Underlying lifestyle drivers maintain positive regional outlook during uncertain times. Prior to the economic shutdown, the Mountain region’s largest markets were recording strong rates of employment growth and net migration that fueled tenant and buy-er demand for commercial properties and residential units. While impacted by COVID-19, the number of recorded cases and jobs lost in the eight-state territory trailed other U.S. regions, prompting widespread reopenings in May. Moving forward, these factors and the Mountain’s low population density position regional epicenters and operators to potentially face fewer post-pandemic hurdles than other areas of the country. However, uncertainty still looms as the region has recorded a recent acceleration in new cases, highlighted by an increased virus spread in Arizona. Should this trend persist, another wave of safe-at-home orders could be enacted, hindering the recovery in the Phoenix metro.

Population growth trends recorded at the onset of this year may resurface. With job creation potentially rebounding during the second half, barring a second wave of closures, households seeking locations of reduced density may relocate to suburban communi-ties within major Mountain metros. Tertiary markets like Boise and Colorado Springs that were recording strong population and tech-related growth leading up to the pandemic could also gain in appeal. A potential uptick in regional net migration would aid the pace of economic recovery, with operators in these markets ben-efiting from increased housing demand, consumer spending, and volumes of essential and nonessential goods.

Higher-paying sectors’ spending accelerates the return of other jobs. Financial, professional services and government organiza-tions with a presence in the region were mostly able to avoid large-scale staff reductions during the shutdown. In Denver, Phoenix and Salt Lake City, these firms accounted for more than one-third of each metro’s employment base prior to the downturn, curtailing the overall number of jobs lost in the second quarter. Dependent on the length of recovery, companies within these sectors could expand payrolls during the summer, tapping the large pools of well-edu-cated residents in the metros. Competition for these professionals may heighten if outside employers seeking lower operating costs in areas less impacted by the pandemic establish regional offices.

Pre-Pandemic Economic Drivers Support Mountain Region Recovery; Lower Density Compared With Coastal Markets Offers Favorable Option

Cases per 1K CapitaThrough June 10

0.1 - 1.7

1.7 - 2.3

2.3 - 2.8

2.8 - 4.0

4.0 - 7.4

7.4+

Acceleration in New Mountain Region Cases Poses Threat to Recovery*

New

Dai

ly C

onfir

med

Cas

es

0

525

1,050

1,575

2,100

March April May June

Mountain Region HasLowest Population Density

2019

Pop

ulat

ion

Per S

q. M

ile

0

100

200

300

400

NortheastWestCoast

SouthTexas/Oklahoma

MidwestMountain

U.S. Total

BEYOND THE GLOBAL HEALTH CRISISMOUNTAIN SUMMER 2020REGIONAL REPORT

* Seven-day moving average; March 15-June 10Sources: Experian; state and local health departments and hospitals; The New York Times

Short Downturn/Strong Recovery Extended Downturn/Strong Recovery

•

•

•

•

•

V-shaped economic recovery

Fewer new cases support phased reopening over the summer

Government stimulus enables companies to rehire workers

Commercial property construction projects su�er minor delays

Investors and lenders resume activity a�er brief uncertainty period

Short Downturn/Weak Recovery Extended Downturn/Weak Recovery

•

•

•

•

•

✓-shaped economic recovery

Economy reopens but people remain cautious of contagion

Constrained corporate budgets limit rehiring, lower spending

Projects in planning stages are reevaluated

Investors focus on stabilized or resilient assets in populated areas

•

•

•

•

•

Extended U-shaped economic recovery

Prolonged business closures accentuate economic costs

Additional federal stimulus key to boosting consumer spending

Health concerns extend delays of projects that have broken ground

Liquidity constrained during shutdown, limiting investment activity

•

•

•

•

•

L-shaped economic recovery

Lack of health solution keeps some businesses closed late into year

Extended period of high unemployment notably curbs spending

Both active and planned development projects face delays

Investors hold a long-term perspective, fewer listings come to market

Econ

omic

Rec

over

ySt

rong

erW

eake

r

Economic DownturnShorter Longer

SELF-STORAGE BEYOND THE GLOBAL HEALTH CRISIS: MOUNTAIN

Short Downturn/Strong Recovery

Rapid economic recovery jump-starts a return to pre-pandem-ic market conditions. If the health crisis is largely resolved by late summer and a second wave of closures are avoided, consumer de-mand, job creation and investor interest could rebound quickly in Mountain metros. A return to market fundamentals recorded prior to the pandemic would improve demand for newly built apartments during the second half, encouraging the commencement of some proposed projects. A speedy recovery could also translate to most higher-earning employees returning to offices, benefiting nearby restaurants and retailers that were temporarily closed during the pandemic. Improved consumer spending would also heighten de-mand for nonessential goods, reinvigorating regional production lines and increasing warehousing demand among industrial users.

