Boom or Bust?

by Jason Kruse  – Managing Broker

Local real estate professionals are in the process of providing their annual guidance and predictions of what will happen in the commercial real estate market for 2022. Will sales prices in Boulder County continue to surge? Will the industrial market continue to be the market darling? Will office employees return to the office? Are construction prices ever going to come down? How long will it take for the supply chain to break free? Depending on who you ask, the answers are a mixed bag. 

Considering the national and local economic outlook is a good starting point. According to Preston Caldwell of Morningstar, the national economy faces navigable waters, despite the pandemic concerns. Inflation spiked, but it appears that the unwinding bottled-up supply chain will drive large deflationary pressure. The Morningstar projection for 2022 inflation will be 3%, with an average of just over 2.2% over 2022-2025. These figures are below the consensus, which they think results from the overreaction to near-term developments. The Morningstar forecast for GDP is 3.9%, which is not altered due to the omicron variant. Morgan Stanley is predicting GDP to grow at 4.7%. Locally, the sales tax revenue increased from $8.7 million to $10.6 million from August 2020 to August 2021. While business consumer confidence spiked last year, the variant took some of the wind out of the sails.  

The local economy continues to see labor forces issues, especially in the service and hospitality sectors. According to Boulder Chamber of Commerce President John Tayer, the balance of primary industries is a significant factor that helps maintain our economic vitality. We have breadth and depth in primary industries as diverse as biotechnology and aerospace to software development and natural products. That type of balance is key to weathering the fluctuation in market demand and/or investment in different industry sectors. He also said, “I also think a continued investment in community services and infrastructure, from education and mobility services to open space preservation and other recreation facilities is an important factor in our attractiveness as a community for businesses and residential development.”


The commercial sales market remains blistering hot. According to Costar, for the fourth quarter of 2021, Boulder County sales of office, industrial and flex buildings in excess of 5,000 square feet fell just short of $159 million. In 2020, the sales volume was $243 million for the same period and category. Further indications of a frothy market are sellers receiving multiple offers, off-market transactions, and buyers paying more than the listed price in some instances. The lack of available investment properties forces buyers to consider alternative markets, different building types, and compressed cap rates. Depending on a variety of factors, it is not uncommon to see properties listed below a 5% cap rate. Some buyers are being pushed out of the market due to the lower returns.   Lenders continue to be aggressive and offer favorable terms, which also stimulates the buyer’s motivations. Inflation in construction materials and supplies is pushing up building costs as well. Over three months, we recently experienced a 15% price increase for a new HVAC unit. A large portfolio sale consisting of over $1mil square feet in Flatirons Park is expected to close this year. The portfolio consists of 21 buildings, and speculation is that the sales price will exceed $600 square foot. The main reason for this is the long-term lease with a national credit company for a large portion of the portfolio. The word on the street is that this tenant is apple. A multi-tenant industrial and flex portfolio in Gunbarrel is expected to sell as well, and the price could exceed $40mil. By all accounts, the buyer demand for Boulder County will continue to remain strong in 2022. 


The leasing market for office, industrial and flex properties is also hit or miss. By far, the product that is struggling the most is office. Companies are still in flux regarding employees returning to the office, working from home, or a hybrid. According to Owl Labs’ 2021 State of Remote Work found that 73% of workers who did some remote work during the pandemic “have returned to the office at least one day a week,” but most opposed a full-time return. Meanwhile, 39% of employers preferred that workers be in the office full-time, but at the same time, they are cutting their office space and adapting jobs and physical locations to accommodate more hybrid work. Landlords are beginning to soften somewhat on their lease rates and incentives as a result, but every situation is different. There have been some aggressive subleases in the market. One example is Twitter attempting to sublease 36,00 square feet at 1301 Walnut Street. The industrial market continues to be the strongest segment, with lease rates increasing and a relative lack of supply. Average lease rates range from $10.50 to $14.00 NNN depending on the location, quality of space, and landlord. 


In conclusion, 2022 looks to be another year of uncertainty. However, the Boulder County commercial real estate market is poised to excel as employers nationally and locally seek to stay or relocate to Boulder County. There is no way to match the quality of life, and despite recent events, we should all consider ourselves lucky to live and work in an amazing place.