Now that 2019 has come to an end, come and explore the forecast for the Denver commercial real estate market, which is continuing to grow in 2020. Indicators show that this will be quite a promising year, but of course, we also know that there are some geopolitical, economic, and local regulatory hurdles to be aware of. That being said, although these potential difficulties may cause transformational changes in the market, most predictions do reveal an outstanding year for Denver commercial real estate, in general.
Over the past few years, there has been much discussion about Denver’s commercial real estate market growth among scholars, so pay close attention. The goal is to determine whether the market has finally started to cool off after being on what appears to be a peak in recent years. Most real estate specialists are looking for a transactional environment that is friendlier to buyers versus sellers moving forward. But, as Denver has just completed its 38th consecutive quarter of positive net absorption, it has had a nearly decade-long hot streak that produced new business, capital, and market players. This tells us that Denver still has a fast-growing commercial real estate market. That is encouraging news!
The big question being asked is this: where should investment be directed in the Mile High City in 2020? For us to answer this question, it is very important to understand the different perspectives out there, but there is not a single answer to a question like this. It is complex, to be sure.
Let us begin…
As the market is boosted up by an expanding economy and an ample job market, combined with low-interest rates, many important institutions reveal confidence in the market. As such, the Denver commercial real estate market 2020 forecast demonstrates gains in office, retail, logistics, and other sectors. That is a good start! And although there are some concealed concerns regarding trade negotiations and the upcoming presidential election, these will not have a significant impact on most of the commercial real estate industry in 2020.
In brief, we can expect resilient economic activity with strong property fundamentals and continuing low-interest rates. With these factors in mind, real estate as an asset class becomes an attractive opportunity as it is supported by this outlook of a promising year. Therefore, rest easy and look no further than Denver for your commercial real estate needs. The forecast is very optimistic!
Now let us dive into the details…
Thanks to the Federal Reserve rate cuts in 2019, along with other important factors, it was assessed that a recession will be avoided. That is great news for Denver and the entire nation. This forecast considers the 2020 momentum that has been building for capital markets and six real estate sectors: Office space and other occupiers, industrial and logistics, retail, multifamily structures, data centers, and alternative sectors. This excellent assessment is based on demand. To conclude, it is predicted that transaction volumes and capitalization rates will stay relatively stable in 2020.
To add even more to this positive growth outlook, a Denver Metro Market Report from First American Title Insurance Corporation states that while conditions have improved for those hoping to purchase commercial real estate, it will be a slightly less harsh seller’s market in 2020 as well. The more good news, the better!
Stable returns generated by U.S. commercial real estate will be even more attractive in 2020 when global bond yields remain extremely low, as expected. It is predicted that investment volumes around $500 billion will land in 2020, which slightly down from 2019, but still expected to be one of the strongest years on record. Therefore, the Denver commercial real estate market will continue to expand.
Adding to this, the data shows that three main factors will drive Denver’s continued economic expansion. First, there is a new type of investor looking at this promising city. There is quite a boost in flexible local office space coming from the industrial and retail sectors. This is being bolstered and transformed by eCommerce. Next, as online sales grow, retailers are adjusting their business models to remain competitive. As such, retailers are delivering goods to consumers much more quickly and efficiently.
The good news that comes from those business model adjustments previously mentioned, is this: the refocus on the market has pushed demand for industrial space near Denver’s major transit hubs. Also, that demand is spreading to other population centers. So, it can be said that technology and the internet has caused this refocus, and businesses are adjusting in the right direction to satisfy the demand.
Another essential aspect to take into account on capital markets is that it will most likely improve with foreign investment. That means the market should rebound after a pullback in 2019. Also, much of that foreign capital will come from investors looking for assets within the safer core markets. Investments are like fuel to heat up the economy and provide faster growth over the next few years.
Although economic growth has been slower in the past years amid global uncertainty, U.S. commercial real estate will remain a haven for investment in 2020. Just keep in mind that there is continued investment caution. Also, there will be buyer-seller disconnects on pricing, which could moderately reduce volume from 2019 levels.
Cap rates should be predominantly stable moving forward into 2020. With slight compression for residential assets but small increases for other major commercial sectors, there is an average spread of about 260 basis point over 10-year Treasury yields next year. With this, Investors should be careful not to count on significant appreciation returns, but can count on income returns remaining steady.
As far as the market has proven so far, the total U.S. retail sales have increased by 3.5% year-over-year by the 3rd quarter of 2019. This sum goes up to $1.57 trillion, however more modest growth is expected in 2020 to $1.55 trillion. This total U.S. retail sales growth is expected to slow in 2020 because consumers are becoming more cautious.