Short Downturn/Weak Recovery

Tenants, owners take wait-and-see approach during sluggish re-bound. An elongated pace of recovery has the potential to hold down consumer spending and hiring velocity during the remainder of this year. Some employees who were furloughed during the shutdown may be laid off, with office users delaying leasing decisions until a vaccine is available. Operators will hold onto income-producing properties across all sectors, limiting acquisition opportunities for well-capitalized buyers. Uncertainty regarding the length of the recovery should also prevent speculative projects from breaking ground and limit the number of apartment starts in the short term.

Extended Downturn/Strong Recovery

Long downturn potentially heightens regional appeal. If the health crisis continues past the summer or a second wave of shut-downs occurs, essential retailers that shined during the initial pan-demic may further excel. With households continuing to utilize online platforms to conduct grocery and essential goods shopping, e-commerce users’ and supermarkets’ storage requirements would likely elevate, benefiting industrial operators. Companies able to keep workers may lease suburban satellite offices to distribute staffs across more locations and ease employee health concerns. As more households seek areas of reduced population density, net mi-gration in Mountain metros could rise, aiding apartment demand and nonessential retailers.

Extended Downturn/Weak Recovery

Prolonged recovery permanently alters business models. A deep downturn could prevent a significant percentage of jobs lost during the economic shutdown from returning. Many nonessential retail-ers will be unable to survive a plodding pace of recovery or a second round of business closures, increasing the number of dark store-fronts. Office users may reduce their physical presence, allowing more employees to work remotely on a permanent basis. Develop-ers will heavily scrutinize their pipelines, avoiding speculative proj-ects and proposals in slow-to-recover metros. Well-capitalized in-vestors are opt to pursue circumstantial acquisition opportunities in markets that experienced the strongest pre-pandemic demand.

SELF-STORAGE BEYOND THE GLOBAL HEALTH CRISIS: MOUNTAIN APARTMENT

Mountain Apartment Supply and Demand

Com

plet

ions

% o

f Inv

ento

ryV

acancy Rate

Completions % of Inventory Vacancy Rate

Denver Las Vegas Phoenix Salt Lake City17 18 19 17 18 19 17 18 19 17 18 190%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

0.0%

1.6%

3.2%

4.8%

6.4%

8.0%

Wide-reaching shift in households’ dwelling priorities could benefit regional rental markets. Prior to the pandemic, strong rates of net migration were driving demand for apartments across the Mountain West. As the nation now enters the recovery with the potential for a second wave of closures looming, more house-holds are likely to consider relocating to markets of reduced den-sity that offer a lower cost of living. Salt Lake City could rank as a top destination for these families as the metro retained a relatively high percentage of jobs during the shutdown and features a lower population per square mile than coastal metros. While harder hit by job losses than the aforementioned market, Denver’s sizable professional and business services sector should also prompt the arrival of new residents, namely younger professionals who prefer the flexibility of renting.

Annual apartment deliveries fall to five-year lows in Mountain metros, easing competitive supply. Temporary construction clo-sures during the pandemic and delays in permit issuance and proper-ty inspections will push some projects initially slated for second-half delivery into 2021. While this reduction in completions should aid tenant retention at existing apartments, properties that are final-ized this year may experience difficulties securing renters, even amid increased concession usage. However, a possible inflow of new resi-dents could enhance overall leasing activity during the second half, allowing overall vacancy in Denver, Phoenix and Salt Lake City to ad-just moderately this year. Las Vegas represents the likely exception, as the metro’s rental market will be notably impacted by widespread job losses and a plausible decline in net migration.

Potential rise in suburban apartment demand preserves value of older properties outside metros’ cores. Pricing in certain real es-tate sectors could adjust during the recovery, yet a pool of prospec-tive investors with significant cash reserves could sustain a compet-itive bidding climate for well-positioned apartments that come to market. Class B and C complexes in Phoenix, Denver and tertiary markets with strong demand leading up to the crisis should retain the most investor interest. Recently renovated suburban proper-ties and nearby assets with remaining value-add potential will ap-peal to more buyers if increased demand for non-core apartments is recorded. Prior to the health crisis these rentals were providing 5 percent minimum returns in major metros, with maximum cap rates exceeding 7 percent in smaller markets.

