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Investors Still Bullish On Denver, As CRE Wants And Needs Change

Denver

Multifamily tenants may be moving down a class when looking for space as the coronavirus-related economic slowdown continues, experts said Wednesday.

PlattPointe Capital principal Jason Aubrey, who was one of the panelists on Bisnow’s Denver Investment Roundtable webinar, said he has seen clients adjusting their needs as the pandemic continues. From an investor standpoint, Aubrey said a lot of sponsors are looking for a Class-C value-add, with some investors likely to fix it up to a Class-B space. 

“The Class-A is going to take a bigger hit in rents,” he said. “I also think that going back to the workforce, people will move down. Someone looking at A is going to go down to B, B to C, etc.”

Denver skyline

DPC Cos. President and CEO Christopher King said that the face of retail will be changed for a long time as a result of this pandemic. He’s said he's been through four downturns — the energy crash, the dot-com bubble burst, post-9/11 and the Great Recession — but this one is “quite different,” as it didn’t have a financial cause. 

“Retail has been especially rocked, as we shelter at home and can’t go out and shop,” he said. Though the stimulus may help Americans spend money, King pointed out that many people don’t have much in their savings accounts.

Derek Conn, executive vice president and partner at Etkin Johnson Real Estate Partners, said that the United States has approximately 24 SF of retail per person, making it the highest in the world. 

“Ultimately, a lot of retail is not going to return,” he said, while adding that it will depend on the business type, obsolete retail space becoming repurposed. “The hard facts are that we have too much retail square footage in this country, and we’re going to have to deal with that in the long term.” 

When it comes to office, King said that April has been a good month.

“This hit late enough that people had reserves in their business plan, and hopefully with the PPP funds small businesses will be able to continue,” he said. 

King predicts a big impact on sectors including oil and gas, leisure and hospitality. “I think we’ll find that their business model is going to change for a long time,” he said. 

The office sector may also move down to lower-quality assets. Telecommuting is both cheaper and easier, and that could put office space at a greater risk than retail space, King said.

Less density in office space is also likely, with trends moving away from shared desks and tight quarters. Panelists said there may be a shift toward more room between people and more hallways and pathways. 

“I certainly think there will be an impact to the office world, and I think we’re going to see a segment that will work from home,” he said. “But I think generally people want to be social and want to collaborate.” 

That could mean a shift to flexible office space, but you can’t build those in the Central Business District, King said. That could signal a shift outward from the CBD to cheaper real estate outside of the city. 

“I’ll be interested to see if there’s a shift in desire for tenants to more of a flex type of space with their own dedicated entrance, and not have to get onto elevators as they would in a traditional office building,” Conn said. 

The migration of office tenants out of the dense CBD and into the suburbs could cause a repurposing of retail. Class-C retail strip centers have parking, and those spaces could be converted into office, Aubrey said. It could be a potential option for tenants to have more space cheaply, so they could put more space between desks and employees. 

“I’m still a believer in the shared office concept, but I think that they’re going to have some issues moving forward because of the density," Aubrey said.

Riley McDermid, Jason Aubrey, Derek Conn and Christopher King.

Pricing

Conn said that credit has come to the fore more, as transactions stay chilled and the recession continues. “I think there’s a heavy focus on credit, probably a heavier focus on tenancy credit than there has been in the past,” he said.

Right now, investors have two major points to consider. One, can your tenant pay rent? And two, can their customers afford their product? 

“As we’re staring down 20% to 25% unemployment potentially, it’s something that I think will have a lot of scrutiny,” Conn said. 

King said it is too early to know what's in the cards, but he pointed out that high-quality real estate will always be in demand. He believes that Class-C and D buildings will be impacted more in terms of pricing, as they don't typically attract credit. 

“Credit unions are an under-used asset in this market, they still have capital, they still want to lend, and they generally want to lend locally,” Aubrey said. “The banks have been reliable, although they’ve pulled back on construction and they’re taking a lot longer."

He added that stronger sponsors will be able to take advantage of the market. 

Overall, Denver’s fundamentals will play a large role in continued investment during and after this economic slowdown. Industrial real estate will likely play a part. 

“We are already on the national radar for many distribution centers for national tenants because we’ve become a big city,” Conn said. “That’s only going to ramp up over the medium term.”

More e-commerce will also mean more industrial activity in Denver. Because of the supply chain disruption that’s occurring, there has been an increase in inventory, Conn said, which translates to more absorption in industrial real estate space. 

“We feel that long-term, industrial is still a really great place to be,” he said. 

Aubrey echoed those sentiments, adding that new construction for industrial is still strong, as the shifting of retail to e-commerce continues to fuel the need for new industrial space. 

All three panelists said they remain bullish on Denver in the long-term. Because both the city and state are economically diverse with strong manufacturing, agriculture, real estate and technology sectors, Aubrey said that the area will likely be “a little insulated” from downturns.

“Denver is set up very well to come back from this quicker than other areas,” he said. "I'm still bullish on Denver."