The commercial real estate market in Grand Junction makes for some interesting observations. While the local market still hasn’t recovered from the peak period of 2008, we’ve seen interesting activity.
Commercial sales activity year to date is on the upswing compared to the same period last year. Our Bray Commercial Report for the first half of 2015 suggests a significant increase in sales activity. Also of special note are the significantly larger transactions, among them the Atrium and Mesa View retirement communities, Mesa Moving land along 24 Road, a shopping center north of Mesa Mall and the La Quinta Hotel. It’s also interesting that various employment reports suggest we’re still short 6,000 to 7,000 jobs in Mesa County from 2008. And, yes, sales tax collections are up locally, but the increases aren’t shooting through the roof.
So why are commercial sales up dramatically over employment increases and sales tax rates? I think the answer lies in the mindset of investors — some of them local, but many of them from outside the area who find the Grand Junction market an attractive place. I think it’s the attractive prices and potential upside, meaning there’s no room to go but up.
Commercial investors buy largely based on projected returns on their investments. A rule of thumb among industry players is expressed as a capitalization rate. Simply put, a capitalization rate is expressed as a percentage of net income over the sales price or value of a property. As an example, a property that’s showing a net annual income of $75,000 and sales price of $1 million indicates a CAP rate of 7.5 percent — $75,000 divided by $1 million. The net income doesn’t include mortgage payments or income taxes as expenses. It’s just the gross income less any property related expenses.
Typically, you’ll see CAP rates in the 6 percent to 10 percent range. Sometime less and sometimes more. It varies depending on the type of property, location, perceived risk with the investment, quality of tenancy and returns on such other assets as stocks and bonds.
The amount of competition for a given asset also affects CAP rates. Increased competition for a property generally drives CAP rates down, while higher perceived risks generally drive CAP rates up. Remember, it’s a rough rule of thumb used in the industry. More sophisticated investors will usually run additional data analysis — internal rates of return (IRR), as an example. But for illustration purposes, let’s stick with CAP rates.
In the commercial real estate market in Denver, which is described as “hot” with demand exceeding supply, prices are up. If net income doesn’t move at the same rate, CAP rates drop. As that market and others become saturated, investors look to other locales seeking higher returns.
That’s one of the big reasons we’re seeing substantial investor activity in the Grand Junction market. Investors are placing their money here because lower prices and less competition result in higher CAP rates. Generally speaking, you might see CAP rates in the Denver market running one to three points lower than here. Lower prices, as is true over here, also portend a perception of greater risk.
But with the volatility of stock and bond markets, investors in growing numbers are looking for better places, such as commercial real estate, to park their money. When Denver gets too pricey with lower returns, they come our way. When we market commercial income property these days, we receive a multitude of inquiries from out-of-area investors. Much more so than two years ago.
So that explains some of the “why” as to the increase in commercial sales activity. I expect it to continue. And the justification for my answer is what I mentioned earlier — the upside potential. I believe we’re in a market that can go nowhere but up.
Allow me to cite just one example to support my rationale. It’s the recently released study commissioned by several community players and described as the competitive location assessment report, also known as the rebranding report prepared by the credible consultants Chabin Concepts/DSG Advisors. The study identifies the strengths, weaknesses and corresponding opportunities for economic growth in our area. Some of the strengths are not surprising, including the higher education opportunities offered by Colorado Mesa University and our regional health care facilities. Other areas noted were solid anchors for diversification, including outdoor recreational opportunities and vibrant downtown districts in Grand Junction, Fruita and Palisade.
Some of the weaknesses include the speed, availability and cost of Internet access; transportation costs; work force availability and a lack of brand identity. A couple of these areas are already being addressed by community leaders, including broadband access and transportation costs. Rebranding our community constitutes a larger task, but certainly an achievable one.
In essence, the report suggests tremendous upside opportunity. I think it’s another reason investors are attracted to our area — they see the potential. And that’s good news for all of us who look for a brighter economic future in the Grand Valley.