Commercial real estate market continues slump

Peter Marcus, DDN Staff Writer

Thursday, July 9, 2009

The overall Denver commercial real estate market continued to slump during the second fiscal quarter, according to a report released this week by a local market advisory firm.

The Grubb & Ellis Denver report shows continued declines in the retail, multifamily and office markets.

“Second quarter was hardly a surprise for anyone in the commercial real estate market,” states the report. “Given the continued economic pressures facing many employers, vacancy rates increased virtually across the board, and lease rates continued a dramatic downward slide.”

Office vacancy rates continued to rise during the second quarter, increasing by a total of 60 basis points during the quarter, slightly less than the 70-basis-point jump during first quarter. Year-to-date, vacancy rates have increased by 130 basis points, according to the report.

The increased vacancy rate, however, is good news to prospective tenants. Asking office lease rates dropped sharply, by an average of 8 percent, with declines of more than $1 per square foot.

The retail market also continued to struggle during the quarter, with vacancy increasing by 40 basis points. Large strip property rates continued to decline, while regional centers and small strip and grocery anchored centers held rates steady.

But the Grubb & Ellis report paints a bleak picture of the near future for the retail market.

“Long anticipated, commercial foreclosures finally began in the retail sector, with first quarter filings released in late April,” states the report. “While still relatively small in volume, the 11 commercial foreclosures during first quarter included four assorted retail properties, which is likely the tip of the iceberg.”

“A true retail recovery will not arrive until consumer spending has returned,” continued the report. “As of yet, consumer confidence remains moribund, with annual average rankings for both Mountain and U.S. half of what they were a year ago.”

The multifamily market also was not shielded from the collapsing market. The good news is that while vacancy rates climbed again, the margin was much smaller than the two previous quarters.

Once again, the increased vacancy rate is good news to prospective tenants. Rents declined during the quarter to $1 per square foot. Net effective rents declined by $9 per unit.

For owners, however, the bad news is that sales volume showed little spark.

“Sales volumes remain anemic,” states the report, pointing to a meager total of 30 transactions year-to-date — only 40 percent of last year’s to-date totals.

Only five sales of properties with 50 or more units have occurred, with the remaining sales in the 10-50-unit category.

Again, all hope lies with consumers, and the outlook for the multi-housing market isn’t that bad.

“The future of the apartment market will rest with consumers,” states the Grubb & Ellis report. “Given rosier job outlook and increasing consumer confidence, individuals will feel comfortable signing longer-term leases for additional units.”

For more information, visit www.grubb-ellis.com

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