth straight year of sustained lease rate appreciation, millions of square feet of new construction and strong pre-leasing activity, metro Denver’s industrial market is breaking new ground yet again.
Roughly three years after setting a record low vacancy rate, and accordingly breaking the $8 per square foot threshold for average lease rates, the metro Denver market has once again surpassed prior performance, this time with a record-setting institutional investment deal.
A 14-building, Class A industrial complex formerly called Gateway Park set a new high water mark for metro Denver when it sold for about $206 million as part of a larger portfolio deal to New York-based Clarion Partners.
Denver-based Pauls Corp. developed Gateway Park between 1995 and 2002, and when Pauls decided to sell the buildings last fall, the quest to find the best possible investor began, said Jim Bolt, executive vice president at CBRE, which represented Pauls in the deal.
"Nothing like this had ever been offered in Denver," Bolt told CoStar News this week. "We long suspected we could achieve record pricing on something like the Pauls portfolio, which is a large critical mass of Class A space. It had never been tested. It was a little bit of an experiment relative to pricing."
And when the property finally went to market, the response was "overwhelming."
"It was unlike anything I’d seen on anything we’d sold before," Bolt said.
The CBRE team received nearly 300 confidentiality agreements from investors that were interested in the property, he said. A more standard benchmark for a high-quality industrial asset is between 75 and 100 such agreements, he said.
Interest came from domestic and international companies alike, and in the end, roughly 30 offers for the property came in.
Gateway Park checked every box on an industrial investor’s list. The size was right for both new and existing investors in the market, the assets were high quality and Pauls Corp. has a good reputation as a developer and owner, Bolt said. In addition, the location was right and the tenant mix was sound.
What resulted was a deal that "reset pricing expectations for Denver," Bolt said. The deal provides clear evidence for what large, high-quality industrial assets in metro Denver can get.
However, the chances that another sale of this caliber occurs any time soon are slim.
Most portfolios of comparable size and asset quality to Gateway Park are owned by companies like Prologis and Majestic Realty Co., both of which are unlikely to sell.
"Denver’s a thinly traded market, with the major developers and owners tending to hold very long-term," Bolt said.
Indeed, the sparse selling climate for Class A industrial real estate here was a driving force behind Clarion’s decision to purchase Gateway Park, which it has renamed Clarion Gateway.
"This opportunity allows Clarion Partners to establish a significant light industrial position in Denver within the premier submarket of Denver, where Class A assets are rarely traded," said Dayton Conklin, managing director in Clarion’s Dallas office.
Denver’s market fundamentals and demand are strong, making it an attractive place for capital, Conklin said, and those fundamentals are expected to remain healthy for the foreseeable future.
While rent growth is slower than in meteoric 2014 and 2015 - both of which saw 12 percent increases in the average rents paid metro-wide according to CoStar data - 12-month averages show that rents are up about 5.5 percent.
Although more than 7 million square feet of industrial space is under construction in metro Denver, rents are likely to continue rising or at least plateau as rising construction costs are passed on to users, Bolt said.
In addition, pre-leasing activity in the metro area means that about 49 percent of the space under construction is spoken for already, according to CoStar data. For example, some 2.4 million square feet of the total under construction will become Amazon’s behemoth distribution center in Thornton.
There’s been a decrease in pre-leasing from recent years, but that doesn’t spell disaster, according to Mark Bowen, senior vice president for the Denver and Phoenix markets for Denver-based DCT Industrial.
Pre-leasing in metro Denver reached more than 65 percent at its peak, a "very high" number, Bowen said, so 49 percent doesn’t sound overbuilding alarms.
And demand remains high. The population influx in Colorado means that the market remains attractive to companies looking to place distribution hubs, although Amazon’s presence here means that similar users will face a new challenge in trying to compete with the e-commerce giant's innovations.
"Amazon challenges every other distributor to re-configure how they distribute and store their product," said Ryan Good, executive vice president and partner at Etkin Johnson Real Estate Partners, the developer of hundreds of thousands of square feet of industrial product in Louisville’s Colorado Technology Center.
Etkin Johnson’s developments in the northwest metro meet a need for industrial space in that market precipitated by light industrial users in the aerospace and technology industries. The properties’ location differentiates them from the east I-70 corridor, which is home to the vast majority of metro Denver’s industrial space.
Most of the land along that corridor is claimed, again by giants like Prologis and Majestic, so developers are looking elsewhere for opportunities, and that increasingly means the north I-25 corridor, Good said.
"I-25 is a tremendous opportunity for developers to capitalize on a new marketplace," Good said.
Already, buildings along the I-25 corridor are proving up as part of industrial’s new frontier in metro Denver, as Hub 25, an industrial park along I-25 in Adams County, went on the market earlier this year and is now under contract.