ValueXpress is working on a CMBS conduit loan transaction secured by a multi-tenant industrial park in suburban Denver, Colorado. As with all our loan transactions, ValueXpress surveys the local market for the real estate asset class that is being financed to build a case for tenant demand for the property. In this case, we were pleasantly surprised to find the industrial market in proximity to the property was very strong and we were able to include this information in our credit write-up, which helped get the loan approved.
According to CBRE, the Denver industrial market is poised for more growth after a strong 2017 and 2018 to date. Solid economic fundamentals and e-commerce are fueling demand. Vacancy may rise as older space is vacated in favor of new, but lease rates will continue their upward swing since new and well-located properties fetch a premium. Furthermore, Cushman and Wakefield reports that the Denver metropolitan industrial market recorded overall vacancy of 5.0% to close the third quarter of 2018, a 30 basis point decrease quarter over quarter. This decrease in vacancy was driven by a huge rebound in absorption following a sluggish first half of 2018. The market recorded 1.2 million square feet of absorption during the third quarter of 2018.
Also benefiting the underwriting of our deal was both CBRE and Cushman reports of declining capitalization rates and increasing values for well-leased industrial properties. Record sales in 2017 and 2018 are resulting in a “feeding frenzy” when deals come to market. As a result, capitalization rates have compressed to an average of 6.5% from 6.75% and to as low as 4.5% for new, class A industrial warehouses leased to high-quality tenants.