A new year, a new look at the commercial market

Dale Beede
Dale Beede

While the commercial real estate market in Denver peaks, the market in Grand Junction nears a top that could last another year or two. Here’s an “in the trenches” look at what’s happening locally.

While sales and lease transactions are beginning to slow, the total dollar volume rises slightly. The spring commercial market will tell the story for the rest of the year in Mesa County. If demand continues at similar rates to the past year, the market will continue to improve both in terms of sales and lease rates per square foot of improvements.

Long-term interest rates are rising, but it’s doubtful they’ll continue to rise quickly.  Rate increases should be moderate if there are increases at all.

Property capitalization rates, or capitalized rate of return for an investment, should rise as interest rates rise.  Income properties leased to high net worth and AAA credit companies like Starbucks and Walgreens will still sell locally in the 6 percent to 7 percent cap range. Other buildings leased to local companies with five or more years remaining on the leases will generally sell in the 7.5 percent to 8.5 percent cap rate range. The same is true of older, well-placed buildings, including apartment buildings and warehouses.

Many prospective sellers think, usually, incorrectly, their 30-year-old structure with five-year leases should sell in the 6 percent range because that appears to be the going rate. In other words, they see Starbucks and Walgreens, with AAA credit, are selling in the low cap rate range, and they want the same for their properties. Quick reminder: the lower the cap rate, the higher the sale price. Consequently, as the Grand Junction and Mesa County market tops over the next year or two, many sellers will be disappointed their overpriced investment properties aren’t selling.

Most buyers, including those on the replacement end of tax-deferred exchanges, just want to pay true market prices for their next investments. They’re not interested in buying overpriced properties at the market peak. I expect there will be a growing number of frustrated buyers and sellers over the next few years.  But for those who price their properties properly, reasonably quick sales should occur.

The greatest interest in land deals focuses on properties located within federally designated opportunity zones. These zones offer tax credits to those who invest in economically slower markets in the country and help build construction jobs and new businesses with jobs. A fairly large portion of private land in Mesa County lies in opportunity zones. Nearly all the land in Delta and Montrose counties also lies within zones. All the tax rules aren’t finalized yet, but this is sure to stimulate land sales in Western Colorado.  My only concern here is we don’t overbuild certain segments within our economy — multifamily properties, for example — and create a surplus that marks our next economic decline. Supply and demand still determine most local market returns.

We know we’re approaching the top of this economic market and rising interest rates, market tops in the stock market, rising construction costs and political upheaval all point to the same.  This is a great time to improve properties, pay off debt, stabilize leases and hunker down for the next few years.

Keep your eyes open for opportunities that always pop up, and enjoy the fact you have your priorities aligned and we’re in a normal market.