You hear the question from friends, family and colleagues. “How crazy is the market right now?”
The last couple of years have constituted an interesting time for all types of investments, whether that’s bonds, cryptocurrency, equities or real estate. Each investment vehicle has presented its own changes, challenges and opportunities while creating different environments for investors.
Specific to commercial real estate, Grand Junction has experienced a shift caused by internal and external factors. Demand is high and inventory low. But there are other things to consider as an investor in Western Colorado.
Through the second quarter of 2021, we’re closing in on pre-2008 levels of commercial real estate transactions and total dollar volume in Mesa County.
Time on market has decreased. Many commercial real estate listings that had been sitting on the market for years have sold at or near asking prices. Listings priced appropriately have sold in weeks rather than months.
We’re seeing capitalization rates on properties start to decline from around 8 percent to 7 percent or below. We’re seeing buyers close on properties based on speculation or pro forma valuation models rather than historical performance or current net operating income.
The values of local property have increased, prompting more competitive offers and wiping out a large chunk of our inventory.
What’s caused these changes? A combination of macroeconomic and microeconomic variables.
The macro factors are geographically consistent, but also fall in line with our particular market. Some of these variables include the lack of inventory for commercial investments, a high number of 1031 exchange buyers, a large amount of government stimulus provided to investors and business owners and low expected returns for alternative investments.
But it’s the microeconomic attributes that separate the Western Slope from other areas and could create a shift in the outlook for many investors placing capital in our market.
There’s been an influx of people moving to Grand Junction and surrounding towns. Young professionals and retirees alike are attracted by the cost of living, price of real estate, geographical proximity, growing labor market, local recreation and attractions and overall pace of life.
In addition, we’re starting to see large institutional and equity groups come into our market to purchase commercial real estate and complete development projects.
Grand Junction has always been a tertiary economy. Getting deep-pocketed investment groups to commit to sales in Grand Junction historically has been challenging. That’s changing with various $2 million to $10 million commercial and multi-family sales and $10 million to $30 million developments taking form. Tax incentives for investing in businesses in opportunity zones also has played a part.
The last obvious variable has been our attractive returns relative to other primary markets. Investors drawn to Grand Junction are chasing cash flow closer to a 6 percent to 8 percent return. In other, larger markets, they see properties yield closer to 4 percent to 5 percent capitalization rates.
Low interest rates have mitigated diminished returns in some of these larger markets, but many out-of-town buyers are tired of little to no cash flow while betting all their chips on long-term equity appreciation on future sales.
Attractive returns combined with commercial development and promising growth potential in a sizable market have put Grand Junction on the map for more than just local investors. There are many indications Grand Junction will be a great place to invest for the future with substantial upside in the years to come.