Downtown Boulder Retail & Office Market Update
By: Scott Crabtree
RETAIL MARKET UPDATE
I ran into an old friend who suggested, “retail on Pearl Street seems to be struggling with a lot of business closing and vacancies?”. I was taken aback by this perspective as I have never seen the retail market on Pearl more active, especially considering the current economic environment.
All the retail listings we have had on Pearl over the last year have had multiple offers, and Landlords have been able to choose the type of tenant they desire, from national retailers/restaurants to local businesses. In addition, the tenants we represent (national, regional, and local) who are looking to join the marketplace have been frustrated by the lack of opportunities and chomping at the bit.
This dichotomy from the public perception to those who deal with Pearl retail marketplace daily gave me pause to consider. Papered windows and brokerage signs have been staying up longer on storefronts when businesses turn, but this is not due to a lack of activity or leases being signed, rather to the length of time it takes to get permits approved and buildouts completed. The city’s process to pull permits has never been slower, and construction cost is at an all-time high with this demand. It would be great to get city employees back into the office with some incentive for processing permits in a more reasonable time frame. With demand for construction slowing down in the current state of the economy, construction pricing may slow its growth pace.
All this to say that demand for quality retail and restaurant space on our beloved Pearl Street is “strong to quite strong,” but the public perception of the contrary is just due to how long it takes businesses to get through their process to get opened. This is no fault of the Landlords or Tenants, just the current state of our systems.
OFFICE MARKET UPDATE
This is a different story. Downtown Boulder’s office market vacancy rate is currently at 29% including both direct and sublease spaces.
1.7M SF of downtown office space with 500,000 SF of vacancy (that we’re aware of).
Boulder county’s office market of roughly 10.5M SF has a vacancy rate of 35%.
I have stopped trying to guess what the new normalcy is or will be. However, it appears to be driven by office policies for return to office and leaders setting new standards, such as Apple and Twitter (not the best example as Twitter just stopped paying on lease obligations) to set the stage for other companies to follow.
We have seen the smaller office markets in Boulder become active again as people want/need to get out of their home environments and spend less time in their PJs, but this is going to be something other than the tail that wags the dog. Kiln co-working is at capacity and showing signs that individuals and companies want a place to meet, collaborate and work.
Without a doubt and as we are already seeing, as companies return to office with flexible work schedules, the class A office space will e the first to get leased. New construction or recently upgraded/modernized office buildings that are close to amenities will be the most attractive to companies dangling carrots for employees to return to the office or setting policies of the number of days in the office (sticks) to try and recapture their company culture.
Regarding Boulder and recent taxes, we will see a significant increase in NNN (specifically taxes) for Boulder in general but specifically in Central and East Boulder which will close the gap in gross rents compared to downtown. In addition, the new Library tax will add roughly $.07 alone to taxes increasing the NNN for commercial properties in Boulder.
My prediction is that companies will look to downsize their office space footprint to one with more amenities in the office and surrounding area, leaving downtown Boulder as the preferred choice. If the gross rent gap between downtown and East Boulder close within 10-15% on a gross lease basis and employers are trying to entice employees to come back to the office a few days a week to a smaller but more amenity rich space than they had in the past, the choice seems obvious, that return to downtown Boulder office space will be the unanimous winner. I have been wrong before, and current vacancies certainly don’t reflect as such in the current market, especially if you consider “Gray Space,” which is the sublease of available office space.