Developing, buying options for owner-users

Here we sit on top of the hill with the car idling.

In our rear-view mirror we see the longest economic expansion in U.S. history (10 years and counting).   We see an economic climate in Northern Colorado that facilitated growth in nearly every industry, and we see a construction boom that served up 5-10 percent annual cost increases during that time frame.

Looking out our windshield at what lies immediately in front of us, we see record low unemployment rates (hovering around 2.5 percent down from a peak of 7.7 percent in 2010), a coinciding general shortage of expensive labor in Northern Colorado, and commercial real estate vacancy rates that suggest demand has outstripped supply in every product type (typically defined as vacancy rates below 5 percent, the ‘equilibrium rate’).

To our right and left we see (or feel) a little uncertainty, a slowdown of the global economy, global trade disputes, an upcoming election year. 

Many business owners who have grown their businesses with the general economy over the past decade are now facing space constraints, and are contemplating their future real estate needs.  As we near the top of an economic cycle, and owners face sticker shock in our high cost environment, what is an owner to do? 

As we all know in business, sitting in idle for too long can result in just an empty fuel tank.  As business owners, we must assess what we see in every direction, make strategic decisions, and drive-on. 

But rest assured, there are a few glimmers of hope worthy of consideration for owners facing real estate decisions.

Owner-occupied interest rates

In short, borrowing costs are historically low, and the low interest rates (particularly for owner users) are providing a substantive offset to high acquisition and construction costs.  Declining federal treasury rates, paired with a highly competitive local lending environment, has paved the way for a great borrowing environment.   Further, lenders are offering longer term fixed interest periods, so borrowers can lock in low rates for longer periods of time (10 years +).

Let’s assume a borrower intends to borrow $1,000,000.  The loan is amortized over 20 years at an interest rate of 4 percent.  Let’s also assume it is only a matter of time before rates increase.  There is no crystal ball, however, so let’s also assume rates normalize in the near future in the 5.25 percent range. 

Finance today at 4 percent, or “tomorrow” at 5.25 percent could mean one of two things for a borrower:

¹Borrowers would save more than $8,143 annually (a 10.07 percent reduction in annual loan payments). 

² Borrowers could increase their loan amount by nearly $120,000 and keep the loan payments the same (@ the 4 percent rate vs tomorrow’s rate of 5.25 percent).

New development is not your only option

The aforementioned sticker shock is never more present than when owners assess ground-up  construction.  City fees, high land costs, labor and material costs all culminate for shell construction costs that can top $340-$360 per square foot, and tenant finish costs that could add an additional $100 per square foot.

Although existing and/or vacant inventory is low, there are options other than constructing a new building.  The ways in which we use real estate is rapidly changing, creating great opportunities for the renovation and re-use of existing buildings.  Video stores, the pullback of national restaurant chains, bank consolidations and shifting trends in retail are all creating buying opportunities for very well-located real estate. 

These buildings oftentimes can be purchased at steep discounts as compared to ground-up construction.  Plus, a few added benefits;

¹ Much quicker occupancy.  The time between the purchase date and occupancy can be half that of ground-up construction.

² Adaptive reuse offers the ultimate green construction, the reuse of existing materials. 

³ Mature landscaping. 

⁴ Often these properties offer more ample parking than current day codes may allow.

The perfect, move-in ready building with ideal financing may not exist for every owner-user in the market.  However, they do offer two strategies worthy of exploration for those owners who are willing to take the car out of neutral and go for a drive.   

Josh Guernsey and Greg Roeder are commercial brokers with Waypoint Real Estate in Fort Collins. They can be reached at 970-632-5050.

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