Pandemic Wins, Losses Will Shape Denver CRE Strategies In 2022

Nearly two years after the pandemic sent the economy into a tailspin, Denver's commercial real estate players are taking stock of the industry's wins and losses.

Experts at Bisnow’s Denver 2022 Forecast event note that Covid-19 simply sped up trends that were already in the works in 2019, and those lessons will shape strategies this year. 

Take retail, for example, a harder-hit sector of the commercial real estate industry in which the pandemic only accelerated trends that were taking shape prior, according to Dimple Manghani, principal at MBH Architects, a San Francisco-based architectural firm specializing in retail and hospitality. 

E-commerce was well on its way to ubiquity long before Covid-19, but the coronavirus pandemic pushed retailers to make the shift basically overnight, said Manghani, who works in MBH’s Denver office and spoke on a panel about the region's path forward at the Bisnow event on Jan. 25.

Those changes are now here to stay, and those who adapted have been able to survive, and in some cases, thrive throughout the pandemic. 

“Retail has reinvigorated itself,” Manghani said. “For years we’ve been hearing about the death of retail, the death of malls. Over the last year we’ve had four to five new clients call, wanting to go from clicks to bricks. They have the data showing that it’s mandated.”

Ray Pittman, CEO of hospitality- and retail-focused developer McWhinney, echoed this, noting that an "acceleration" has indeed occurred. 

“The pandemic twisted the lens. It changed the way we interact with the built environment," Pittman said. 

While the majority of McWhinney’s portfolio in Denver consists of hospitality, retail and housing properties, the company counts one office holding at the Dairy Block, an adaptive reuse project in LoDo. The office sits atop Milk Market, a mixed-use space with food stalls and local retailers. These amenities have helped drive demand for the office, Pittman said.

LoDo, with its historic buildings, proximity to Union Station and distinctive vibe, has had an easier time maintaining a tenant base than the Central Business District or Uptown areas, which have struggled to find tenants in the post-pandemic leasing environment, he said. 

Indeed, the LoDo and Central Platte Valley areas have a vacancy rate of 11.1%, less than half that of the Central Business District at 25.5%, according to CBRE’s Downtown Denver Office Marketview report for the fourth quarter of 2021. Meanwhile, office rents in LoDo average $11 more per SF than their CBD counterparts.

Pittman points to the experiential nature of the city’s newer office buildings as a significant contributor to this disparity.

“Demand is there for offices that are nice places to be,” he said. “Employers use that as a way to encourage people to come back to the office. The premium is on environment … It’s about the environment, creating a place where young, talented people want to be.”

Owners of legacy office properties in downtown Denver were busy upgrading their buildings for years before the pandemic, but persistent demands for updated surroundings could further catalyze these changes. 

Additionally, there are new submarkets on the outskirts of the traditional commercial core of Denver, like Five Points and Arapahoe Square, that have been development targets in recent years and have the potential to scale up office offerings to meet demands for engaging atmospheres and accessible amenities.

Tami Door, the new CEO of office developer Q Factor who recently stepped down from her long-held post at the helm of the Downtown Denver Partnership, noted that activity in cities tends to ebb and flow between submarkets, leaving plenty of opportunity for other parts of downtown to experience their own post-pandemic renaissance.

“Cities are always, always changing, and the brightest, shiniest objects in any city will not always be the brightest, shiniest objects,” she said, reminding the crowd that it hasn’t been very long — about 30 years — since downtown advocates were in the midst of a major revamp of LoDo that turned it into the destination it is today.

Despite challenges from the pandemic, certain aspects of the local commercial real estate market keep chugging along, according to Bahman Shafa, CEO of local developer Focus Property Group. The first two examples are industrial, the current market darling, and multifamily, a persistent beneficiary of the shortage of for-sale housing in the metro area.

Shafa is also optimistic about self-storage, a long-overlooked asset class that has experienced tremendous growth in the last decade, particularly in the wake of a late-2020 wave of residential decluttering that caught on as it became evident that working from home would be a long-term reality for many people.

Even in the sectors that have struggled, like office, signs point to increased hope and confidence, he said.

At the pandemic’s outset, there was “a lot of paralysis,” Shafa said, as office users dealt with unprecedented uncertainty.

“Tenants would renew for a year and put off the long-term decision,” he said. “Over time, as confidence built, we saw leases between three and five years being signed.”

The seven- to 10-year lease that was common before the pandemic hasn’t regained its prevalence, but office users are slowly working their way back to a longer-term commitment with their office space, especially if those spaces come with the right atmosphere, Shafa said.