It’s no secret that Denver’s real-estate market has been ridiculously strong the last few years.
The city is fifth in the nation for home price increases, and rent has increased by over 22%. All of this growth has naturally touched the commercial market as well, where tenants have absorbed more space than they have let go of for a record-shattering 29 consecutive quarters. People are moving to Colorado in droves, and jobs are expected to increase by 1.8% in 2018.
This all means that Pete Foster, Senior Advisor with Pinnacle Real Estate Advisors, is a very busy man. But he was able to find time in his schedule to talk to us about the three biggest challenges he sees facing the Denver commercial real estate market in the near future.
1. Spiking property taxes
Without hesitation, Foster sees rising property taxes as the number one challenge facing Denver’s commercial real estate market right now.
“It’s not only for Denver, but for most of the major municipalities in the metro area,” he notes. “What we’re seeing is a huge increase in property taxes due to values going up so rapidly.”
In Denver, commercial properties have increased in value by nearly 20% over the last year. Naturally, property taxes go up with it. But Foster is seeing that cost being passed on to tenants via triple-net leases.
“Many business owners are getting hit with large tax bills out of the blue. It’s keeping them from expanding their business or, in some cases, putting them out of business,” Foster says. “It’s slowing economic development, putting pressure on existing businesses and in some cases deterring investors from purchasing in Denver.”
How it’s being addressed
Denver’s market is forecasted to cool down soon, which should bring modesty to rising home values. There are also neighborhoods and submarkets where property values haven’t spiked so much. The biggest bumps are in trending areas where rapid development is taking place.
Cities are also able to create tax incentives to keep development churning along, such as Westminster did to attract Maxar Technologies’ new HQ.
And while it’s a difficult challenge to solve, Colorado’s lawmakers are actively finding ways to reduce the burden on business owners. It’s something that state Republicans and Colorado’s Democratic governor agree is a big deal, meaning it’s top of mind for lawmakers.
2. Very low supply, and very high demand
“Vacancy is at an historic low for all commercial properties. It’s hard to find anything right now,” Foster laments.
Whether you are an investor or business looking to expand, move to Denver or even downsize, finding the right property is extremely difficult in the Denver-metro area. This is part of what’s driving the spiking values in the region.
“Values are going up, rates are going up, and supply is staying low,” he says. Foster says this adds urgency to being able to act quickly when a property does become available. “You need to have a good broker that has their ear to the ground and you need to make sure your finances are ready to act immediately.” This is especially true for investment properties, one of Foster’s specialties.
How it’s being addressed
“One way to address low supply is for businesses to look in nearby markets that are more affordable,” Foster notes. Downtown Denver may have been the first choice, but the many potential submarkets start to become attractive when there’s nothing available in primary, central markets.
Foster is finding that “people are more willing to expand their searches to find the right property.” This means suburban areas may continue to see a boost in commercial real estate activity.
With housing prices so high in central Denver, more workers are moving to the Southeast Suburbs, Bisnow notes. In turn, big employers are opening more offices in the area to attract and keep talent there. As more workers live and work in the area, small businesses like bars and restaurants are able to thrive.
And with real estate prices predicted to even out, developers will have space to catch up with market demands, keeping costs in check.
3. New tax code uncertainty
With a major tax bill recently passed, there’s a ton of speculation circulating about what it means for Denver’s commercial real estate market.
On one hand, there’s fretting about whether interest rates will go up. “We’re watching the Treasury Yield Index on 10 year notes and the federal funds rate, which could slow commercial real estate activity in the form of higher interest rates.”
Higher interest rates, in theory, mean less investment. But in the short term, it could mean a spike in local market activity trying to beat a potential rate hike.
“Some people may forecast an increase in interest rates, which actually keeps the market strong as buyers try to acquire real estate before the interest rate increases would go into effect.” But if interest rates do go up and the new tax bill spurs inflation — that word you’ve been hearing a lot about with the recent stock market fluctuations — it could cause what Foster terms “a domino effect.”
On the other hand, some predict that the new tax bill has built-in incentives for commercial real estate investors in the form of tax savings. But ultimately it will take years for it all to play out.
How it’s being addressed
“How the new tax bill affects the overall economy will an impact on Denver’s commercial market, but right now it’s just speculation,” Foster says.
It appears counterbalances are built in for any market fluctuations related to the new tax bill. If inflation goes up, there should be tax relief to even it out. The hardest part is the current uncertainty, but however it will ultimately play out doesn’t seem to be hampering investment and development for the time being.
“The good news so far,” Foster says, “is the latest inflation report showed inflation increasing just slightly and remaining relatively flat.”
Despite challenges, still one of the best markets
Every market has its challenges, and they will change and transform over time. Foster says that despite the challenges he sees, he believes Denver will remain a very strong market and continue to grow.
“Regardless of these challenges, compared to places like New York, Los Angeles and Chicago, Denver is still significantly more affordable, it’s a central hub on the map and we have a very highly educated, youthful workforce.”
While the Denver market has challenges to deal with, Foster ultimately sees the city as a long-term winner in commercial real estate.
“I think it’s going to remain attractive to businesses for a long time.”
Pete Foster is a Senior Advisor with Pinnacle Real Estate Advisors, specializing in Commercial and Investment properties.