CREJ

Page 12 — Office & Industrial Quarterly — December 2020 www.crej.com OFFICE — OUTLOOK 2 020 has truly been an unusual year. When the pandemic hit, commercial real estate deals plummeted, construction projects stalled, businesses were forced to close under new gov- ernment directives, schools went virtual and everyone became well acquainted with Zoom. Most industry veterans are used to handling cyclical economic downturns, but this one is unique given that the trigger was a health crisis. Although there still is a great deal of uncertainty, one thing appears clear: Recovery from this downturn will be uneven across metros and property type. The rate of recovery in any given metro will be dependent on the severity of COVID-19 cases as well as the types of asset classes that drive the local economy. Lenders are paying close attention to vulnerable loans within the hospitality, restau- rant and retail sectors. Industrial properties, particularly those that support e-commerce activity, are poised for continued growth, as is the multifamily sector. So how is recovery going? Before diving into the Colorado market, let’s back up and examine the U.S. market as a whole. One of the best indica- tors of commercial real estate deal- making activity is environmental due diligence. Phase I environmental site assessments typically are conducted before commercial real estate deals close. By examining Phase I ESA trends, we can assess the relative strength or weakness of the overall commercial real estate market in a particular area. On a national basis, the market appears to be recovering more each month, as investors get more comfortable clos- ing deals even amid continued restrictions on business activity and travel. In Sep- tember, U.S. Phase I ESA volume nearly matched September 2019 levels and was higher than Sep- tember 2018. The third quarter saw the highest volume of Phase I ESAs since the pandemic hit. Normally in an election year, we see activity dip off for the second half of the year, but like I said, 2020 has truly been an unusual year. n The market in Colorado. Like the national market, Colorado experi- enced steady increases in Phase I ESA activity each month since May. Not surprisingly, the biggest decline took place from March to April. While things have been increasing since June, third-quarter activity in the state still is down 11% compared to the same quarter 2019. In the context of the Western region, Colorado is not the only state to experience a yearly decline in transactions in the third quarter. Nevada, New Mexico, Washington andWyoming all experienced quar- terly declines. Among those that experienced a positive increase in Phase I ESAs, however, were Arizona, Alaska, California, Montana and Utah, with Montana experiencing the most robust growth, at 27%. n County highlights. When assessing the market at the county level, it’s important to consider the different rates of COVID-19 infections. Individ- ual counties are seeing more cases and facing different restrictions. As of November, the counties with the highest number of infections in Colo- rado were Denver, Adams, Arapahoe and El Paso. Each of these counties saw a negative growth rate in ESA activity from third-quarter 2019 to third-quarter 2020. The counties with the biggest declines were Fremont (50%), Boulder (48%) and Pitkin (46%). The largest county-level markets for Phase I ESAs that registered third- quarter growth relative to 2019 levels were Larimer (3%), Pueblo (8%) and Broomfield (28%). n Breakdown of data by asset class. Examining recovery by asset class is where you see the impact of COVID- 19 the most. Different asset classes are seeing varying levels of impact from COVID-19. According to a Sep- tember report fromTrepp LLC, 26% of hotel commercial mortgage-backed security loans were in special servic- ing along with 18.3% of loans tied to retail properties. Both rates are record highs for each sector. The same report shared that industrial, office and multifamily were all below 3%. When examining Phase I ESA activity by property type in Colo- rado, the trends are similar to what the commercial real estate market is experiencing on a national level. The majority of third-quarter activity was in office, multifamily, industrial and undeveloped/vacant land. Not surprisingly, retail/shopping centers saw the least activity over the past quarter. Overall, the commercial real estate market in Colorado has aligned with what the rest of the country is see- ing. There is reason to be optimistic about recovery. We had a strong market going into this downturn, lenders know how to be disciplined in managing risk and there is plenty of capital waiting to be spent. While we can be optimistic about eventual recovery, as these recent spikes in cases remind us, we are dependent on the health crisis ending. s Environmental assessments offer recovery insights Are your tenants uncomfortable? We can help. www.cmimech.com 303.364.3443 We love solving complicated mechanical problems. Dianne Crocker Principal analyst, LightBox, dcrocker@ lightboxre.com By examining Phase I ESA trends, we can assess the relative strength or weakness of the overall commercial real estate market in a particular area.