Commercial real estate in metro Denver is improving
If the last recession walloped overstretched housing markets, commercial real estate brokers in Denver are bracing for the hardest blows to come their way this time around. But they also remain hopeful the region will fare better than larger coastal markets and bounce back faster.
“Restaurants have been hit really hard. We expect to see a lot of carnage and vacancies there,” Courtney Key, a partner at SullivanHayes, said Thursday at a webinar hosted by the Denver Metro Commercial Association of Realtors.
Retail in general was already under stress as more consumers shifted their purchases online. It is now staring down a chasm.
“Landlords and tenants are working two to three times as hard to make half as much money,” she said. But the big rent discounts some tenants are holding out for have yet to materialize.
About a quarter of U.S. workers are still working from home, and the longer that goes on, the more pressure owners of office buildings will face once leases come up for renewal. Kevin Foley, a managing director at JLL, said more subleases are becoming available and new space from projects started months ago continues to hit the market.
He estimates that office lease rates could drop 10% to 20% in Denver, although he expects the declines will average closer to 10%. Foley also expects the setback downtown Denver has suffered between the pandemic and civil unrest this year will prove temporary.
The apartment market will likely continue to struggle in the months ahead, said Shane Ozment, vice chairman with Newmark Knight Frank Multifamily.
“We aren’t seeing a lot of rent growth anywhere in the metro,” said Ozment. The federal eviction moratorium the remainder of this year means apartment landlords, especially in older buildings, face additional income losses, adding to their woes.
If there is a saving grace, it is that developers were already pulling back well before the pandemic hit. Multifamily permits are down by half this year, which will dramatically reduce supply two to three years out, he said. As more residents from crowded and expensive cities take flight, Denver is among the places where they are expected to land.
“I believe once we get to 2023, we will see something similar to what we saw between 2010 and 2015,” said Ozment, referring to a period where rents rose rapidly because of apartment shortages, triggering a construction boom.
Likewise, investors are reconsidering where to target their money, said Tim Richey, a vice chairman at CBRE. Money that once flowed to favored cities like San Francisco, Seattle, Portland, Ore., and Chicago, could be increasingly redirected to smaller markets like Denver, offering them a strong base of support. He also expects suburban markets will get much more attention than they have in the past.
“Six months from now we will be shocked by how active things are,” Richey predicted.
Hotels, which face perhaps the bleakest outlook, are on track to see a surge in defaults. But even there, investors are likely to swoop in and buy them at sharply discounted prices. They will continue to operate, just under new owners.