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.
For some struggling companies, there may be a lease renegotiation strategy that can help alleviate the financial stress their leased office space is creating. In many cases, these challenged businesses are weighed down with the burden and cost of unused office space, whether it’s because they’ve let people go, they’ve had to accommodate their employees’ desire for hybrid or work-from-home arrangements, or they’ve had employees quit due to a back-to-office mandate. As these business leaders consider their options, they should realize that their landlords also are feeling pain in this economy … and this opens the door to a solution that can help both parties make the best of their respective bad situations.
It seems many major employers are becoming less nervous about implementing adamant, wholesale return-to-the-office mandates.
Over the past 18 months, they’ve steadily progressed from inviting employees to come back, then encouraging/incentivizing them, and then requiring their attendance, albeit with a seeming lack of enforcement. The next step, one that we’re seeing now, is enforcing those requirements that many employees have simply ignored.
Offices are slowly filling up. A recent study documented that during the pandemic, 55% of workers who could do their jobs from home did exactly that. Now, 41% are working hybrid and only 32% are still working full-time from home.
At first glance some of the 2023 Q1 data presented here seems contradictory: increased sales prices accompanied by declines in rent growth; higher vacancy rates alongside higher rent rates.
But if you look deeper into the data and consider the stories behind the numbers (which we’ll lay out below), there’s a logical explanation for the unique dynamics we’re seeing today in the Metro Denver commercial real estate (CRE) market.
Tenants and lessees often consider lease renewals to be perfunctory and routine. They may not be aware how the renewal process can give landlords the upper hand in setting terms of this new contract.
In fact, as soon as lessee signs the original contract, future negotiating leverage shifts to the landlord. Landlords knows that unless the lessee outgrows the space or has another strong reason to relocate at the end of that lease, they’ll gravitate toward re-signing and staying in that leased space. Landlords understand that businesses owners value continuity, and relocating is costly, disruptive to their business, and distracting for their employees.
The most recent commercial real estate (CRE) data show that we’re in a period of slow but steady transition. Throughout the Denver Metro area, the demand for industrial space has slowed and we’re likely in early stage of emerging from the depths of a depressed office real estate market.
We’re not out of the woods, yet though. Fed action is at least partially responsible for a dramatic decline in 12-month sales volume, which decreased almost 25.75 percent for industrial properties and 21.5 percent for office properties compared to Q3 2022. The CRE market is clearly in a wait-and-see mode at this time as it relates to future Fed interest rate increases.