Listings emerge as an offshoot of the economic shutdown. As de-velopers evaluate projects under construction with increased scru-tiny, more opportunities to acquire recently completed properties could surface moving forward. By assuming lease-up risk during a period of economic uncertainty, well-capitalized investors will at-tempt to obtain these complexes at a discount to average Class A pricing. Additionally, proposed projects further along in the ap-proval process may come to market with increased frequency, at-tracting buyers with construction experience. These planned proj-ects are likely to have entitlements in place; however, financing may be difficult to obtain in the short term as lenders underwrite fewer ground-up developments and tighten their funding criteria.

Byproducts of the Pandemic a Boon to Regional Apartment Demand; Well-Capitalized Buyers Continue Pursuit of Properties With Upside Potential

Source: RealPage, Inc.

SELF-STORAGE BEYOND THE GLOBAL HEALTH CRISIS: MOUNTAIN RETAIL

Mountain Retail Supply and Demand

Com

plet

ions

% o

f Inv

ento

ryV

acancy Rate

Completions % of Inventory Vacancy Rate

Denver Las Vegas Phoenix Salt Lake City17 18 19 17 18 19 17 18 19 17 18 190%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

0%

1.6%

3.2%

4.8%

6.4%

8.0%

Essential retailer expansions and store closures on the horizon as shops enter the economic recovery under differing circumstanc-es. Apparel and home-goods retailers and sit-down restaurants hit hard by temporary closures have now opened their doors through-out the region. These retailers may struggle with reduced operating hours, increased store sanitation and capacity restrictions that will weigh on margins this summer. Stores and shopping centers that were hurting before the economic downturn could shutter, while others reassess their position in the marketplace, potentially seeking assistance from property owners to survive initial disruptions. Ulti-mately, vacancy in major metros will push higher during the second half of this year, causing planned developments to be reevaluated. While storefronts darken, some leases will remain in place, creating a disparity between physical and economic occupancy. As retail avail-ability rises, essential retailers that excelled during the pandemic may expand, leasing well-located storefronts at potentially discount-ed asking rents. Adapting to a more permanent shift in consumer behavior, these grocers, drugstores and mass merchandisers have placed a greater focus on curbside pickup services and their omni-channel presence heading into the recovery.

Initial consumer reluctance to fly, stay at large hotels post-pan-demic impacts Las Vegas retail. Even as most shops and restau-rants open, patrons may be slow to follow this summer, further weighing on retailers’ margins. Las Vegas could experience another

round of store closures following widespread job losses that slashed local households’ discretionary incomes. Should employment growth recover slowly or trend further downward, these residents will be hesitant to purchase nonessential products and dine out, dealing a notable blow to local retailers. Additionally, restaurants and shops adjacent to hotels will suffer as global economic volatili-ty and health concerns surrounding air travel have prompted many would-be visitors to delays trips until next year.

Sparse volume of retail listings places interested buyers in a po-sition to accept pre-pandemic pricing or assume significant risk. The evolving retail landscape will prompt investors to heavily scru-tinize tenant mix and centers’ locations when considering potential acquisitions moving forward. Properties with high-credit tenants that have signed recent lease extensions will trade at pre-pandemic pricing. While most owners may hesitate to list income-producing drugstores and fast-food establishments, other investors with a portfolio of assets could sell, using the proceeds to backstop other holdings. The volume of distressed strip and neighborhood centers listed for sale could rise if more tenants decline rent payments and owners are unable to cover a property’s debt. Viewed as a poten-tially risk-laden investment option, these listings may increasingly change hands via all-cash transactions or loan assumptions as lend-ers will avoid underwriting these acquisitions.

Recovery Tests Nonessential Retailers’ Viability as Essential Merchants Weigh Expansion; Investors Selective When Pursuing Shopping Centers

Source: CoStar Group, Inc.

SELF-STORAGE BEYOND THE GLOBAL HEALTH CRISIS: MOUNTAIN OFFICE

Mountain O�ce Supply and Demand

Com

plet

ions

% o

f Inv

ento

ryV

acancy Rate

Completions % of Inventory Vacancy Rate

Denver Las Vegas Phoenix Salt Lake City17 18 19 17 18 19 17 18 19 17 18 190%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

4.0%

7.2%

10.4%

13.6%

16.8%

20.0%

Employers spread staffs across more or larger offices post-pan-demic, benefiting suburban owners. By largely shifting to a work-from-home model during the economic shutdown, professional service, tech and financial organizations were able to preserve staffs at higher rates than other employment sectors. As these or-ganizations now weigh how to best return employees to physical locations, demand for lower-cost satellite offices and larger spaces in Phoenix, Denver and Salt Lake City suburbs may rise during the recovery. By occupying these spaces, firms could reduce staff counts at main offices or spread employees throughout a larger floor plan, easing health concerns for workers who have grown accustomed to working remotely.

