Colorado commercial values plummet; who are the winners?

Colorado, like much of the country, is going to be in for a rough ride on the commercial side in 2021 Why 2021?  What property types will be most affected?  Unfortunately, the recent pandemic has created many more losers than winners in Colorado commercial real estate properties.  Even though, the lockdowns are easing and the economy has started to reopen the damage has been done.

What happened

The pandemic essentially spurred the closure of the vast majority of businesses throughout Colorado from the local ice cream store to mattress kingdom and everything in between.  Essentially businesses were shut for around 90 days and are just now emerging from the closures.  Even when they emerge, the business landscape is drastically different with new requirements for social distancing and cleaning that substantially reduce capacity while at the same time increasing costs.  Furthermore demand has radically changed.  A good example is a gym.  They are technically allowed to reopen but the demand for going into an enclosed area for an extended period of time has changed.  Furthermore, the gym has to limit capacity and spend considerably more on cleaning.  This has led to one of the largest fitness chains, 24 hour fitness, to declare bankruptcy and permanently close 13 locations in Colorado.  This is just one example of the deep changes occurring in commercial real estate throughout the state.

Who are the biggest losers?

Unfortunately, the list is going to be long so I’m going to hit some high-level categories.

1. Hotels: this is the easy one, hotels are going to take many years to recover (if ever). Think of a hotel near the Denver convention center.  Without any conventions how will they possibly fill all their rooms.  What about all the large event spaces they have?
2. Restaurants/ bars: Even though they can open with limited capacity, demand in many cases has waned. Take for example a bar/nightclub.  How does this model survive?  Unfortunately, until there is a vaccine many will perish.
3. Big box retail: The list of failed and/or distressed retailers is long from Nieman Marcus, Bloomingdales, etc…, all of this space is now coming on the market with little if any demand for large retail locations.
4. Banks: The pandemic has forced customers to embrace online technology which will diminish the need for branches.  For example, I haven’t been to a bank in years.  I’ve gotten loans, opened accounts, deposited checks, etc… Many other consumers were forced to use the new technology and as a result banks will close a substantial number of their physical locations.
5. Large office: There aren’t many people that want to go to 100k foot office complex with thousands of their coworkers in cubicles. The old office model doesn’t work and companies will substantially downsize their office footprints.

Are there any winners?

1. Grocery: This category will continue to thrive as less people continue to venture out even after the pandemic subsides. There will be long lasting consumer changes to eating more at home.
2. Industrial/distribution: This is one of the hottest commercial categories as demand for storages has skyrocketed and also demand for transportation/logistics with all the online buying has also surged. This category will remain hot for years to come.
3. Small remote offices: Office isn’t totally done; you will see more companies setting up small remote office locations with exterior entrances to geographically diversify and allow employees to still have the sense of community culture. This is an up and coming category and we will see a large increase in this area over the next several years as many companies pull back from the huge corporate campus model.

What do all the commercial “losers” have in common?

Unfortunately, all the losers have one trait in common that will make this commercial downturn considerably worse for certain property owners.  Each property that is a “loser” is unique and difficult to repurpose.  Take a gym for example.  What do you do with the 13 24 hours fitness locations in the Denver metro area?  Each one is 30-50k feet.  What do you repurpose the buildings for?  Before the pandemic, the first choice would be office, but there is no demand for open office space.  The second would be retail, but who wants to open a retail location in this environment?   The second example would be big box retail.  Before the pandemic, there was a glut of space.  Some of the traditional users were office, education, gyms, children’s fun zones (trampolines, laser tag, etc..).  All of these traditional users are also struggling and very unlikely to expand.

Why will 2021 be the year of reckoning?

We are just now seeing the beginning of a huge decline in Colorado commercial real estate property values.  Much of the pain will take years to fully feel.  For example, think of a large office user.  They typically sign a long term lease (5 years with options for example) and assume this office user is financially stable, they will not declare bankruptcy to “give back” the space, but they will negotiate their current lease (amount of space and rates) and when their option comes up they either will not exercise their option or they will renegotiate the entire lease for a much smaller footprint and greatly reduced rates.

The reason I put 2021 as they year of reckoning as this is the year you will start seeing the impacts flowing through the Colorado tax base.  Recall, Colorado only assesses properties every odd year.  Assume you had 24 hour fitness as a tenant that has now vacated the property and the property is still sitting vacant (or you got lucky and was able to lease at a much lower rate), the value of the property is substantially reduced and should be assessed considerably lower in the 2021 revaluation.

Summary

We haven’t even come close to seeing the true impacts of the pandemic on Colorado commercial real estate.  The difficulty releasing many of the “losers” spaces will create a glut in inventory and huge loss in values in various sectors that will likely never recover.  Now is the time to hang on tight for a wild ride that is just beginning in Colorado Commercial real estate!

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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending.  Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine,  The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

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