Like many industries, the commercial real estate market took a hard uppercut to the jaw, followed by a Mike Tyson like blow to the body. There is no doubt that the effects will last for a long time, and recovery will be painful for both tenants and landlords. To date, the hardest hit segment in the market is retail. Restaurants, personal services, non-essential medical, and many other retail tenants are struggling. Several questions remain unanswered to address the situation adequately.
First and foremost is how well the business is capitalized? Do they have a strong balance sheet or are the surviving month to month. If a retail tenant cannot make payroll, it is unlikely they will have the funds to pay rent. The second question is how government assistance programs will help. In order to work, these programs cannot “lock-up” and must provide tenants will fast relief. Finally, the ability of the retailers to earn back the trust of the public is going to be essential. Once the pandemic is resolved, it will be crucial for consumers to spend early and spend often. The news is not all terrible. Prior to the pandemic, the Boulder County commercial real estate sales market was unbalanced. Sales prices were setting records each month, and there was a drastic difference between the number of properties on the market and the number of buyers. CoStar, which is a national real estate database, currently lists 37 properties for sale in Boulder County above $1 million dollars; This includes commercial condo sales and some properties that are not yet constructed. With the result of the pandemic, there should be a more balanced market with an increased supply of properties for sale. In the short term, the expectations are that sales prices will be more reasonable, and the supply and demand will level out.
The second positive aspect is that Boulder County is a very innovative atmosphere. According to the book, Abundance, The Future Is Better Than You Think, Innovation is driven by four factors. These factors are curiosity, fear, the desire to create wealth, and the desire for significance. At this moment, we are indeed experiencing at least two of these factors. Innovation has been a significant driver for decades, and this pandemic will continue to drive innovation in many arenas. Innovation helps start companies and helps current companies grow. The largest area of innovation typically takes place in small to medium-sized companies, which is the definition of the companies that occupy buildings in Boulder County. We should expect to see start-up companies continue in the entrepreneurial environment.
Another positive impact could be a capital flow toward real estate. Many investors may pull their money out of the stock market. These investors will be looking to put their money into commercial real estate. Real estate can provide steady income, is less volatile, and outperforms stocks and bonds. Boulder County has been viewed as a very safe haven for commercial real estate investment. Borrowing costs continue to remain favorable, which will help investors and owner users purchase their properties. It remains to be seen, but sale prices will also be affected by the costs of construction. The expectation is that construction costs will be more reasonable as a result of the pandemic.
There is no doubt that the commercial real estate market will feel the effect of this pandemic. However, we are very fortunate to live in one of the best places in the country with a talented and well-educated force, a very high quality of living, and the grit and determination to come of this surviving all the punches. Jason Kruse, Managing Broker of the Colorado Group, Inc.