Positive net absorption and rent growth in the U.S. markets will spark from a lack of new supply and thousands of retail store openings. As an example, locations such as shopping malls are benefiting from the refreshing influence of Generation Z, who are those born after 1997. Why is this happening? Because strangely enough, this is a generation who prefers to shop in physical stores. With that in mind, many retail assets will convert to mixed uses, creating communities, and thriving town centers.
Despite Denver seeing a slightly lower industrial sales volume at the end of the 3rd quarter in 2019, it still recorded a $999M in profit. That number was a dip from the 2018 total during the same period, but still very strong. The thing is, the city has been attracting the interest of different types of investors. There is now a demand for industrial space going along with the region’s outstanding economic performance. That means there are record levels of interest from institutional capital, and that has led to some historical sales. Great news for Denver indeed!
As we’ve seen by now, economic growth is likely to slow down in 2020, but will still continue to grow. One of the leading causes weighing on growth is the lower capital expenditures by corporations. Those lower expenditures are caused by a growing uncertainty that started in 2019. There are two reasons for this uncertainty. First is the ongoing U.S.-China trade conflict, which definitely slows global growth. Next is the upcoming presidential election that holds unforeseen risks for the economy. The good news is the forecasts that a recession will be avoided, thanks in large part to the stimulatory effects of the previously mentioned Federal Reserve’s rate cuts in 2019. And even with a slow growth this year, there are already strong property market fundamentals. And that brings another interesting hurdle to the table: lower growth means more investment risk.
In 2020, expect a few economic risks to consider. These risks come from slower growth, which makes the economy more vulnerable to unexpected shocks from geopolitical conflicts, for example, or disruption of commercial trade lanes. Because of these reasons, the economy may remain at a level of uncertainty. And with that, businesses should try to remain defensive throughout 2020. Caution is always a good idea.
Furthermore, industries that are vulnerable to any policy changes after the 2020 election will remain reluctant to significant change. Additionally, a relatively stable U.S. economy amid a weaker global environment will create conditions for a stronger U.S. dollar. Then, with the dollar appreciation snowballing, debts under dollar denomination may spike a bit, creating small instability in the global financial system.
We see higher-than-normal renewal rates, particularly in the markets with the lowest vacancy rates. This trend should continue if not accelerate in the near term. That means the U.S. industrial market will see some dramatic shifts in 2020. Absorption gains will be difficult to achieve, having meager vacancy rates and limited space options in several markets. As a consequence, net absorption will be lower than in previous years.
In conclusion, this may also mean that the market will remain stable as eCommerce penetration continues to impact the market. As operations become more complicated for occupiers, there will be a heightened focus on outsourcing, which secures a stable growth in the third-party logistics sector.
As the supplier-consumer dynamic changes with supply-chain growth, it requires more facilities to be placed across industrial hubs. And with that, several secondary markets are becoming desirable from an investment perspective. The major risk to investors in smaller, secondary markets is oversupply and lack of liquidity. Thus, Denver has been identified among many other important U.S. cities as key secondary markets that will offer strong liquidity and relatively high-income returns in 2020.
Despite a slightly weakening market, forecasts predict a rent growth of 5% in 2020. This percentage is on par with previous years, meaning no major changes are expected. Also, that means the rising rent from new construction will be driven by newer products and infill industrial space in supply-constrained markets.
The high-quality, first-generation warehouse space, for example, will typically generate a rent premium. Also, demand for light-industrial warehouses of less than 120,000 square feet will accelerate as eCommerce companies race to offer same-day delivery to customers. These properties have seen rents rise by 30% in the past five years. Compared to big-box rents, which rose by 15%, that is a very interesting scenario for the Denver commercial real estate market 2020 forecast.
Considering there will be more renewal activity and fewer leases for new space, the consensus among the research data shows some interesting information. For example, the businesses that supply commercial space for rent will outpace demand by 20 million to 30 million square feet – the first time vacancy rates compare to that of the 2008 recession. The vacancy rate may increase slightly but should remain near historic lows this year.
Flexible office space is another bright spot on Denver’s horizon. The city’s flexible office inventory ballooned almost 600% between 2014 and 2019, making it the seventh-largest flexible office market nationwide, according to reports. Although looking through this data, experts are still calm about Denver’s prospects in 2020. They say that eCommerce and construction will continue to drive growth as industrial fundamentals remain steady.
One of the crucial attributes in Denver is the area’s diversity across all sectors. Add to that the highly educated and skilled workforce and a live-work-play lifestyle, and you have a significant draw for investors and new residents alike. From there, experts can now say that Denver has truly advanced to become a Tier-2 market, and investors are taking notice. Moreover, proactive policies to address commute times and transportation bottlenecks, like the FasTracks light rail system and the Interstate-70 reconstruction, are all good signs the Mile High City is bracing for growth. Definitely, the Denver commercial real estate market 2020 forecast is looking very bright!