In order to bring you the most in-depth and up to date information on the commercial real estate market around Denver, we’re starting a quarterly roundtable with local experts. Joining me on the first episode of the new series are:
- Tom Konkel of First Integrity Title
- William Foy of Spearhead Commercial Capital
- Kevin Woosley and Will Scherman of Kaufman Hagan Commercial Real Estate
- Travis Sperr of Renovo Financial
We talked about what we’re seeing across the market, and what it means for investors. To hear the full discussion, listen to the podcast or watch the YouTube video.
- Listen to the podcast “#376: Denver Commercial Real Estate Q1 Market Updates” on the Denver Real Estate Investing Podcast
- Watch the YouTube video (at the bottom).
- Read the blog post. Note, the blog is an executive summary. Get the in-depth breakdown from the podcast or video.
How Are Rising Interest Rates Affecting Deals?
Tom is seeing smaller deals of $5M or less being affected, as first-time buyers have to step away or reprice.
The trend that stands out to Will is buyers having to shift their strategies. It’s no longer enough to just focus on value-add plays and do a cash out refinance after a few months. Thanks to an appreciating market, some buyers were able to simply sit on a property without making a clear value-add and still sell it for a profit.
With rising costs, value add can extend beyond the concept of turning units to include operational and managerial improvements, too.
How Is Loan to Value Changing?
William says it’s hard to get deals to work at 75% leverage these days. Travis agrees and reminds us that there’s no rule that says that loans have to be 75% Loan to Value (LTV). The LTV has to come down to hit the necessary debt coverage, which is why we’re seeing smaller deals falling out. Big deals will keep getting done because the buyers have billions of dollars they want to park in an asset.
When Does Affordability Come into Play?
Rising interest rates are causing some would-be buyers to stay in the rental pool. With rents rising at historic levels, when will affordability become an issue?
Supply in the Denver metro area is constricted, and municipalities are taking 14-18 months to approve new building permits. At the same time, people are still moving into the area and willing to pay higher rents.
To respond to this growing issue, Denver is implementing regulations that require new buildings of 10 or more units to have 25-30% affordable housing. There isn’t a clear answer yet for what the city means by affordable. There are a lot of types of affordable housing, and not all are overly market restrictive. For instance, affordable can mean the rent is capped at a proportion of the average median income, or it can mean HUD and Section 8 housing.
What Is the Best Opportunity in the Market?
Travis: As interest rates increase, there’s still a good opportunity to use exchange funds. Even if you “overpay” using equity, it’s still a free ride. You can find a property that’s easier to manage or has upside and hold it for the long term.
Will: Adding value by improving property management. Being a quality lessor with new products, lowering management costs, and leasing rates that are in tune with the immediate rental market are a great way to shine going forward.
Kevin: There are great pockets of suburban areas that are very desirable right now. Old Town Arvada, Westminster, and Littleton all have walkable downtowns that are more affordable than downtown Denver. As people are able to work from home and don’t need to go to their Denver office, they’re starting to gravitate towards more affordable but hip places. There’s an opportunity to add value and push rents in those areas.
William: If multifamily property owners are at the end of their rope and want a property that takes less time and is easier to manage, triple net properties are a great asset class to look into.
What’s Your Prediction for the Market?
Tom: With stress comes opportunity. When your competition is sweating, that’s when you can get a win because you’re smart and thoughtful. In the next 12-36 months, a lot of people will be repositioning themselves, and it’s a great opportunity for smart buyers to take advantage.
Stay Updated on the Latest Commercial Market Trends
If you have questions, feedback, or a rebuttal to anything we talked about today, reach out to us. We love to hear what you think!
Reach out to our panel directly: