Real estate experts: Deal flows diverge in county
The pandemic has changed a lot about how deals are going in 2020’s commercial real estate market, but those trends are diverging based on subtypes and geography within Boulder County.
Freeman Myre principal Andrew Freeman led a panel at Bizwest’s Boulder Valley RE/CON on Wednesday morning about how the subsectors of the commercial market are shifting. He was joined by Conscience Bay Co. director of investments Ben Woolf and St. John Properties regional partner Brandon Jenkins.
Office and retail hanging on
In downtown Boulder, Conscience Bay saw four retail tenants leave at the end of 2019 for normal business reasons.
Woolf expected to have a difficult time re-leasing those locations as the pandemic emerged as a national threat, but that wasn’t the case.
“Surprisingly, both the Chipotle space and our Goorins Bros. space were the fastest to lease,” he said.
Woolf said over the past 12 months, the city’s downtown has had a negative absorption rate of 150,000 square feet of new office space and 27,000 square feet for retail space, leading to vacancy rates of
12% and 8.5% respectively.
He points to data from real estate intelligence firm Costar, which forecasted lease rates to drop by a few dollars per square foot in early 2021 before rising back later.
“I think Costar is recognizing that we might have some tenants re-evaluating, but that the long-term trend continues to be strong for downtown Boulder,” he said.
However, the Costar data predicts average vacancy rates in downtown Boulder to hover around 14% for some time as those tenants make moves. Woolf doesn’t believe that to be a particular threat to returns on investment because the area doesn’t have a significant amount of commercial development in the pipeline.
Flexibility in the R&D market
St. Johns Properties, based in Baltimore, primarily deals with business parks across the country and most recently is seeking to build what would be called the Simms Technology Park in Broomfield, spanning just more than 577,000
square feet. Jenkins said that deal occurred entirely during the pandemic, when he began searching for acreage to build something along U.S. Highway 36 that’s similar in vision to what was previously proposed as the Great Western Park.
The purchase and sale agreement was finalized in February, and St. Johns is expected to close it within 60 days despite the broader economic volatility across the world.
“The flex and R&D market is very hot right now on the U.S. 36 corridor, so we see this as a good opportunity for us,” Jenkins said.
According to Costar forecasts he presented, Jenkins said the pandemic hasn’t caused a particular drop in rent per square foot in the area, which has been flat much of this year near the $12.75 mark.
He said that suggests that developers and landlords are offering concessions to keep their tenants signed on, and data showing a drop in sublet rents from about $12 per square foot in the first quarter of the year to just under $9.50 in the current quarter shows volatility for the companies most likely to look for flex space.
“Some businesses are struggling right now and looking to sublease space at significant discounts,” he said. “We’ll see if it goes down past the $9.50 mark like they’re projecting, but it looks to be following the trend.”
OPERATORS SEEK to Buy IN THE INDUSTRIAL SPACE
The dominant trend in the industrial sector along the U.S. 36 corridor is an increase in companies looking to buy their buildings outright, particularly larger firms that historically leased and didn’t buy.
Freeman said that’s been driven by smaller companies seeking to avoid rising lease rates and taking advantage of historically low interest rates to finance an acquisition. He expects that to continue through the pandemic, particularly as the Federal Reserve has signalled its intent to keep interest rates extremely low for the foreseeable future to aid economic recovery in a POST-COVID world.
“Even some of these higher purchase prices have a monthly payment that may be similar or lower than the rents that they’re paying,” he said.
The industrial sector is also hot because the pandemic’s acceleration of e-commerce spending has driven more interest in warehouse-type facilities, particularly outside of Boulder city limits. Freeman is tracking 20 firms looking for between 30,000 to 100,000 square feet, along with two Fortune 500 companies seeking between 300,000 and 500,000 square feet.