The Denver Commercial Real Estate market saw another slow quarter for sales during Q1. The four major property types saw $1,819,601,974 in sales volume during Q1 2023, but we only saw $1,437,101,913 in sales volume for Q1 2024. This represents a (21%) decline in sales volume. The largest change came from a (75%) reduction in office sales volume. This is driven by persistent work-from-home policies, aging office buildings, higher interest rates, tighter lending standards, and economic uncertainty around this property type.
The four commercial property types we are tracking are: retail, multi-family, office, and industrial. It is interesting to look at the Commercial Real Estate Market as a whole and the individual property types. Let’s dive into supply, demand, new construction, vacancy rates, and rent growth for Denver Commercial Real Estate.
Below is a summary of key details for each property type.
Supply
There are 1,041 active listings across the four major property types with 339 retail, 120 multi-family, 321 office, and 261 industrial. Throughout 2023, we average 947 commercial listings at the end of each quarter. It is worth noting that the Denver MSA has 30,164 buildings totaling 874M sf of space. Hands down, the most new construction is in multi-family with industrial being the next largest by sf. Interestingly, office has quite a bit of growth and retail has very little under construction. Let’s take a look demand.
Demand
Demand for commercial real estate is created by people (population growth) and businesses (job growth). When our population is growing, there is an increased demand for housing and shopping. When jobs are created, there is more demand for industrial, office, and retail. With that said, office demand has been decreasing due to remote work policies, so previous metrics for forecasting office demand are no longer applicable.
There were 382 closed sales in Q1 2024, which is an increase from 270 closed sales in Q1 2023. Though the number of sales increased, the sales volume decreased. This means more smaller properties are selling than in Q1 2023. The total dollar volume for retail, multi-family, office, and industrial was $1.43B in Q1 2024 compared to $1.81B in Q1 2023.
Another gauge for demand is net absorption. Absorption is a gauge of the space tenants need to live or operate their businesses. In Q1 2023, Denver absorbed 955k sf, but Q1 2024 saw 4.4M sf of absorption. This is a big increase! The large swing came from office losing (1.1M) sf of occupancy in Q1 2023 and only losing (286k) sf of occupancy in Q1 2024. Also, Industrial jumped significantly from 139k sf in Q1 2023 to 3.08M sf in Q1 2024. Let's take a look at new construction in the various property types.
New Construction
Developers started construction on 1.2M sf during Q1 2024. This is down from 9.95M sf started during Q1 2023. Therefore, new construction starts slowed significantly. As for sf under construction, we had 31.7M sf in Q1 2024 compared to 43.2M sf in Q1 2023. The largest declines are coming from (4.7M) sf less of industrial and (6.3M) sf less of multi-family.
Retail construction starts accounted for 11.5K sf. Multi-family construction starts were 1.1M sf. Office construction starts were 60K sf, and industrial construction starts accounted for 40.9k sf.
Another factor to consider is the total sf of space under construction for each property type. Retail has 331K sf under construction. Multi-family has 21.2M sf under construction. Office has 3.8M sf under construction, and industrial has 6.4M sf under construction. Altogether there is 31.7M sf of Commercial Real Estate under construction in the Denver MSA.
Developers delivered just over 5.09M sf to the market in Q1 2024. There were 2.63M sf of deliveries in Q4 2023 so this is a much larger wave of new properties coming into the market. Retail delivered 61K sf. Multi-family developers completed 2.7M sf. Office developers delivered 256K sf. Industrial developers delivered 2.06M sf.
Next, let’s look at vacancy rates to see how much space is not occupied.
Vacancy Rates
A vacancy rate is a metric comparing the amount of unoccupied sf to the total sf of all the buildings in a market. Denver has 49.8M sf of vacancy for Commercial Real Estate in the MSA. Although this sounds like a lot, Denver has 874M sf of commercial buildings. Therefore, our commercial vacancy rate is 5.7%. As you can see in the chart below, office historically has a higher vacancy rate but the trend really moved higher starting in Q2 of 2023.
If we are to understand commercial vacancy rates, we need to compare the current vacancy rates to the long-term vacancy rates. Retail is the only vacancy that is lower than the long-term average, and we believe is because retail development has been among the lowest in new construction sf. Multi-family, office, and industrial are all higher than their long-term average, which will limit rent growth.
Rent Growth
Rent growth could be lumped into demand but it is interesting enough to separate into a new paragraph. Industrial YOY rent growth came in at 4.01%. The next highest rent growth came from office at 1.5%. Multi-family and retail both grew less than 1% YOY. The Bureau of Labor Statistics reported that the Denver MSA Consumer Price Index grew by 2.8% YOY in March 2024 for all items and 3.4% for all items less food and energy. Therefore, industrial rents are the only rents exceeding inflation at this time.
Final Thoughts
In Summary, supply, demand, new construction, vacancy rates, and rent growth are all good key performance indicators for the commercial real estate market in Denver. We have a decent supply of properties for sale. Demand for properties, as measured by sales volume, has softened significantly during Q1. Though the transaction volume of smaller properties has picked up. Developers are hard at work building retail and industrial properties, but total construction has slowed. Vacancy rates are different among the different commercial property types. Office has been consistently higher than the long-term average for several years now. We expect office vacancies to stay higher for the foreseeable future. Lastly, rent growth is stalling for retail, multi-family, and office. Industrial rent growth isn't as strong has it was but at least it is still outpacing inflation.
Link to all the presentations for each property type: