It seems many major employers are becoming less nervous about implementing adamant, wholesale return-to-the-office mandates.
Over the past 18 months, they’ve steadily progressed from inviting employees to come back, then encouraging/incentivizing them, and then requiring their attendance, albeit with a seeming lack of enforcement. The next step, one that we’re seeing now, is enforcing those requirements that many employees have simply ignored.
Offices are slowly filling up. A recent study documented that during the pandemic, 55% of workers who could do their jobs from home did exactly that. Now, 41% are working hybrid and only 32% are still working full-time from home.
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.
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.
For the most part, Metro Denver commercial real estate owners and investors have the luxury of waiting out a short-term economic downturn since markets here have been, and will likely remain, relatively strong compared to many areas of the U.S.
Rising Federal Reserve interest rates haven’t significantly impacted commercial real estate deals and markets yet. We have every reason to believe that even if the Fed continues its attempts to slow the economy, markets here will only decelerate, not necessarily decline.
Recent actions by the Federal Reserve Board appear to be on their way to having the intended effect – an economic slowdown, especially in the commercial real estate (CRE) market. The Fed’s Board of Governors has raised the federal funds policy rate by 225 basis points since the first of the year to 2.5% and that rate may reach 3.5% or higher by year end.
Let’s look at some of the national CRE implications of these rate increases before we zero in on what really matters – the Metro Denver market.
Slowdown in Commercial Construction and Transactions
Higher interest rates increase borrowing costs and, therefore, CRE construction project costs. These increases are coming on top of the higher costs already factored in over the past two years related to labor shortages, supply chain bottlenecks, and the cost of building supplies in general.
