RE Summit: Pandemic impacts commercial sector, but unevenly

The foreclosure actions affecting two Northern Colorado shopping malls — The Promenade Shops at Centerra and Foothills in Fort Collins — are not a foreshadowing of things to come in the region, unless you’re in the mall business.

Ryan Schaefer, CEO of NAI Affinity commercial real estate agency in Northern Colorado, provided that assessment during a forecast of the commercial real estate market in the region during BizWest’s Northern Colorado Real Estate Summit this morning. 

“There will be some [foreclosures], but percentage wise it will be relatively minor,” he said in response to a question.

The foreclosures in recent months of two of the region’s largest shopping centers drew the attention of the commercial market, but as Schaefer noted, the problem is not unique to Northern Colorado.

“It’s about demographics. We have too many malls in the United States, and those suffering most are too large for their markets,” he said. Citing household-penetration numbers in areas within five miles of malls, he said that most successful malls need high-income households numbering 15,000 to 20,000 within five miles to be successful. Some have upward of 50,000 high-income households in close proximity. Foothills has about 10,000 high-income households in the sweet spot nearby, he said.

Schaefer’s solutions are not likely to be welcomed, he acknowledged, but could include creating one mall in Northern Colorado that is centrally located so it’s convenient for the maximum number of people, or demolishing the malls and rebuilding differently.

He speculated that if McWhinney Real Estate Services Inc. is successful in buying Foothills out of foreclosure it will need to “decrease the retail gross leasable area and increase density of rooftops around the property.”

“You need a lot of high-income housing to make these work,” Schaefer said.

Despite the travails of mall-based retailing, Schaefer said that retail sales during the pandemic “outperformed expectations.” He credited government stimulus and the Paycheck Protection Program for helping prop up retail sales and for staving off a far-worse recession.

Retail sales were up 6.7% in 2020, but that includes online retail sales, which were up 21.9%, he said. “The bad news is that a bigger share [of shopping] is happening online.”

Categories such as home improvement and grocery did well during the pandemic, but other categories such as department stores and fashion saw declines. He predicted that the region will see little new brick-and-mortar retail in the coming months with the exception of restaurants and what he called “daily-need retail” such as convenience stores.

Another commercial real estate sector particularly impacted by the pandemic was office space, where transactions nationwide were down 46.9% as office tenants sent their employees home. Denver, Larimer County and Weld County all saw negative absorption of office properties, with Denver seeing 4.6 million square feet vacated, Weld County 108,000 square feet and Larimer County 244,000 square feet. 

Schaefer said the pandemic taught employers that productivity is not necessarily affected by staff members doing their work from home. They have discovered, however, that training and collaboration suffered as a result. Yet companies are approaching what they learned differently. Citing two large national employers, Schaefer said Facebook plans to permit workers to work from home “forever,” while Google has announced massive new office building projects around the country.

Using a rough guess on how many workers might permanently leave congregate offices, Schaefer said that if companies reduce office space by even 10%, that means that available, existing office space is 16 times greater than the amount of new office space delivered in 2019. 

Cautioning that his calculation doesn’t take into account population growth and obsolescence of properties, in any case the market will have many years worth of space that needs to be absorbed before it makes sense to build additional. 

“I think it could be as little as five years of supply, but there will be less new office coming on line in the next few years,” he said. 

Absorption rates for industrial properties were up in Weld County and Denver, but down in Larimer, Schaefer said. Vacancy rates for industrial properties ranged from 4.7% to 6.5% in the three metropolitan statistical areas that he cited. 

While several industrial property developers have announced plans or have broken ground on projects in the region, Schaefer believes that the differences between the developments reduces the head-to-head competition that might otherwise be the case. 

“We don’t know how much our market can absorb,” he said. “It’s quite probable that we can absorb more than is being delivered. The question is ‘how much more?’”

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