The Metro Denver area is a good place to do business. We have a healthy business environment that leads many other geographic markets with regard to commercial construction and leasing activity, thanks to the strength of certain sectors and the general influx of companies to the area from higher cost coastal business centers.
Even so, the markets for industrial and office real estate here continue to move along two distinctly different trajectories. This is maybe most apparent when you consider the fact that there’s almost 9 times more industrial space than office space under construction in this region.
Additional data from Q1 2022 confirm that the demand for industrial commercial real estate space is still outstripping supply – and this disparity is continuing to drive rents and market sale prices to new record highs. The strong demand is due in large part to the need for logistics space and the continued, major growth of the life sciences sector in the Denver-Boulder corridor.
(Disclosure: Fountainhead Commercial Real Estate is currently representing the seller of one of the largest life-science commercial properties currently on the market in the Denver-Boulder corridor.)
In contrast, the real estate market for office properties remains flat, due in large part to the continued delay in bringing office workers back to the workplace. Some researchers estimate that 20% of the nationwide workforce will permanently work from home, compared to 5% pre-pandemic. This will no doubt dampen the office real estate market for several years unless company work-from-home policies shift or until excess capacity is absorbed. In the meantime, office landlords are confronted with relatively high fixed costs and are forced hold firm on rent prices.
Industrial Commercial Real Estate Sector – Key Data Points
In Q1 2022, commercial industrial vacancy rates reduced further to 5.5%, down 0.8 percentage points over the past 12 months. It appears this figure may represent the approximate floor for vacancy rate for the foreseeable future – the vacancy rate is not expected to climb much above 6% over the next several years.
Predictably, industrial real estate market rents continued to creep upward in early 2022, to $11.15 per sq. ft., up $0.84 over the last 12 months. This is a year-over-year 8.1% increase in market rents, and this annual rate of increase is projected to peak for the foreseeable future later this year at just over 9%!
Office Commercial Real Estate Sector – Key Data Points
Although the vacancy rate in the office real estate sector continues to inch up (it’s now at 14.2%, an increase of 0.8 percentage points from 12 months ago), the rent rates are not dropping as one might expect in this office environment. This is likely due to relatively strong business activity in certain neighborhoods (e.g., Suburban Denver) and the fact that the region still has a strong ownership market with landlords not seeing a compelling reason to reduce rents and put themselves at financial risk. The average market rent per square foot is $28.76, up 1.3% from a year ago, and we expect this rate to steadily, but slightly increase in the immediate years ahead.
Office properties continue to provide a strong investment yield (compared to STNL Retail or Industrial), with a market cap rate of 7.1% and sales prices up nearly 4% from this time last year to an average of $244 per sq. ft.
If You’re a Tenant Preparing to Negotiate Your Commercial Lease ...
Even though the commercial office real estate market is lagging the industrial market, landlords in both sectors are anticipating a moderate-to-strong economy in the months and years ahead depending on how the current headwinds (i.e massive inflation, labor shortage, urban crime spike) impact businesses. They’re pricing and marketing their space accordingly. Industrial tenants, in particular, aren’t in the driver’s seat at this time.
If you’re approaching your tenancy lease renewal in 2022 or early 2023, considering making a move, or planning your new business initial lease, you’ll need to optimize your lease agreement in every way you can – the rental rates for sure, but also the lesser-known economic provisions that can also add up to big savings and the numerous non-financial contractual provisions that provide flexibility and options.
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.