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.
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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.
In spite of the Fed’s rate increases and a slowly deteriorating economy, commercial real estate (CRE) transactions are still happening. But in a few cases, we’re seeing and hearing about transactions that seemed on track for closing just three or four months ago that are starting to fall apart.
Investing in commercial real estate (CRE) can be a sound strategy for diversifying a personal asset portfolio. CRE yields and growth can be more predictable than those offered in the equity and bond markets, for example, where trying to time buying and selling opportunities can seem more like wagering than investing.
It’s easier to invest in CRE than many investors think. Sure, commercial office buildings are valued in the tens of millions of dollars – but informed investors can have a stake in a property of that size by participating in a CRE investment syndication. In these arrangements, their money is pooled with that of other investors, making each person a part-owner in the property with nearly all the tax advantages and opportunities for returns as the major CRE investors enjoy.
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