Recently released Q3 2023 Metro Denver commercial real estate (CRE) data confirms the situation on the ground we’ve been observing. The market is bifurcated. The office market is struggling; the industrial market is still relatively robust. The single-tenant retail market is also strong. CRE activity continues to move from Denver’s downtown core to suburban areas.
Let’s dig a little deeper into the industrial and office CRE data.
The very strong industrial market has reached its peak, but that’s not a sign of decline. We see it as a return to a situation closer to normal after the pandemic-driven run up in demand in the distribution warehouse and other industrial subsectors. Industrial vacancy rates increased just over one percentage point from this time last year to a still very low 6.5%; largely as a result of 6 million new square feet of inventory being added to the market in the past year.
Industrial market sale prices are stabilizing and even declining slightly after soaring 34% in the eight quarters through Q3 2022. Sale prices will continue to drift lower in the year ahead, but they are still near record highs by a large margin. This slight drop in sale price reflects massive increased financing costs, excess of new supply coming on the market near DIA, along with stabilizing demand.
In this environment, landlords are still able to command increasing rents. While the annual growth rate in market rent is down by more than 1.3 percentage points from this time last year, an annual positive rent growth rate of 7.1% is not an indicator of a market in distress. Rents will continue to increase for the foreseeable future even as the rate of growth slows.
In contrast, the office market remains in a steady, prolonged decline. Many institutionally owned office buildings are losing value and are in jeopardy of being handed back over to the bank as the average tenant downsizes and some landlords have difficulty refinancing expiring loan obligations. As we noted in our blog last month, this situation has driven many tenants and landlords to work together in early lease re-structuring and re-forecast arrangements that help landlords preserve tenancy and cashflow by allowing tenants to downsize their space well in advance of their lease expiration.
Hybrid working arrangements and the economic slowdown are taking their toll. Vacancy rates continue to climb – they increased 1.4 percentage points in the past year to over 16%. Rent growth this quarter is up by 0.9% – in the range where it has been since Q4 2021 – but it appears that landlords will not be able to sustain even these modest increases as the forces of supply and demand continue to work against them. Sale prices are continuing to slip – they are down 8.5% from Q3 2022, standing at $226 per sq. ft. after peaking at $252 per sq. ft. two years ago.
All of these data points are averages, of course, and they don’t account for the age and location of Metro Denver properties. In fact, the CRE bifurcation between new and older properties is very apparent. New office properties continue to come on the market outside the traditional downtown area and many tenants are migrating out of the major downtown high-rise office properties. For healthy businesses, the office market is full of opportunities to aggressively negotiate rental rates and other concessions.
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 situation, please contact us.