Tenants question viability of dense downtown office buildings. While suburban office space may increase in appeal during the recovery, office towers and other core-located buildings with ele-vators, lobbies and common spaces may see a dip in renewals and new leasing. For users, the social-distancing and health-related challenges presented at these buildings may outweigh the bene-fits associated with operating a centralized office near mass tran-sit and clients. Additionally, these organizations may not replenish their in-office staffs to pre-pandemic counts, reducing their space requirements. In contrast, tech companies that recorded growth during the pandemic and are without a Mountain presence could occupy recently vacated office and R&D space, confident in the re-gion’s ability to attract more well-educated professionals seeking markets of less density.

Users’ reluctance to occupy newer properties prompts owner flexibility. Uncertain demand for higher-end space coupled with shutdown-induced construction delays will alter the number of projects completed in major metros this year. Still, delivery vol-umes in Phoenix and Salt Lake City are likely to surpass 2 million square feet, driven by suburban-located projects. While annual supply additions in Denver and more notably Las Vegas trail these markets, roughly half the space slated for finalization in each of the two metros is available. These offices could struggle to secure tenants and see companies with provisional lease agreements pull out, similar to WeWork passing on more than 200,000 square feet in downtown Denver. This situation would increase tenant conces-sions usage and require owners to offer more flexible lease terms.

Performance of office sector during the pandemic attracts more outside buyers. Anticipating a resurgence in suburban office de-mand, investors are likely to pursue listings outside the region’s major office districts. Assets off Interstate 25 in Denver and prop-erties south of Salt Lake City along Interstate 15 should appeal to buyers seeking areas of recent development and corporate growth. Phoenix will remain a target for California-based buyers seeking nearby metros that were less impacted by the pandemic then their home markets. The metro’s large retiree population and overall sprawl should heighten demand for medical office properties in Scottsdale and Glendale as more residents seek health services near their homes. While economic volatility may prompt buyers to avoid Las Vegas, the volume of new development along Rose Parkway in Henderson could spark deals.

Organizations Reevaluate Requirements, Dispersal of Staffs; Resilience of Regional Office Sector, New Entrants’ Commitments Spark Investment

Source: CoStar Group, Inc.

SELF-STORAGE BEYOND THE GLOBAL HEALTH CRISIS: MOUNTAIN INDUSTRIAL

Mountain Industrial Supply and Demand

Com

plet

ions

% o

f Inv

ento

ryV

acancy Rate

Completions % of Inventory Vacancy Rate

Denver Las Vegas Phoenix Salt Lake City17 18 19 17 18 19 17 18 19 17 18 190%

1%

2%

3%

4%

5%

6%

7%

8%

0%

2%

4%

6%

8%

10%

Linchpins of the regional supply chain, major metros’ industri-al sectors retain tenants better than other commercial real es-tate segments. Shifting consumer behavior that emerged from the pandemic should increase users’ warehousing and distribution re-quirements during the recovery, benefiting operators with available space or upcoming lease expirations. Responding to heightened e-commerce spending and supply/demand shocks recorded at the onset of stay-at-home orders, suppliers in the region’s major met-ros are likely to bolster their safety stocks of essential products. Ad-ditionally, the recent rise in online grocery orders may lift demand for cold-storage space able to handle high volumes of perishables. Increasing inventories could elevate users’ near-term storage re-quirements, yet many owners in major metros are unlikely to agree to short-term leases during a span of strong industrial demand.

Potentially greater need for existing storage could somewhat offset the impact of speculative deliveries. Of the 17 million to 26 million square feet of industrial space slated for delivery in the four-metro combo this year, more than half resides in Phoenix. Here, more than 30 speculative properties comprising a total of ap-proximately 8 million square feet of available space were underway at the onset of the pandemic, all with completion dates set for 2020. If finalized during the second half and unable to secure tenants due

to economic uncertainty, these supply additions could trigger an in-crease in local vacancy. Elsewhere, annual delivery volumes in Las Vegas, Denver and Salt Lake City should trail prior three-year aver-ages. Still, speculative additions will occur, placing upward pressure on vacancies if left unoccupied and not offset by steady absorption of existing space.

