Page 8 — Office & Industrial Quarterly — March 2021 OFFICE — MARKET UPDATE 303.804.0123 Your full service property management specialists for 35 years and counting. We make it our business to manage yours Over 6 Million Square Feet under Commercial Management C OVID-19 dealt a significant blow to the sale market in commercial real estate, par- ticularly the office and retail markets. Market activity was strong prior to the pandemic, and it seemed as though the market could not be slowed down. What COVID- 19 reminded everyone is that major events can alter market dynamics seemingly overnight. One of the most important fac- tors we are seeing in the quest to market recovery is increasing inves- tor optimism. Furthermore, inves- tors have shifted their focus from downside risk to upside potential. With increased capital waiting to be deployed, low interest rates and increased debt financing, invest- ment is poised for a rebound in 2021. Last year was a year to forget for many in commercial real estate. With 2021 underway, the election over, the vaccine rollout underway (albeit slowly) and general impa- tience in the market, we now are seeing what market recovery looks like. Markets like Denver that were performing better than most before the pandemic are seeing recov- ery sooner and faster than others. Despite an increase in sales, leasing and construction activity from last year, general activity in the mar- ket remains lower than before the pandemic began. According to the National Association of Realtors, dollar sales volume in commercial real estate is down 56% from the prior year. In order for sales, leas- ing and construction to rebound to prepandemic levels, social distanc- ing measures will need to be relaxed so that restau- rants, stores and public places can be full of people again. Of course, this should be done safely, with public health given the highest level of consider- ation. According to President Joe Biden, there will be enough vaccine doses for every- one to be vaccinated by May. If this happens, we can expect market recovery to accelerate by the third and fourth quarters of 2021, with full recovery hopefully happening sometime in 2022. The bottom line is the market will not fully recover until the pandemic is brought to an end. Another important aspect of the market recovery in commercial real estate will be how the U.S. Federal Reserve behaves, and how large banks react and adjust to the new landscape. According to Kansas City Federal Reserve Bank Presi- dent Esther George, “Strains on real estate finance currently appear contained.” This is encouraging to hear, as recovery can only occur in this scenario. Programs like the Payment Protection Program have been effective in getting small busi- nesses, nonprofits and event venues hit hard by COVID-19 the necessary support needed to stay afloat. Large government support programs like this have been successful in shifting a significant amount of the finan- cial burden from business owners to the federal government. This shift also allows capital to remain with investors. It is estimated that there is more than $200 billion in investor capital waiting to be deployed for 2021. In terms of the nuances of the sale and lease market recovery, COVID-19 undoubtedly has altered the way tenants, landlords, buy- ers and sellers are behaving. Jamie Gard, executive managing director at Newmark, said tenants have the leverage right now and they are pushing the envelope. “They are asking for less space in the short term, but does that mean they won’t need it in the long term? Probably not,” he said. “It would not be surprising to see them say in a year or two that they need more space because their employees are coming back.” This is not surprising, given that in the grand scheme of things COVID-19 is very much temporary. “User sales have been very strong with multitenant office investment properties much slower,” Gard said. “The suburbs are recovering mar- ginally faster than downtown, but downtown is improving. Short-term extensions are mounting up, which should lead to a better 2022.” Perhaps the group most affected by the pandemic are landlords, who are competing with an abundance of sublease space. Todd Roebken, executive managing director at Savills Studley, said, “Concessions are up, tenant improvements from landlords are up and there is still not much velocity. Landlords are going to need to get more aggres- sive because they are competing with a sizeable amount of signifi- cantly discounted sublease space. Will the market recover? Yes, but tenants will occupy 20 to 40% less than their original size and demand an option to contract and expand.” Although COVID-19’s impact on the commercial real estate mar- ket has felt overwhelming, there is reason to remain optimistic. Real estate markets historically are cyclical, and major events have been overcome before. Despite the downturn, COVID-19 appears to be moving further into the rearview mirror. With an abundance of read- ily available capital, low interest rates and lots of pent-up demand, one can hope the recovery will lead to an even stronger market than what existed before the pandemic. While conditions will be some- what different in terms of spatial needs, fewer common areas and maybe one or two fewer buffets, it is unlikely that the commercial real estate landscape will be funda- mentally changed forever, as some have suggested. It is likely that more employees will be given the option to work from home, but that amount is expected to be negligible, and additional job growth likely would offset any noticeable impact. Denver remains one of the most desirable places to live, work and invest, and not even a pandemic can derail it. s The sales market recovery is underway in Denver Darrin Revious Senior adviser, Pinnacle Real Estate Advisors