Will Aspen’s commercial rental rates decline? | AspenTimes.com

Will Aspen’s commercial rental rates decline?

William Small

As the country heads into recession, are we likely to see commercial property rental rates decline in Aspen? This question is currently on the minds of tenants and landlords throughout the area. Whether a business currently occupies commercial space or is looking for space, the future of rental rates is a big factor.

To answer this question, we must look at the factors that influence commercial rental rates. These factors are supply, demand and inflation. If supply and demand is balanced, the increase or decrease in rental rates should track inflation, which is really a refection of the change in the value of the currency. Over the past 30 years, inflation has increased on average about 3.9 percent per year. If the supply of commercial space keeps up with demand, rental rates should increase at approximately the rate of inflation. So despite a recession, we can expect commercial rental rates in Aspen to track roughly the rate of inflation over the next few years.

What about the influence of supply and demand? Currently, Aspen has 1.37 million square feet of commercial space consisting of primarily retail, office and some light industrial. Roughly 67 percent of the total inventory of space is located in the downtown retail core. About 24,000 square feet of new space (roughly a 1.8 percent increase) is scheduled for delivery into the market in the next 12 months of which about 13,000 square feet is still available. In addition, about 18,700 square feet (1.4 percent) of commercial space of all types is vacant in Aspen. In addition, about 11,600 square feet (.8 percent) of commercial space is on the market for sublease. In total, Aspen has about 3.2 percent of its commercial space available in one form or another for existing tenants to find new space and new tenants moving into the market.

In a typical commercial real estate community, a real vacancy rate of 6.0 percent to 9.0 percent would be considered healthy and balanced, i.e. enough space to allow tenants to move around, but still tight enough to allow a reasonable annual market rent increase to keep up with inflation. Real vacancy is space that is ready for occupancy but does not include space available as sublease space. If a market has a real vacancy rate greater then 9.0 percent, you’re likely to see stagnate rental rates. As the real vacancy rate increases over 9.0 percent, the market for tenants becomes very competitive and landlords typically start cutting rental rates.

When Aspen is compared to a typical market, it’s obvious that Aspen has an undersupply of commercial space. Aspen’s commercial real estate market is currently at a real vacancy rate of approximately 1.4 percent, well below what’s considered a balanced market. Due to a number of factors including the current difficult financing environment and the no-growth political environment in the City of Aspen, Aspen is not likely to see any significant new supply of commercial space in the near future.

What about the demand side of the equation in Aspen? Demand is really the wild card in determining the direction of commercial rental rates. If the recession deepens, demand for commercial space in Aspen is likely to soften. In the past few months there have been numerous economic reports about the decline in retail sales across the country. A number of national and international retailers that might consider store locations in Aspen have announced plans to cut back expansion plans and consider closing weak performing stores. This along with the expected falloff in visitors to Aspen this winter could significantly reduce demand for retail space in downtown Aspen. As local businesses and professionals feel the effects of a slowing economy, the demand for office and light industrial space could soften as well.

Despite the possibility of softening demand for commercial space, its unlikely Aspen will experience any decline in commercial rental rates primarily due to the current low vacancy rate and the constraint on supply of new commercial space. It’s more likely that the big increases in commercial rental rates Aspen has experienced in the past few years will likely subside to more modest annual increases until the economy begins to recover.

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