CEO Roundtable: Real-estate market copes with winds of change

BOULDER — The real estate and development market in the Boulder Valley is still finding its legs after the COVID-19 pandemic but still faces some headwinds, according to industry leaders who participated in BizWest’s CEO Roundtable on Tuesday at the Boulder Chamber.

“We have a little more inventory” of residential units for sale “than a couple years ago, but it’s fairly stagnant,” said Todd Gullette, managing broker for Re/Max of Boulder,

Whereas 66% of his listed attached-dwelling units and 60% of single-family homes were under contract in 2021, he said, today’s figures are 35% and 34% respectively. 

“That shows how low we are,” Gullette said, “When you get into the mid- to low-30s is where we track where appreciation stops. Under 30% is a depreciating market. We’re used to Boulder going through peaks and valleys of appreciation, peaks and plateaus, and certainly this is that plateau.”

Gullette said his brokerage has seen some falling residential prices, especially in single-family homes and “maybe even some dropped prices in the attached,” which he said has a lot more inventory now.

Still, he said, 31.5% of Boulder’s total housing, “a huge chunk,” lists for more than $2 million.

The amount of time a listed property sits on the market has increased as well, he said. Scott Holton, founder and principal of Element Properties, noted that “townhomes around downtown Boulder are staying on the market longer,” and Gulette added that his listings are staying available now for around 60 days, “and that’s up maybe 20 days” from last year.

“There’s a lot of chatter about how much more patient you have to be as a seller,” Gullette said.

“My sense is that we’ll start to see some more apartment buildings, probably 10 units and above, start coming on the market,” said Eric Rutherford, a broker at WK Real Estate. “I don’t know what the big boys think about buying in the state of Colorado, but I think apartment building construction is going to slow down and there’ll be some opportunity for sales.”

For investment properties, although Beau Gamble, newly named president of Dean Callan & Co., said “there’s still good deals to be had,” Chris Jensen, president and broker at Vista Commercial Advisors Inc. said “we’re not seeing a lot of motion.”

One of the biggest headwinds faced by all sectors is the increase  in interest rates, the real estate leaders agreed.

“When interest rates essentially double, the market goes in the other direction. So it’s going to get worse before it gets better on the investment side,” said Geoffrey Keys, president and broker of Keys Commercial Real Estate.

One of the barometers that real estate investors watch is capitalization rates, Gamble and Keys said. As defined by Investopedia, “the ‘cap rate’ is calculated by dividing net operating income by the total cost of a property. Expressed as a percentage, the cap rate represents the investment returns from different properties.” Investors use cap rates to compare the returns of different properties. For example, according to J.P. Morgan & Co., a property worth $14 million generating $600,000 of NOI would have a cap rate of 4.3%.

“We were used to these fun deals with low cap rates, but now the world has changed,” Keys said. “Maybe it gets to the point where we were in the late ‘80s when it becomes a lot more affordable, and there’s a lot more creative ways to finance. That would help us kind of pull out of this.”

Ben Woolf, director of commercial investments for Conscience Bay Co., cited “the bid-ask spread between sellers and buyers” as a challenge. “Sellers are looking at cap rates from 12 months ago, and those don’t exist any more,” he said. “Buyers are confronting lenders that aren’t there. They won’t touch office right now.”

Overall, Keys said, “retail and multifamily are doing better than the rest of the market. Industrial’s not hurting that bad, but office is where the heartache is right now.”

Even so, said Angela Topel, brokerage vice president at Gibbons-White Inc., “there’s also opportunity where I think some things will come to market you would not be able to pick up otherwise.”

“The last investment sale I was involved with closed last fall. It’s been really quiet since,” said Jeremy Kroner, senior vice president of CBRE. “We were doing two, three, four investment sales a year before.”

Still, he added, “it feels like it’s thawing out a little bit.”

Jorge Espinoza, principal and broker associate with The Colorado Group, said “investment sales are down significantly. Small offices are still leasing fairly often, and medical are still leasing. But the big offices, we’re not seeing much of that.”

At TenantWisdom LLC, “we’re finding a very different situation,” said Mark Casey, owner and principal broker. “On the industrial side, it’s very hard to find anything to buy. The office side is more available, but the expectation is with how bad, how weak the office market is, they ought to be getting a better price.”

Keith Burden, president of Burden Inc., agreed. “It seems like there’s a pretty significant buyer-seller disconnect in terms of pricing,” he said. “Banks are a pretty hard and fast ‘no’ on anything that’s office related. New construction is a hard ‘no.’ So it’s a challenging market out there.”

Aaron Spear, market president of Bank of Colorado, one of the CEO Roundtable’s sponsors, pushed back on Burden’s characterization of the banking climate.

“It is not a hard ‘no.’ Every deal, every situation, every borrower has a unique circumstance, a unique balance sheet, unique tenant,” Spear said. “ Long-term tenants obviously are going to be more attractive with long-term leases and credit ratings.

“In the office market, there’s a lot of vacancies, a lot of risk, so we have to underwrite some of that risk,” Spear said. “Yes, some banks are pencils down, but we are fortunate that Bank of Colorado is not the case. There are a lot of people who are still lending, but there are real attacks on balance sheets. We saw that with [Silicon Valley Bank}, we’re seeing that trickle through the market in terms of earnings reports.

“As Warren Buffett would say, we’re going to find out who’s swimming naked.”

If the bank can’t finance a deal, said David Fingerhut, an associate broker with Colorado Real Estate Brokers Inc., maybe the seller can.

“Seller financing has a key role moving forward,” he said. “We have a deal right now where the seller’s offering 3½% interest only. He wants his price. The price right now is worth that with that interest rate.”

