The pandemic has rocked the commercial real estate market to its core, boosting demand in some sectors such as industrial and destroying it in others such as office space. But 30 months after the first lockdown orders were issued, not all dire predictions have been fulfilled.
Consider the recovery in demand for retail space. As consumers have increased their online purchases of even groceries, supplies are much scarcer than anyone expected. Tenants fled densely populated areas during the outbreak, but developers continued to churn out urban apartments at a steady pace, raising concerns of oversupply.
Denver’s retail, multifamily and industrial real estate vacancy rates are in the 5% range, but for office space it’s just under 20%, said Hessam Nadji, president and CEO of Marcus & Milichup, at a rally. I talked about it. The Denver Metro Commercial Association of Realtors earlier this month.
Demand for office space remains sluggish as employees fight for the right to continue working remotely, and it could be several more years before the fog clears. Meanwhile, signs of contraction are mounting as online retailers exit. However, Denver does not appear to be as vulnerable as other markets.
Here’s what area brokers in the forecast panel compiled by DMCAR predict will lead in their areas of expertise.
Office: An uncertain future
When employers closed offices early in the pandemic and sent their employees home, probably after more than two-and-a-half years, they struggled to get them back in and wondered how much space they had. Few people probably expected that they would be faced with uncertainty about what they could do. lease.
Tenants in office buildings are looking to take advantage of shorter-term leases for less space, creating a magic formula that makes employees want to come back for shifts without commute times and self-cooked lunches. CBRE senior vice president Lee Diamond said many still don’t know what their workforce will look like in the coming months, making it difficult to plan office requirements. says there is.
A tight labor market is running counter to a return to previous jobs with office requirements. With worker shortages and high turnover, some employers fear enforcing the issue. But in a recession, management may once again gain the upper hand and demand employees take their seats.
Another big problem in the office market is all the space that tenants sublease because they are no longer needed. In Q2 2021, the Denver metropolitan area was approximately 5 million square feet. It recently dwindled to 4.7 million square feet, but Diamond predicts he’ll be over 5 million square feet soon. The excess of space is getting worse instead of better.
Landlords need to be more creative in the concessions they offer and the amenities offered to lure workers back into the office, such as more on-site restaurants, fitness facilities and co-working spaces.
According to Diamond, the office market continues to have a flight to quality. This is the old and less desirable class B or C space problem. They need to refurbish to stay in the game, but construction costs have skyrocketed from $100 per square foot pre-pandemic to $120 per square foot today to $280. So some building owners are hitting the pause button until they are sure they can lease the improvements.
Cherry Creek is a hot office market, downtown Denver is bifurcated, and the new West End is far more popular than the East Side, according to Diamond.
Retail: Stronger than expected
Retailers were hit hard by lockdown orders in the early weeks of the 2020 pandemic, with some forecasts predicting it would take years for physical stores to recover. they were wrong.
According to Courtney Key, partner at Sullivan Hayes Brokerage in Greenwood Village, Metro Denver is seeing strong demand for retail outlets, especially new grocery stores. King Soopers, Whole Foods, Target and Costco are some of the retailers actively seeking space. The problem is that there aren’t enough places to meet the stronger than expected retail demand.
“Construction costs are disrupting new business,” Key said. “There is incredible competition for pad space.”
Pads that may have been $90,000 to $115,000 in 2019 are now $120,000 to $150,000, she said.
National chains such as fast food, gasoline and banks are overwhelming local competitors in bidding wars. Denver is also attracting “new to market” tenants from unexpected locations such as the UK. They target areas they consider to be more vibrant neighborhoods, such as Cherry Creek, River North, and parts of downtown Denver.
Industry: Denver could buck slowdown
Online retailers have aggressively built distribution centers to keep products closer to consumers and speed up delivery times. This trend accelerated as online purchases increased during the pandemic. Demand for warehouse space has also increased as companies have started stockpiling goods to avoid shortages due to supply chain disruptions caused by the pandemic.
But as the recovery took hold, brick-and-mortar retailers regained their share of purchases, and consumers shifted more spending toward services rather than goods.Amazon leads the market by adding new warehouse space has gone from scaling and subleasing space in some distribution centers and canceling other plans to scaling and scaling.
Tyler Reed, managing director of Stream Realty in Denver, said Front Range should do better than other regions as Amazon exits. The online retailer, Colorado, continues to work on his four-million-square-foot facilities in both Springs and Loveland.
“The Amazon is healthy here. No gloom or ruin,” he said. And while the shift to online retail is slowing, it’s still ongoing and will require more warehouse space.
Industrial space along the U.S. 36 Corridor between Boulder and Denver is now leasing for $14 per square foot, compared with $8 to $8.50 per square foot before the pandemic, Reed said. . And as demand continues to outstrip supply by millions of square feet, industrial rents are rising across metropolitan areas.
“Rental rate increases are real and it’s happening,” he said. “It’s a pretty rosy picture.”
Multifamily: overproduction in progress
Josh Newell, principal at Pinnacle Real Estate Advisors in Denver, said apartment rents in the Denver metropolitan area are typically a bit cheaper in the winter, but this year they’re up, with average rents dropping 16 year-over-year. % increased. .
Despite rising rents, apartment tenants in the Denver metropolitan area are spending about 22% of their income on rent, below the national average income of 23%. A large influx of workers from more expensive markets, some of whom are working remotely and driving down wages, is better able to finance rising rents and luxury units under construction.
“Apartment fundamentals are still strong,” Newell said. “There are fears, but everything on paper says this is great.”
Interest rates are rising sharply, pushing more buyers out of the market and continuing to rent. And unless there are significant cuts in the tech sector, remote his workers will still have to maintain spreads, earn San Francisco levels of wages, and pay Denver his levels of rent.
So why fear? The developer is expected to bring about 15,000 apartments to market in the Denver metropolitan area this year, but it appears that only his 12,500 will be “absorbed” or occupied by new tenants. Overall vacancy is a reasonable 4.75%, but should increase as these new units hit the market.
This is where the outlook gets jeopardized. Newell said Metro has his 40,000 apartments under construction in Denver, and he has another 72,000 in the planning stages. The developer is looking to bring 112,000 apartments to market, but there are concerns about whether the market can absorb that, especially if people stop moving to Denver like they have in the last decade.
Much of that new apartment growth is concentrated in the central business district, where vacancy rates already appear to be approaching 7.5%.
The new supply will represent about a quarter of the existing apartment inventory, Newell said. Some projects could be canceled, but if developers’ predictions don’t pan out, the shortage of apartments could quickly turn into an oversupply of apartments in the Denver metropolitan area.