Investor interest to potentially outweigh listings volume in the short term. Well-capitalized buyers are likely to view industri-al properties with credit tenants as attractive investment options during the recovery. Pricing uncertainty may prompt operators to hold income-producing assets, limiting acquisition opportunities. Warehouses near intermodal terminals and international airports may record the strongest valuations in Phoenix and Denver as user demand for these facilities should remain stable, supported by lo-gistics firms. Last-mile distribution facilities and warehouses near recently developed housing and planned residential expansions in suburban Salt Lake City should also garner buyer interest. Outside major metros, increased consumer demand for same- or next-day delivery could heighten the appeal of smaller properties in Boise, Albuquerque and other tertiary markets that serve as last-mile dis-tribution centers to rural cities.

Consumer Reactions to Pandemic Impact Industrial Users’ Storage Requirements; Buyers Target Assets Adjacent to Major Terminals

Source: CoStar Group, Inc.

Share of Jobs Lost in March and April

U.S.

March/April Cumulative Percent Change

-25% -20% -15% -10% -5% 0%

Las Vegas

Denver

Phoenix

Salt Lake City

Denver 11.5%

Salt Lake City 9.5%

Las Vegas 32.1%

Phoenix 11.9%

April Unemployment Rate

SELF-STORAGE BEYOND THE GLOBAL HEALTH CRISIS: MOUNTAIN

Healthcare Capacity Key to Managing Crisis

Hos

pita

l Bed

s per

1,00

0 Pe

ople

0

1

2

3

4

5

ORWAUTNMCAMDIDHICOAZCTWIVAVTRINCNHNVDEAKTXMASCNJGAMNMIMEILFLNYINOKOHTNPAIAMOALKYARMTLAKSWYNEWVMSNDDCSD

U.S. Average

Sources: American Hospital Association; Bureau of Labor Statistics

Prepared and edited by Erik PisorResearch Analyst | Research Services

For information on national commercial real estate trends, contact:John ChangSenior Vice President, National Director | Research Services DivisionTel: (602) 707-9700 | john.chang@marcusmillichap.com

Price: $1,500

The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guaranty, express or implied, may be made as to the accuracy or reliability of the information contained herein. This is not intended to be a forecast of future events and this is not a guaranty regarding a future event. This is not intended to provide specific investment advice and should not be considered as investment advice.

© Marcus & Millichap 2020 | www.MarcusMillichap.com

Denver Office:

Skyler CooperRegional Manager, National Director | Hospitality DivisionTel: (303) 328-2000 | skyler.cooper@marcusmillichap.com

Las Vegas Office:

Justin FormanRegional ManagerTel: (702) 215-7100 | justin.forman@marcusmillichap.com

Phoenix Office:

Ryan SarbinoffVice President/Regional ManagerTel: (602) 687-6700 | ryan.sarbinoff@marcusmillichap.com

Salt Lake City Office:

Justin FormanRegional ManagerTel: (801) 736-2600 | justin.forman@marcusmillichap.com

SELF-STORAGE BEYOND THE GLOBAL HEALTH CRISIS: MOUNTAIN

Mountain Region Growth Surpasses U.S. Averages Across Multiple Metrics

Population Growth (%): 2009-2019

Household Growth (%):2009-2019

Median Single-FamilyHome Price Growth (%): 2009-2019

Retail Sales Growth (%): 2009-2019

Commercial Real Estate Price Growth:2011-2020 Growth Cycle

Perc

ent C

hang

e

Mountain Region U.S. Total

Cap Rate Spread Over 10-Year TreasuryNear Widest Point in Two Decades

Ave

rage

Rat

e

Mountain Region CRE Cap Rate 10-Year Treasury

Percent Growth0% 5% 10% 15% 20%

United States

Salt Lake City

Phoenix

Las Vegas

Denver

0% 20% 40% 60% 80% 100%

United States

Salt Lake City

Phoenix

Las Vegas

Denver

Percent Growth

17.9%

18.0%

19.5%

17.6%

6.8%

55.5%

60.7%

76.3%

92.0%

52.6%

Percent Growth0% 5% 10% 15% 20% 25%

United States

Salt Lake City

Phoenix

Las Vegas

Denver

Percent Growth0% 30% 60% 90% 120% 150%

United States

Salt Lake City

Phoenix

Las Vegas

Denver 107.0%

124.8%

105.7%

70.1%

62.8%

14.2%

18.1%

17.7%

20.6%

8.8%

0%

30%

60%

90%

120%

150%

IndustrialO�ceRetailApartment 0%

2%

4%

6%

8%

10%

20*1918171615141312111009080706050403020100

510

bps

230

bps

600b

ps

550

bps

* Through June 8 Sources: Marcus & Millichap Research Services; CoStar Group, Inc.; Real Capital Analytics