Otherwise, he said, “we’ve been talking to a lot of sellers. They want 2021 pricing, 2020 pricing, but it’s just not there. So it’s a hard conversation to have.”

Steve Kawulok, managing director for SVN/Denver Commercial, reported that “we’ve had about three or four deals blow up this year over financing issues,”

Stephen Tebo, founder and owner of Tebo Properties, sounded more upbeat – “We are definitely buying” – but also cited a laundry list of challenges, including high interest rates, a daunting post-COVID office vacancy rate and the much-publicized surge in property-tax assessments, for which Tebo said he has filed 152 protests so far.

“In the last month, we’ve seen two more headwinds on that,” he said.

One is government. Longmont, responding to the need for transit-oriented development, “is coming to us and saying this is what we would like you to do — hundreds and hundreds of apartments. It’s pretty impressive,” Tebo said. However, he added, other cities “are getting so incredibly difficult to deal with. On one of his properties, “we had a tenant finish package but it took 405 days to get a building permit. It’s forcing a lot of people to do tenant finish without a permit.”

The other newer headwind Tebo cited is the problem with transients.

“The homeless issue is incredibly difficult,” he said. “We’ve had three windows broken this week already. It’s getting worse.”

Seth Chernoff, CEO of Chernoff Boulder Properties and CB Property Management, agreed, citing “20 windows broken in the last six weeks” at his company’s buildings, and Keys decried what the safety issue in downtown Boulder is doing to his ability to sell prospective renters on claiming a space.

“”We’ve got to get a council elected that will do something. It is completely out of control,” he said. “The encampments are all over. The city does come out and clean them up, but they just come back two days later.

“I was walking into Pearl West the other day, one of the nicest Class A buildings in Boulder, and there’s this woman halfway naked shooting up, got her kit all over the entry, in the middle of broad daylight,” Keys said. “Five years ago, that would have happened, they probably would have called out the SWAT team, but now you just keep walking.

“I think we’re getting too used to this insanity with the transients or unhoused or whatever you call it. I think that’s a headwind we need to confront. I think we need to do it politically, and I think now is the time,” he said. “When you’re hauling your prospective tenant around and there’s somebody shooting up,” it makes leasing far more difficult.

“When people don’t feel safe, they don’t make bold decisions.”

Office leasing in downtown Boulder has struggled since the pandemic, Gamble said.

“I have started to see the midsize users of 5,000-, 10,000-square-foot tenants out looking, but they’re only out looking because they know they’re going to get a deal right now,” he said. “It’s certainly not a landlord’s market at all, and we’re starting to see a lot of landlords get creative and trying to land deals. On five-year terms, maybe they’re going 50% below market on years 1 and 2, and get closer to what market is by year 3.

“A lot of landlords are wondering, ‘Hey, should I go to my space that hasn’t had a user in there for two years, should I go in and spend the money and spec it out and make it look cool?’ The reality is, I think they should, because the 3,000-square-foot user, 5,000-square-foot user, 7,000-square-foot user who’s out there looking right now is probably downsizing from 30,000 or 40,000 square feet, and they want something that’s turn-key move-in ready. So the landlords that are out there spending money and getting their spaces ready or are lucky enough to have a tenant that had a cool space they vacated are the ones seeing the most activity.”

Topel said “a lot of tenants do not want to build out and bring money to the table beyond” securing the space, Kroner described the office market as “choppy.” and Casey noted that “even if a tenant gets a screaming deal on the net rent, their overall rent may be higher because of the tax issue.”

The silver lining is “less uncertainty,” Jensen said. “Decision-makers a year ago were saying, ‘we don’t know what we need,’ and we as brokers were not able to help them. We could try to get them moving in the right direction, but they weren’t taking a position. Now they do.”

On the retail side, Gamble said he sees “a lot of activity, but it’s from mom-and-pop retailers. And a lot of mom-and-pop retailers don’t want to come out of pocket $50 to $100 a square foot to build out a space that’s in shell condition. So I’m trying to get my landlords to build these spaces out, but as much as they want to do that, they need a lender on that, and the lender has numbers they have to meet, and the lender has X amount of dollars they can provide.”

Burden said he sees “a real push in some of these larger retail centers for a live-work-play type of environment. So hopefully the municipalities will allow more uses like that where you can have some residential uses, you can have some office uses that make sense, and then fitness or entertainment-type uses.”

The brokers generally agreed that the industrial sector is more robust in the region, but Espinoza sounded a note of caution.
“The interesting thing will be when the loans have to be financed,” he said. “Industrial and commercial are on five- to seven-year loans. If you buy your building at 5½% and have to refinance it at 7% and all of a sudden you’re not meeting your debt-coverage ratio and you have to come to the table with some money, your investors aren’t happy, and then you have to put it up for sale. There’ll be some turmoil.”

At Bank of Colorado, “we’re at that point now in the cycle where those conversations are being had by lenders with their customers,” Spear said. “What are you going to do to resolve this, is the question. How are we going to work together to fix this, and what do you need from me in terms of helping shore this up so I can help us get out of this. So it can be a negotiation, it needs to be a problem-solving discussion.”

In all sectors but especially industrial, Kroner concluded, the one constant and reason for optimism is the attractiveness of the region.

“The Front Range, and Boulder in particular, is on everybody’s map,” he said. “They love it here. It’s a two-hour flight from anywhere on the West Coast. They love the engineering talent that’s here, the education level.

“And as expensive as we’re getting, we’re still a bargain compared to San Diego.”

The CEO Roundtable was attended by Jeremy Wilson and Josh Engle of Plante Moran; Aaron Spear and Wade Wimmer with Bank of Colorado; and Ashley Cawthorn and Peter Schaub of Berg Hill Greenleaf Ruscitti LLP.

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