Mirror, mirror on the wall, will 2004 bring the best local commercial real estate deals of them all?
That depends on whom you talk to in the Boulder Valley. Local mortgage brokers say this is a great time to borrow money, but some local real estate agents say the fire sale of cheap property isn't here yet.
Still, the combination of low mortgage rates and some small real estate discounts -- in what usually is a rapidly growing market -- is convincing many people that now is the best time to buy.
In March, mortgage rates hit eight-month lows after hitting 45-year lows in the summer of 2003. Subsequently, local mortgage brokers have reported an unusually high amount of business during the dead of winter. Buyers who normally make property deals during the summer seem eager to pounce on the real estate market right off the bat in 2004.
"The holiday season is usually pretty quiet, but this was one of our busiest fourth quarters ever, and the first quarter has also started strong," said Jeff Lemon, the Northern Colorado Market Manager for Bank One. "I think we saw the height of refinancing this summer, so this (jump in winter activity) involves a lot of new businesses wanting to lock in those low rates."
Commercial mortgage rates differ from the more common publicized residential rates, but follow the same trends based on the U.S. treasuries, Lemon said. A commercial loan for an owner-occupied building is running around 4 percent for a one-year fixed rate, 5.25 percent for five years and about 6 percent for seven years. The commercial rates can vary largely based on the type of real estate an investor is buying or how much business that investor has done with the institution making the loan.
Along with the low mortgage rates, there are also some discounts popping up in local commercial real estate market, which has recently faced some of the highest vacancy rates in the country, between 20 percent and 25 percent. But local commercial real estate brokers like Don Marcotte, president of the O'Connor Group in Boulder, said buyers have yet to see a great drop in prices, which usually accompany such high vacancy rates.
"It's kind of strange," Marcotte said. "I think most landlords are hoping for a turnaround, and they are willing to ride it out, even with empty buildings." Marcotte added that the low mortgage rates also have benefited the landlords in that they've been able to refinance their buildings and use the saved cash to hold out longer.
After a dismal year of real estate business in 2002, Marcotte said things began to slowly improve during the latter half of 2003. He thinks the recovery will continue into 2004, but if it's too slow, some landlords might lose patience and drop prices.
Boulder Valley's office space market could be the first to crack if a recovery isn't quick to come. With about 2.1 million square feet of unused local office space, vacancy rates are still high at 23.3 percent in the Boulder Valley, according to Trammell Crow, a national real estate service company with offices in Denver. This is high when compared with local retail vacancy rates at only 5.7 percent and industrial vacancy rates at 13.5 percent.
The office space vacancy rate in the Boulder Valley is worst throughout the Denver metro area, and is one of the highest in the nation. The only silver lining is that this market showed the best improvement in the area during 2003. According to Trammel Crow's end-of-2003 figures, Boulder Valley's office vacancy rate decreased 3.3 percent from 26.6 percent at the start of last year.
But the recovery may be too little, too late say several local real estate experts. Until the vacancy rates drop back into the teens, prices should remain level and may even drop, especially on older buildings. In 2003, local office rental rates averaged around $20 per square foot, triple net, which is a slight decrease from the previous year. Average office sales prices also declined throughout the entire Denver market from $122 per square foot in 2002 to $111 per square foot in 2003.
The value of new construction -- which there is little of also is declining. According the Colorado University Business Research Division, the value of nonresidential building permits in Boulder County fell to $212.7 million in 2003, a 26.5 percent drop from 2002.
Looking at these figures in the context of the past decade, however, show that the local market is still relatively strong, said Gary Horvath, who helped compile the numbers. He pointed out that in 1997 and 1998 (during good economic times) the value of nonresidential building permits in Boulder County was also around $200 million. In 1999, the figure jumped to $467.3 million, mainly because of the Flatiron Crossing development in Broomfield, Horvath said. Therefore, he said it is no surprise to see the number work its way back toward $200 million as the area builds out.
Even though there still is some new office construction in the area, the projects tend to be on a smaller scale, built specifically for a tenant's need. Other larger local office space projects, such as the Discovery Office Park in Superior, cautiously wait for the market to improve before building out their entire plan.
Discovery Office Park's main 36,000-square-foot building is scheduled to be complete in June, but construction of the three remaining buildings, totaling about another 100,000 square feet, is on hold.
"We don't plan to start the other buildings until we get the first one filled," said Ron Nixon, treasurer of Aweida Capital Management. The Superior venture capital company is overseeing the construction of the Discovery Office Park, which is on the east side of McCaslin Boulevard, just north of Rock Creek Parkway.
Bargain rates
Nixon said Aweida Capital would use about 8,000 square feet of the main building for its headquarters and then search for additional tenants. Although he could not provide lease rates yet, Nixon said the sluggish local office market would translate into some discounts.
"We'll probably have a bargain rate to come in, and then depending on the market, the rates will eventually move back up to their normal levels," Nixon said
Mark Casey, president and real estate broker at Casey Partners LTD, said he predicts 2004 will be "a golden year to buy commercial real estate."
Even though commercial real estate prices might dip lower in 2005 and beyond, mortgage rates are likely to start climbing back up, he said. This theory has a higher than normal percentage of commercial clientele expressing interest in buying rather than renting, Casey said.
"One of the reasons companies don't usually purchase is because they prefer the flexibility of renting or leasing," Casey said. That remains true for many high-tech companies with unpredictable growth. For the established small business owner, however, the favorable real estate market conditions have made purchasing owner-occupied property an attractive option, Casey said.
Landlords are responding to this type of consumer by splitting up their large commercial buildings into what Casey calls "commercial condominiums."
"Traditionally, we didn't see these kind of smaller commercial spaces for sale in Boulder," Casey said. "What it allows is for people to own their own space at a lower price."
The shift of benefits toward the buyer in 2004 hints that this year could bring a flurry of property transactions. The question property buyers must ask their mirror on the wall for 2004 is -- should they take advantage of the current low mortgage rates and small discounts now or should they risk higher mortgage rates waiting for better bargains to arise in 2005?