Rents must rise with high-priced buildings

Originally published in The Aspen Daily News on August 15, 2014

A developer who has invested in a dozen commercial properties in downtown Aspen is hoping his tenants will pay higher lease rates to rent his commercial spaces, Randy Gold, an appraiser for Aspen Appraisal Group, said Thursday at a real estate symposium.

Since 2010, developer Mark Hunt invested approximately $80 million into 12 commercial properties, which add up to about 100,000 square feet of space in Aspen, according to Gold.

“It’s hard to talk about commercial sales without talking about Mark Hunt,” Gold said during the Aspen/Snowmass State of the Real Estate and Tourism Economy Symposium presented by B.J. Adams & Co.

“He probably would agree he overpaid for everything he bought,” Gold said.

Gold added that Hunt probably will be in Aspen for the longterm and in 5-10 years his purchases will likely have been very smart plays.

One way commercial buildings are valued is by using an equation called the capitalization rate, which is the ratio of the amount of net income a building generates divided by the sale price of the building. The capitalization rate for commercial buildings in Aspen has trended down over the past few years and it is currently around 4 to 6 percent, Gold said. That is an extremely low value, he noted, adding that the more investors pay for buildings, the higher rents they need to charge.

Generally, if a business were paying $200 per square foot for a 1,500-square-foot space, it would have to make $3 million or more in gross sales for it to be a prudent decision, he said.

“These are huge rents,” Gold said.

Michael Adams, President of BJ Adams and Company, takes a historical look at the trends of real estate inventory and sales during the State of the Aspen/Snowmass Real Estate Market at the Aspen Institute on Thursday afternoon.

He speculated that most businesses paying that kind of rent are not generating the sales to justify it. Despite that, Aspen’s commercial buildings are likely a good investment in part because business owners don’t necessarily make the right decisions.

“There are a lot of tenants that don’t make prudent decisions,” he said.

That’s particularly true in Aspen, because the resort town has a history of attracting international luxury brands like Dolce & Gabbana and Prada, which can afford to take a loss for a few years in exchange for having a store-front in Aspen. If a business moves out, another one can replace it, he added.

“There’s always someone in line,” Gold said after his presentation. “We’ve always had that phenomenon.”

Gold noted the businesses that can afford to take the loss are not local “mom and pop shops.”

He added that about 45 percent of commercial real estate in downtown Aspen is controlled by five owners, which makes the market stable.

As for the residential market, more multimillion-dollar, single-family homes are likely to come on the market in the next few months, because buyers have purchased 70 vacant properties in the past three years and some are going to be developed by speculators into single-family homes. There are usually only about one to three single-family home sales above $20 million a year in Aspen, Gold noted.

B.J. Adams noted at the beginning of Thursday’s symposium that the event was created four years ago in response to the Great Recession, which hit the local real estate economy particularly hard. The symposium was created in an effort to contribute to the community’s understanding of the local real estate economy.

“We were flying so high in ’08, we didn’t see the recession coming,” Adams said.

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