How Colorado’s commercial real estate has been impacted by COVID-19

As Colorado emerges from lockdown, its economy is revving back up, and the state’s outlook is sunny. While other reopened states have seen coronavirus cases rise, Colorado is already in Phase 2, which means restrictions are beginning to loosen. Home sales have jumped in recent weeks, as pent-up demand hits the market.

But that doesn’t necessarily mean we’re headed back to business as usual. The state economy has been profoundly impacted by the pandemic, and that’s especially true for the commercial real estate sector. While it could rebound back to its pre-pandemic highs, it’ll have to make some serious changes to do so. Let’s look at where the commercial market stands now, how it’s evolved over the past few months, and how it’ll have to adapt if it’s going to fully recover.

Recovery has just begun

Before we offer any assessment of the commercial real estate market, let’s note that Colorado’s economy is nowhere near fully reopened yet. Colorado is currently in Phase 2, which has specific restrictions in place for offices and retail. Right now, in-office capacity is capped at 50%, workstations have to be spaced at least six feet apart, and gloves and masks are required for any interactions with outside customers or vendors. To put it simply: things are not yet back to normal.

So when will things be back to normal? That’s hard to say. Some experts say a vaccine is at least 12-18 months away, which means these distancing guidelines could remain in place through 2021. So, we may not be able to assess the big picture effects of the pandemic on the market until late 2022 or even later. But what we’ve seen so far does offer glimmers of hope.

Colorado’s pre-pandemic boom

Fortunately, Colorado’s commercial real estate market went into the pandemic in a position of nearly unprecedented strength.

The first quarter of 2020 came on the heels of a record-breaking 2019. With nearly 7 million square feet of space under construction at the end of March, the industrial sector was riding a 40-quarter streak of positive leasing activity. In addition, most industrial tenants in Colorado have been designated as “essential,” and haven’t been as affected by the lockdown as some. And with e-commerce seeing a huge spike, as people do their shopping from their phones and computers, a lot of these tenants could flourish over the next year-and-a-half.

Retail was also riding high coming into 2020, with vacancies at a low 6.6% and an all-time high average asking lease rate of $19.92 per square foot. But as demonstrated by all the boarded up storefronts in downtown Denver, this sector has been hit hard by the pandemic.

The Fed stated recently that about half of all small businesses went into the pandemic with 15 days of cash reserves or less. When the Paycheck Protection Program expires, many of these businesses could fail. The survival of a large swath of Colorado small business may depend on future government support.

Which brings us to the office sector.

Although vacancies had been inching up in the first quarter of 2020, and total sales volume was down 5% compared to 2019, the market overall was still very strong. Nearly 3.7 million square feet of new office space, spread over three massive projects, began construction in the first quarter, and a dozen office properties sold for $827.9 million. This includes Denver’s biggest office transaction in more than a decade: the $400 million Denver City Center deal. And because new office construction has been slowly tapering off since the 2017 peak, there isn’t a lot of excess capacity slated to come onto the market and drag down prices.

But while Colorado’s industrial and retail markets are reasonably sure bets to rebound, post-pandemic, the office market will have to undergo a profound transformation to survive.

Experts say 62% of employed Americans worked from home in April, and many companies are telling employees to stay out of the office through 2020. This is leading to a reimagining of the workplace; not only about how the office is physically laid out, but about who actually needs to be there.

This doesn’t mean offices are going away for good. In Denver, at least, things could more or less even out as some tenants give up their office space, and others expand their footprint to bring density down in accordance with social distancing rules. Many experts say that sharing a physical space is vital to company culture, so going 100% remote could hurt a lot of bottom lines.

Regardless, the look and feel of the modern office is going to change. Say goodbye to open floor plans and get ready for the return of cubicles. Protective partitions and barriers are going to be common, and reception and meeting areas will have to be reworked or eliminated entirely. Short-term leases, as in the WeWork model, and “hot desking” are also likely to wane, as hygienic concerns take precedence.

But these are relatively minor concerns – offices will need a remodel, but they’ll be back. Because Colorado continues to be such a desirable place to live and invest, its entire real estate market rebounded faster than most other states. The only question is, will the resurgence happen in 2020, 2021 or beyond?