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Denver-area commercial real estate defies pandemic expectations

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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.

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