Reviewing the current marketplace for commercial property in the Greater Denver region is a tale of two sectors. The data for each of the two primary segments, industrial and office, matches the narrative we’re all familiar with regarding the relative impact of the COVID pandemic on these two market segments and the status of the financial recovery in each.
On one hand, the manufacture and distribution of consumer goods didn’t let up in 2020 or YTD 2021, and these facilities today are continuing to try to catch up with pent-up demand. Significant increases in industrial real estate inventory and square feet under construction, though, have helped limit the increases in rent and sales prices. Without this infusion of new space, those numbers would likely be even higher.
In contrast, many companies closed their offices or dramatically reduced employee office presence 2020 and 2021 – a situation that will continue for the near future and possibly longer. This is no doubt adding to the softening trends in office real estate rent growth and vacancy rates. In the next six months, companies will be making some hard decisions about bringing employees back to the office that could affect this market in 2022 and 2023.
The industrial sector real estate market remained relatively strong throughout the last 18 months, thanks in large part to the distribution sub-sector.
This slower but sure growth is reflected in the 3.3% rent increase observed over the last 12 months, back up to Q2 of 2020 levels, but well below the 5-6% range we saw in the prior seven years – and which we’ll likely see again shortly.
The other data that jumps out here is the $153 sale price per sq. ft., an all-time high after a relatively large jump this quarter. It’s now at a level where we expect it to remain for the next 12 months. It will begin to creep up further after that as the recent expansion in surplus inventory is absorbed by industrial tenants and owner-occupants.
The office building investment market may take several years to recover from the COVID pandemic. Tenants will be at an advantage when negotiating economic terms for a new lease or office lease renewal.
Annual rental rates are down 1% as of this quarter. CoStar’s analysts predict these will remain in the red, at that level and lower, until breaking through into positive territory in Q1 of 2023. Rents won’t reach 2019 Q4 levels ($20.46/sq. ft.) until Q4 of 2024 by our calculations. In the face of this uncertainty, market cap rates will likely remain steady at 7.1%.
Another trend we’re watching closely is the office vacancy rate. This crept into double-digit territory in Q1 of 2020 and continued to rise slowly but steadily in the past year. Now standing at 14.3% across Denver-metro, the vacancy rate is expected to continue to climb and top out at around 17.5% in 2024.
If you’d like to dig deeper into this data or if you have questions about what all of this might mean for your commercial real estate investment plans or your tenancy arrangements, please contact us