CREJ - Land and Development - July 2016
Certainly the Denver metro commercial real estate market is strong across the board, but what we’re experiencing in the southeast market area is absolutely unprecedented. It all starts with rooftops and there’s no shortage of demand for housing and new residential development in the southeast area. Virtually every sector is strong with multifamily and higher-density attached projects now rivaling traditional single-family detached housing for the first time. With the rebound from the last downturn, the southeast market is squarely on the radar for intense residential growth and expansion, and all that comes along with it. But why? The central business district and north metro areas are enjoying a strong resurgence, too, but each market has its own appeal and the southeast region is uniquely different. There’s a different feel and a distinct appeal to this area and it seems like everybody wants to be here. The quality of life and freshness of the area appeal to new Colorado residents, first-time homebuyers and move-ups. The comprehensive planning for abundant open space, parks and trails in the communities in the southeast market has created an appeal that’s hard to match anywhere else along the Front Range. And those who already are calling the southeast area home don’t appear to be moving away. There is a strong demand for senior housing of all types emerging to serve that residential segment as well. Excellent transportation planning and ongoing improvements provide great access to downtown Denver, but the area is quickly developing its own economy almost independent of the Denver market. Employment in the southeast continues to rise with new office buildings coming out of the ground as employers seek to locate closer to their workforce, with commercial and retail development keeping pace. Impact on land and commercial real estate. The demand to live, work, shop and play in the southeast market is creating pressure for development opportunities, and the area is rising to the challenge. New residential development is occurring in pockets previously overlooked and on land that was once considered too great of a challenge to develop. Attached housing and rental product are finding a home in a part of the metro that wasn’t previously considered for that market segment as employers and retailers find room in the area and stake their ground. Vacant land prices now reflect the combined demand in all sectors. Homebuilders are paying record high numbers for ground even while lot finishing and development costs are soaring. Employment centers and retailers are paying whatever it takes to be here, but they’re all making it work and they’re all confident in the future of this market. We’ve felt the pressure on retail space and office space for lease, with vacancies moving steadily down and rates heading proportionately up. Supply and demand. Dark retail spaces and large blocks of office space for sublease have all but disappeared, and new inventory is coming to market at rates higher than we’ve ever experienced. Commercial landlords are in the best position they’ve ever been in and leasing incentives are tightening up as competition for space is outpacing supply. Terms for lease renewals are getting negotiated in the landlords’ favor and tenants are making the deals work for them (as they’re also enjoying success in this market) to keep their locations secure. Build-to-suit development is seeing its share of demand as well. National tenants want to take a position in this area and those projects are getting done. Owners of pad sites and lots for commercial development have been moving over to ground leases rather than sales to stay in the game for the upside, and those deals are starting to come together where they once were not. A good indication of strength in a growing market is diversified product demand. More than just ground for residential construction, office space and retail space are in demand. Large-scale manufacturing, distribution and research-and-development users are seeking new locations in the southeast as well. Some are new to the market, taking advantage of the workforce, and some have been squeezed out of industrial/light-industrial metro Denver areas by the swelling “growers’ industry.” Light-industrial and flex space also is experiencing record demand. Small- to midsize businesses in the service and supply industries are seeking a home in the southeast and inventory is at an all-time low. New flex space buildings are getting leased up before they’re completed as owners of new and growing businesses living in the southeast are setting up shop close to home. Income and investment properties have felt the strength of the demand in this area as well. The wave of income and investment property buyers (typically 1031 driven) that pushed through the market over the last couple of years consumed a good deal of the available inventory at record numbers. Now the remaining properties with less attractive cap rates and in less desirable condition are moving too. Those buyers are betting on the continued demand at all levels (office, retail, medical, industrial and light-industrial) and making strong investments. There are plenty of statistics to support what’s going on in the southeast market. But is it sustainable? We think so, and perhaps more so than in any other region. It’s the character and appeal of the area that everybody wants to tie into. Obviously, the residential market is a primary driver. But unlike the last peak in housing demand, that segment is not being fueled in this area by unrealistic residential financing and the resulting endless fields of flavorless housing. It’s being driven by homeowners’ desire to live here (not to just buy a home because they can) and an evolving rental market.