The Sales Market Recovery is Underway in Denver
Published Expert Article
by Darrin Revious
Senior Advisor at Pinnacle Real Estate Advisors
COVID-19 dealt a significant blow to the sale market in commercial real estate, particularly the office and retail market. Market activity was strong prior to the pandemic, and it seemed as though the market could not be slowed down. What COVID reminded everyone is that major events can alter market dynamics seemingly overnight. One of the most important factors we are seeing in the quest to market recovery is increasing investor optimism. Furthermore, investors have shifted their focus from downside risk to upside potential. With increased capital waiting to be deployed, low interest rates, and increased debt financing, investment is poised for a rebound in 2021. 2020 was a year to forget for many in commercial real estate. With 2021 underway, the election over, the vaccine rollout underway (albeit slowly), and general impatience in the market, we are now seeing what market recovery looks like.
Markets like Denver that were performing better than most before the pandemic are seeing recovery sooner and faster than others. Despite an increase in sales, leasing, and construction activity from last year, general activity in the market remains lower than before the pandemic began. According to the National Association of Realtors, dollar sales volume in commercial real estate is down 56% from the prior year. In order for sales, leasing, and construction to rebound to pre-pandemic levels, social distancing measures will need to be laxed, so that restaurants, stores, and public places can be full of people again. Of course, this should be done safely, with public health given the highest level of consideration. According to President Joe Biden, there will be enough vaccine doses for everyone to be vaccinated by July. If this happens, we can expect market recovery to accelerate by Q3-Q4 of 2021, with full recovery hopefully happening sometime in 2022. The bottom line is the market will not fully recover until the pandemic is brought to an end.
Another important aspect of the market recovery in commercial real estate will be how the U.S. Federal Reserve behaves, and how large banks react and adjust to the new landscape. According to Kansas City Federal Reserve Bank President Esther George, “strains on real estate finance currently appear contained.” This is encouraging to hear, as recovery can only occur in this scenario. Programs like Payment Protection Program (PPP) have been effective in getting small businesses, nonprofits, and event venues hit hard by COVID-19 the necessary support needed to stay afloat. Large government support programs like this have been successful in shifting a significant amount of the financial burden from business owners to the federal government. This shift also allows capital to remain with investors. It is estimated that there is over $200 billion in investor capital waiting to be deployed for 2021.
In terms of the nuances of the sale and lease market recovery, COVID has undoubtedly altered the way tenants, landlords, buyers, and sellers are behaving. Jamie Gard, Executive Managing Director at Newmark says that “tenants have the leverage right now so are pushing the envelope. They are asking for less space in the short term, but does that mean they won’t need it in the long term? Probably not. It would not be surprising to see them say in a year or two that they need more space because their employees are coming back.” This is not surprising, given that in the grand scheme of things, COVID is very much temporary. Gard adds “user sales have been very strong with multi-tenant office investment properties much slower. The suburbs are recovering marginally faster than downtown, but downtown is improving. Short term extensions are mounting up which should lead to a better 2022.”
Perhaps the most affected group by COVID are landlords, who are now competing with an abundance of sublease space. Todd Roebken, Executive Managing Director at Savills Studley, says that “concessions are up, tenant improvements from landlords are up, and there is still not much velocity. Landlords are going to need to get more aggressive because they are competing with a sizeable amount of significantly discounted sublease space. Will the market recover? Yes, but tenants will occupy 20-40% less than their original size and demand an option to contract and expand.”
Although the impact COVID has made on the commercial real estate market has felt overwhelming, there is reason to remain optimistic. Real estate markets are historically cyclical, and major events have been overcome before. Despite the downturn, COVID appears to be moving further and further into the rearview mirror. With an abundance of readily available capital, low interest rates, and lots of pent-up demand, one can hope the recovery will lead to an even stronger market than what existed before the pandemic. While conditions will be somewhat different in terms of spatial needs, fewer common areas, and maybe one or two fewer buffets, it is unlikely that the commercial real estate landscape will be fundamentally changed forever, as some have suggested. It is likely that more employees will be given the option to work from home, but that amount is expected to be more or less negligible, and additional job growth would likely offset any noticeable impact. Denver remains one of the most desirable places to live, work, and invest, and not even a pandemic can derail that.