Aspen commercial rents will likely keep climbing
Aspen, CO Colorado
Aspen’s downtown retail rental rates are some of the highest in the country. Well-located spaces smaller than 1,000 square feet on key intersections such as Galena Street and Cooper Avenue are reaching rents of more than $250 per square foot net of expenses.
Larger spaces are going for almost $200 per square foot. So what level of retail rents could we expect to see in downtown Aspen in 10 years, and what impact will higher rental rates have on the tenant mix in downtown Aspen?
To get a better idea of what the future holds, it’s helpful to look at the past. If we go back approximately 25 to 30 years and look at rental rates, we find that the best locations in downtown Aspen leased in the range of $18 to $25 per square foot. During that time, Aspen’s retail rental rates increased on average between 7 percent and 7.5 percent annually. This appreciation in retail rents is about half the 15 percent-plus average annual appreciation of Aspen residential prices over the past 30 years, according to statistics provided by the Aspen Board of Realtors.
Aspen’s growth in retail rates is roughly twice the average retail rental increases ” 3 to 4 percent ” for most major metropolitan areas.
In most markets, commercial office and retail rental rates track the CPI index, which has increased about 4.1 percent annually for the last 30 years.
A big reason for Aspen’s dramatic increase in commercial rental rates over the past three decades has been the influx of national and international retail tenants, which started in the mid to late ’80s. Since then, we’ve seen local businesses whose ability to pay rent ebb and flow with the local economy be replaced with national and international retailers whose ability to pay rent depends on other factors, most of which are not directly tied to the local economy. These national and international retailers are drawn to Aspen due to the everincreasing wealth of residents and visitors.
In addition, the supply of new retail space has been constrained by the geographic boundaries of downtown Aspen and the local political environment that’s made it difficult for new development.
The combination of a constraint on supply of new commercial space and the upward pressure on rents from national and international tenants has created a perfect storm, which has dramatically increased Aspen’s commercial rental rates over the last three decades.
What’s likely to happen in the future? If the past is any prediction of the future and the supply of retail space in downtown Aspen continues to be constrained, we are likely to see future retail rents for prime locations in Aspen in the $400-plus range per square foot within 10 years, given a 7.5 percent annual market rent escalation.
What will this mean to retail and restaurant businesses and the overall tenant mix for downtown Aspen?
Retail businesses try to keep their occupancy within 15 to 20 percent or less of gross revenues. In 10 years, a typical Aspen retailer in a prime location will have to gross between $2,000 and $2,700 per square foot to maintain that ratio of cost to gross.
That means a typical 1,500-squarefoot retailer will have to gross $3 to $4 million in total sales to be profitable in Aspen. Restaurants, on the other hand, now pay $60 to $80 per square foot and will likely see their rents increase to $120 to $160 per square foot.
Restaurants typically like to keep their total occupancy costs at or below 6 percent and 10 percent of their gross sales. This means a 2,000square-foot restaurant would have to gross from $3.2 million to $4 million in revenues to stay profitable in Aspen.
It’s likely that national and international retailers will be able to continue to pay the higher rents. Many of those retailers already are paying significantly higher rents in other parts of the world. Aspen, however, will likely continue to lose locally based retailers with only the strongest surviving further rent increases.
Restaurants are likely to experience increasing pressure on profits and will likely migrate to lower-level space and second floor space, or close or move to downvalley markets such as Basalt and Carbondale.
As we look forward 10 years, we’re likely to see more prime retail spaces occupied by high-end national and international retailers, fewer local retailers and fewer restaurants in street level spaces in downtown Aspen.