Where will commercial real estate go in 2019?

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”   — Mark Twain

At Waypoint, we triangulate as many believable viewpoints as possible before answering questions. We fielded a lot of similar questions in 2018, and with some help from our friends, this article aims to answer a few of these questions and shine a light on the path our real estate market will travel in 2019.

How is our local economy doing, and what does this mean for commercial real estate?

This is a great question for local economists who know the data inside and out, and they had the following to say during a recent conference call:

“We have had an unemployment rate below 3 percent for quite some time now, which creates a tight labor market that favors job seekers,” said Amanda Repella, workforce economist for Larimer County Economic and Workforce Development. “In these conditions, many unemployed workers quickly find new jobs, and those who are among the long-term unemployed (those out of work for more than 27 weeks) are likely to have more significant barriers to finding employment.”

“Employment growth is slightly outpacing population growth”, said Jensen Morgan, analyst with the city of Fort Collins Economic Health Office. “We are continuing to see steady population growth as workers move to this market to fill jobs. Additionally, we are seeing more and more an exchange of people commuting to jobs across county lines along the Front Range.”

Waypoint’s take: Larimer County continues to attract employers that are looking for a highly educated and skilled workforce, adding steady growth to an already stable and diversified workforce. Consequently, office space leasing turned a corner in 2018. According to Costar Analytics, the current vacancy rate of office space in the Fort Collins/Loveland market is 4.02 percent. This is down from 6.53 percent at start of 2018. 273,241 square feet of office space was absorbed in 2018, compared to 112,205 square feet absorbed in 2017, an increase of 144 percent.  A lack of current inventory, paired with no speculative office currently under construction, means a tight office market for 2019.

I see a lot of restaurants closing in Fort Collins. What is going on?

There are not many more experienced restauranteurs in our market than John Arnolfo, owner of the Silver Grill Café in Old Town Fort Collins. John shared the following during a recent meeting:

“People love the restaurant business. They see a vibrant economy and they want to get into it, however there are challenges in the current environment. New restaurants are opening at a time when build-out costs, rents, and labor costs are all at all-time highs. Additionally, restaurant home delivery services and grocers offering more ready-to-eat meals have affected how many people are eating at restaurants. The concepts that can consistently deliver a great experience will persevere. The healthy competition will continue pushing everyone to be better.”

Waypoint’s take: 53 new restaurants opened in 2018 and 29 closed. According to the most recent sales tax reports, total sales at restaurants and bars in Fort Collins increased 6.7 percent from 2017 to 2018. Within the Old Town restaurant segment, total sales increased 9.4 percent. While this is a competitive industry, it is not a struggling one. The best concepts and operators in “A” locations will thrive.

I would like to own commercial real estate in this market, however I cannot find an existing building that works for my business. Should I consider new development?

According to Scott Mikulak at Saunders Heath Construction, “The overall cost of construction has increased an average of 5.3 percent annually over the last few years. However, there has not been a uniform cost increase of 5.3 percent across all types of construction. We hear concern in the market about high construction costs and we always encourage our clients to let us put a budget together for their projects. They are often pleasantly surprised at what we can creatively accomplish with different ideas and strategies. We are continuing to see a high amount of activity with industrial/flex, medical office, education, and multi-family projects.”

Waypoint’s take: Almost universally, users will save money if they can find existing real estate to occupy and/or convert for their use. However, absent any existing opportunities, ground up development is still a very attractive for certain owner/users. Banks are lending aggressively to attract owner-occupied construction loans to proven, successful businesses, especially in the medical office and light manufacturing sectors. Contractors are bidding jobs more aggressively if you happen to have a time frame that aligns with when they want to get work on schedule. The best contractors will propose creative ideas to keep costs as low as possible.

Has the multi-family segment peaked in the Fort Collins/Loveland market?

Consider these multi-family stats provided by Costar Analytics:

• The occupancy rate in Fort Collins is currently 90.91 percent. The five-year average occupancy rate is 94.21 percent.

• 329 units have been absorbed over the past year. The five-year average over the past is 218 units per year.

• Annual rent growth has been 1.7 percent over the past year. The five-year average is 2.92 percent. From 2017 to 2018 the rent growth was 4.39 percent.

1,275 units are currently under construction and scheduled to be delivered over the next four quarters. This represents a 13 percent increase in total inventory.

Waypoint’s take: This market segment’s future will be decided by the absorption rate. Can the current rate be maintained? Steady employment and population growth lead us to believe that absorption over the next five years will exceed the average absorption rate over the last five years (218 units/year). With such a substantial increase in overall inventory, we anticipate a continuation of the most recent trends over the short-term: Flat rent growth (1-1.5 percent) and an occupancy rate hovering around 90 percent. 

Where are we going in 2019? Be wary of anyone who has a quick answer. There is one thing that I do know for sure: Despite risks and challenges, the Northern Colorado market offers an abundance of opportunity in 2019.

Greg Roeder is a partner and co-founder of Waypoint Real Estate based in Fort Collins.

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