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Denver’s commercial real estate market was cruising before coronavirus

One real estate market leader remains hopeful the government response will lead to a speedy recovery

Chris Roden tries to stay warm in his sleeping bag in front of Think Tank Tattoo and their boarded up facade along South Broadway in Denver on April 14, 2020. The coronavirus has caused many businesses to shut their doors as stay-at-home orders stay in effect until the end of April. Commercial real estate in the Denver area was humming along before the virus struck. Now many wonder if they can survive the economic fallout from the effects of the virus.
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In the middle of a statewide stay-at-home order and a period of unprecedented job loss in Colorado, it’s easy to forget how smooth the economy was sailing along before the shock of the COVID-19 pandemic.

Riding the wave of the longest economic expansion in U.S. history, the Denver metro area, in particular, was seeing strong job growth and strong demand for commercial real estate. The details are laid out in the latest quarterly market reports from the Denver office of real estate services firm CBRE.

“We were certainly in a peak cycle. Our Q1 stats, by and large, were very positive,” Pete Schippits, CBRE’s Colorado market leader said in an interview Tuesday. “There was strong rent, strong investment activity, stable or low vacancy literally across the broad. I think stats lag a little bit just by the nature of the transaction cycle, but you are going to see a fundamental change in that starting in Q2.”

The stats may not bear out the damage yet, but boarded up storefronts along Denver’s iconic South Broadway business corridor are a stark visual demonstration of the pain many businesses are going through. Some of the big questions ahead are how deep will the damage be and how fast can economies recover once it hits bottom?

The first three months of 2020 became the latest in an unheard-of string of 40 consecutive quarters of positive leasing activity for industrial and warehouse space in the metro area, part of a broader 18-year winning streak for the category. Almost 7 million square feet of new space was under construction at the end of March, the highest total in two decades, according to CBRE.

On the office side, three new projects broke ground in the quarter driving development activity up to 3.7 million square feet of space under construction. Twelve office properties changed hands during the quarter, selling for a combined $827.9 million. Total sales volume was down 5% compared to the first quarter of 2019, but early 2020 included Denver’s largest office transaction in over a decade, the $400 million sale of the Denver City Center office space.

Retail real estate has had a rockier go of things in recent years with vacancy rates spiking from 2016 to 2018 before coming back down. Vacancy in the first part of 2020 was stable 6.6%, down less than 0.1% compared to a year prior. But average asking lease rate hit an all-time high at $19.92 per square foot. That’s a figure driven in part by the opening of new, high-end spaces and by high rents in desirable areas like Cherry Creek.

If he had to offer an analogy for the abrupt shift in economic conditions brought on the novel coronavirus, Schippits, who oversees CBRE’s business across five Front Range offices, said he would look at it like a car cruising down a highway from the mountains and then going up the runaway truck ramp.

“We didn’t stop dead, but in a really short amount of time we have ground to a halt,” he said. “It’s because of gravity essentially, the equivalent of shutting off the economy. Where we went from going downhill to going uphill in sand.”

And while he anticipates that Denver’s commercial real estate market will have “fallen off the peak” by the end of the second financial quarter in June, Schippits is striking a hopeful note when it comes to the potential speed of recovery. He notes governments from the federal level down to municipalities have been quick to react and launch relief efforts ranging from national CARES Act and the small-business support programs contained in that legislation, down the property tax relief efforts launched in Denver.

Mail carrier Henry Mosley delivers mail along an area with many shuttered businesses on South Broadway in Denver on April 14, 2020.

“We really stand behind the concept that we’re going to get through this in a 12- to 30-month period,” Schippits said. “The general view is we always underestimate the impact of stimulus.”

He notes some segments, like the already red hot industrial real estate market, could come back quickly and maybe even stronger as staying-at-home changes consumer behavior and drives even more people toward e-commerce options. Other industries like hotels (which do not factor into CBRE’s three main quarterly market reports) could face years of consequences as a result of the crisis.

With office space, Schippits said he could see companies learning different lessons from their experience. Some may decide they need less space because their workforce can operate effectively with many people at home, while others may decide to grow their footprint to decrease density while still having teams working together on site.

Schippits remains bullish on Denver’s future. As long as it continues to be attractive place to live, it will be a competitive place in the eyes of real estate investors.

“The sun still shines here. The mountains are here and the strong workforce, that educated workforce, is still here,” he said.

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