February 7, 2022

Norton: Areas to watch in commercial real estate this year

Circa 2020, during the early months of the pandemic, it was anybody’s guess what impact  COVID-19 and the policies surrounding it would have on the economy, not to mention what  future recovery would look like. Considering the fairly recent Great Recession of 2008-2009,  many hesitatingly predicted a long road to recovery. Nearly two years after the pandemic  began, we evaluate the recovery thus far and look forward to 2022. When we narrow our  evaluation to the scope of commercial real estate in Northern Colorado, we are optimistic.  

Despite lingering COVID-19 policies, the Northern Colorado commercial real estate market  continues to recover. On the heels of a strong 2021, we anticipate a continued recovery trend  in 2022. In the current year, there is one particular positive trend to pay attention to, the  improvement in the office asset class. Along with the positive trend, be sure to keep a  cautionary eye on the inflationary environment and how interest rate increases will affect  prices and deal volume.  

1. Office space (Larimer County) — Without a doubt, office is the slowest asset class to  recover due primarily to COVID-19 related governmental policies — Larimer County is  still under a county wide mask mandate. However, there is improvement in this asset  class moving into 2022. This is great news for property owners with vacant office space. Work-from-home policies are unlikely to disappear altogether, yet many employers will  choose to return to an office setting. Currently at 6.31%, vacancy in office space is  projected to slightly decline. The limited construction of new office buildings makes  existing office space an improved asset class. According to CoStar, there are currently  four office construction projects in Larimer County — three of which are less than 15,000  square feet. While activity around office space leasing was slow in 2021, sales of office space remained relatively strong. The strong sales activity was likely attributable to low  interest rates, particularly for owner occupants. In our market, the current average sale  price for office is $185 per square foot, which is a relative bargain when compared to the Denver metro area or other parts of the country. 

2. Inflation and interest rates — Inflation looms strong. The question is, how long will it  persist in 2022 and how will the Federal Reserve’s tinkering impact local markets? While  low long-term interest rates (available to businesses and investors) aided in economic  recovery, the federal government policy of printing more money to spend in aid has  many unintended consequences — chief among them is an inflationary environment not  seen in decades. The increase in printing money, along with the continued supply chain  disruptions, spur inflation, which was pegged at 6.8% in November 2021 (The Balance).  Inflation typically creates demand for commercial real estate, as investors and owner  users look to hedge against rising inflation. Commercial real estate is an asset class that  performs well during periods of high inflation, compared to other investment types.

In an attempt to curb runaway inflation, the Federal Reserve plans to increase  interest rates by .25% three times in 2022, with more possible increases in 2023, according to the Wall Street Journal. Although rates will likely remain historically low,  investors and users will be eager to buy property this year.  

We’re towing the line between optimism and realism. Commercial real estate in 2022 will not  be without its challenges, but we have reason to believe it will be a great year for the industry  throughout our growing market. 

Nick Norton is a commercial broker with Waypoint Real Estate in Fort Collins.

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