For the most part, Metro Denver commercial real estate owners and investors have the luxury of waiting out a short-term economic downturn since markets here have been, and will likely remain, relatively strong compared to many areas of the U.S.
Rising Federal Reserve interest rates haven’t significantly impacted commercial real estate deals and markets yet. We have every reason to believe that even if the Fed continues its attempts to slow the economy, markets here will only decelerate, not necessarily decline.
Recent actions by the Federal Reserve Board appear to be on their way to having the intended effect – an economic slowdown, especially in the commercial real estate (CRE) market. The Fed’s Board of Governors has raised the federal funds policy rate by 225 basis points since the first of the year to 2.5% and that rate may reach 3.5% or higher by year end.
Let’s look at some of the national CRE implications of these rate increases before we zero in on what really matters – the Metro Denver market.
Slowdown in Commercial Construction and Transactions
Higher interest rates increase borrowing costs and, therefore, CRE construction project costs. These increases are coming on top of the higher costs already factored in over the past two years related to labor shortages, supply chain bottlenecks, and the cost of building supplies in general.
Is the U.S. in a recession? Whether the correct answer ultimately proves to be “yes,” “no,” or “not yet,” it’s an academic issue that’s not keeping us up at night.
There’s no doubt, though, we’re entering a period of economic slowdown in the commercial real estate market caused by:
With interest rates steadily climbing, we’ll likely see the commercial real estate investment markets cool off, along with more parity between office space opportunities (the sector has struggled of late) and industrial space investment activity (which has been hot for several years).
However, interest rates shouldn’t be the only factor in a CRE investment decision, of course. Location and industry-specific trends (e.g., the life sciences boom in the Denver-Boulder corridor) also help determine demand, supply, and therefore the market price of a property.
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.
Commercial real estate leases can be lengthy and dense. Prospective tenants assume that much of the content other than the financial terms is unchangeable “boilerplate” language. When reviewing the lease, commercial tenants look hard at the numbers and simply try to understand the rest. In fact, many non-financial provisions in a commercial real estate lease are negotiable.
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