The Market: Q1 2021

a drone photo of Denver

A new report from JLL lists our two favorite markets – Denver and Austin – as “rising star” cities, meaning that they’re becoming even more attractive for investment and competing with larger markets like New York, San Francisco and Chicago for coveted corporate relocations, international spending and talented workers.

Even with the COVID-19 pandemic wreaking havoc on the national economy, the effects on the local commercial real estate markets in these two cities have been less severe than in big gateway markets where rental rates for office space, in particular, have skyrocketed in recent years.

And with the distribution of COVID-19 vaccines happening more quickly than expected, businesses are opening back up with fewer restrictions, and there’s good reason to hope that both cities will quickly return to their pre-pandemic growth trajectories soon.

Of course, both Denver and Austin have experienced some setbacks as a result of the pandemic, with office and retail leasing velocity dropping as shops and restaurants dealt with decreased traffic under stay-at-home orders and office users coped with troubled bottom lines.

In both Denver and Austin, the total office vacancy rate in the first quarter of 2021 was 13.4%, an increase of 4% from a year earlier in Austin and of 3.3% in Denver.

In Austin, a large portion of the increase can be attributed to new construction. Development is booming here, with 1.2 million square feet of new office space delivered in the first quarter, right on the heels of 2020, which saw 3.8 million square feet of new office space. In Denver, the pace of new construction is slower, and the increased vacancy is unfortunately attributable to companies either vacating their office growth plans or placing space up for sublease.

But deals are still happening in both cities, and the lease rates on those deals hold up to pre-pandemic levels. Overall average rents in Austin and Denver have ticked up in in the last year at roughly $37 and $29 per square foot, respectively, on full-service leases, according to data from CoStar.

The retail real estate market is having the most difficulty right now nationwide, but both of our markets were in healthier positions with respect to retail than much of the country before the pandemic, which has served them well. In Austin and Denver, developers have been conservative about building new retail space in the last decade, after being left with a glut of available retail space after the Great Recession.

This means that in spite of the difficulties for retailers that began well before the pandemic, and the increased challenges in the last year, the retail vacancy rate in Austin was just 4.4% in the first quarter, below the 5% threshold that is usually considered a “balanced” market. In Denver, 5.3% of retail space is vacant, a similarly healthy number.

Retail users in both of these cities have given back large amounts of space, however, and this will continue to pose challenges for retail landlords for the next several months. But the worst of the pandemic is behind us and rental rates have remained mostly flat in both markets. Additionally, Austin and Denver are both prosperous cities with large pools of young, well-paid workers who are likely to come back out to shops and restaurants in force after receiving their vaccines.

Industrial real estate remains the brightest spot in Austin, Denver and the U.S. at large. Warehouse and distribution users have grown as online shopping has skyrocketed, and specialty uses like cold storage are growing fast.

Both cities are in the middle of historic industrial construction booms, although Denver’s has been going on for years while Austin’s is just getting started. In Denver, 5.2 million square feet of new industrial space is under construction, which is down from the 7.2 million square feet peak in early 2020, but still well above the 10-year average of 2.6 million square feet.

And in Austin, a staggering 11 million square feet of new industrial space is on the way, five times more than this time last year. Both markets have maintained positive net absorption throughout the pandemic and are on track to continue experiencing healthy leasing volumes, keeping vacancy rates down and rents up.

Both of these “rising star” cities weathered setbacks in 2020, along with the rest of the country, but these initial data points from the first part of 2021 show us that the market fundamentals that make Austin and Denver stand out are still at play, pushing back on downward forces to keep our commercial real estate markets relatively healthy all things considered.

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