I’ve read and listened to so many experts about the impact that COVID-19 (C19) has had on commercial real estate in Denver that I could write a book or perhaps a brief blog 😊.
C19 has severely impacted airlines, hotels, and many other businesses that use commercial space particularly restaurants and retail shops. Office buildings are struggling as employers embrace remote work and are downsizing their footprint. In the reverse, the demand for industrial and multifamily properties remains very strong. Demand for warehouse space and is high. Migration into Denver remains near the top of national charts sustaining strong demand for apartments and homes. Denver remains one of the hottest economies in the US.
Some of my church clients are suggesting that commercial properties will come available at fire-sale prices and, therefore, it makes sense to wait a while. Is this likely to happen? It sounds logical, but let’s take a closer look. First, let’s start by listing the most suitable property types for a church — first an existing church or school building, then retail, office and/or warehouse/flex buildings.
Available Church Buildings. As a commercial broker who specializes in church expansion projects, we stay keenly abreast of existing church properties in the Denver metro area. We hear about churches in transition, churches seeking to renovate, and churches looking for another location. We help many of them. Rarely do we hear of a church planning to vacate its existing property.
Schools. We have been involved with two charter school projects in the past few months. Schools are continuing to receive tax-based funding and continuing to seek existing buildings. We have not heard of any schools planning to close as the result of C19. Aurora like many cities is balancing its school locations because neighborhoods gentrify and new home communities sprout up. We know of one property that might shutter and be sold.
Retail Properties. The mostly suitable commercial property sector for church use is retail. When we search our subscriber database CoStar or identify every building of a suitable size in a particular area, the list mostly comprised of retail options. If you are a church seeking property, you want to first target existing retail.
C19 has greatly impacted the retail property sector. Having led many renovation projects for Regency Centers, who owns 20 shopping centers in the Denver area, we have observed this condition first-hand. We’ve observed a few small shops closing, but the majority of tenants are current on their rent and plan to remain in their space.
Those big-box spaces (25,000 sf and up) that do come available are quickly re-leased to grocery, fitness, recreation, and other specialty occupiers. When we do find an available space, usually we encounter restrictive covenants that expressly disallow certain uses including church. This is because retail shopping centers succeed with high traffic from Monday-Saturday hours of operation. Its common knowledge in the retail property industry that a shopping center containing a church became a failed center before the church occupied. In summary, there is a very low chance of finding retail property suitable for a church (size and location) in Denver today.
Office Properties. From a church’s perspective, office buildings rarely provide sufficient main level space and sufficient parking. Over 12 years of leading church real estate acquisitions, we have yet to find an office property that worked for church use.
Industrial/Flex buildings. As with office properties, there rarely is sufficient parking for church use. further, the cost to fit out this basic core and shell construction is enormous. We have yet to convert a former industrial property into a fully functioning church.
Land. The potential to develop new church properties from the ground-up has diminished significantly. Since 2008, when financing went away and the market for land dropped out, selling prices have skyrocketed - particularly entitled sites with services in the path of development. When we find a possible land site, usually it’s priced so high that a church cannot afford it. Today, it is difficult to find land, especially land with services. Recently we’ve looked at constructing a ground-up church project without municipal water and sewer utilizing well and septic as we’ve done this before. It’s not ideal, but possible.
Needless to say, it’s challenging work being a commercial real estate broker representing growing churches!
So, I’ve built the case. Let’s now ask the question again – will we see future fire-sale opportunities suitable for a church facility? Not likely. In summary, here’s why.
- Denver’s economy remains hot and in-migration will continue.
- Big pools of national investor groups are chasing limited commercial real estate in Denver.
- There remains continuing strong demand from developers for retail properties.
- Most transactions occur “off-market” meaning quality properties never hit the commercial property databases. When we are hired by a church to seek property, we first identify every building in the target area regardless of whether it’s on the market or not, then reach out to the owner to see if they will sell.
- We are currently seeking property in the Denver metro area for several church clients and are struggling to find existing buildings to renovate or land that is affordable. In one case, we’ve got the opportunity to purchase a former grocery box for $100/sf which is a bargain compared to recent selling prices. In another opposite case, we have a 12-acre undeveloped land site with only 8 acres useable to accommodate up to 80,000 sf of church and related space that can be purchased for $4.5 million which is very high!
- Those properties that do come available will be in less desirable locations outside the path of new residential growth that is attractive to younger families or in properties only available to lease if the covenants allow church use.
Here are some recent examples of properties we thought would come available.
AMC Theatres. We have been pursuing the AMC theatre property in Highlands Ranch. AMC has been closed and has been struggling. Since they are a tenant, we called the local property owner. He told us that he won’t sell because the attendance metrics for this location are at the top of the industry. If AMC fails, someone else will want this location.
24-Hour Fitness. They have closed only 3 of their 11 leased locations in the metro area. We recently reached out about several shuttered locations including at Parker/Quincy and Highlands Ranch. At Parker/Quincy, the shopping center owner is planning to renovate this 25,000 sf building for a future tenant. As a large shopping center owner, Kimco has plenty of staying power to weather yet another brief economic storm. At Highlands Ranch, the local owner recently re-leased this entire 30,000 sf building to a thriving dance gymnastics studio that needed to expand. These are two properties that one might have thought could have been purchased at a discount.
Quebec Village. On behalf of a growing church, I recently reached out to the owner to discover that the 60,000 sf big box, formerly a grocery store and most recently occupied by Stein Mart and Hobby Lobby, was under contract to another developer with his tenant in tow. This is a common scenario as described above.
Future Retail closings. We are aware of many retail brands that intend to right-size their national footprints. Most retailers are tenants located in shopping centers, so they don’t own their buildings and usually are not in a single-use stand-alone building. I am in the process of going through every retailer’s announced situation at https://www.offers.com/blog/post/store-closings/ just to be most aware of possible future opportunities.
Possible Opportunity? With the high number of national mall-occupied retailers struggling, it might be possible to lease space inside an existing mall. The potential to accomplish this will buck up against the success prototype described above. While mall spaces can get carved up quite small, some mall owners may just be desperate enough that they might consider leasing to a church. While it’s usually best for a church to own its property, this could present a unique new opportunity worth considering.