Western Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Western United States.
Issue link: https://westernrealestatebusiness.epubxp.com/i/818922
M A R K E T H I G H L I G H T: C O L O R A D O 40 • May 2017 • Western Real Estate Business www.REBusinessOnline.com FIVE TRANSFORMATIVE YEARS ELEVATE DENVER'S OFFICE MARKET The region is creating transforma- tive projects that are substantially elevating the desirability of its of- fice market five years into Denver's strong development cycle. This trend — strongest in Denver's Central Busi- ness District (CBD) and Southeast Suburban (SES) submarkets — is at- tracting a new breed of tenants to the Denver landscape. About 1.4 million square feet of Class A office space has been deliv- ered in Denver's CBD since 2012, with an equal amount under construction. Deliveries in the previous develop- ment cycles (1999 to2003 and 2007 to 2010) were on a smaller scale, deliv- ering about 800,000 square feet and more than 1.5 million square feet, respectively. During the 2007 to 2010 development cycle, which had the un- fortunate timing of commencing right before the financial crisis, new prod- uct struggled with pre-leasing. It took an average of 10 quarters to lease up to stabilized occupancy at 85 percent. Only one project, 1800 Larimer Street, was more than 85 percent leased in the first year. In contrast, the current cycle is much different and much stronger. The amount of square footage be- ing added to the CBD outweighs the previous other two cycles. Leasing ac- tivity is white hot as well, with new product averaging 60 percent occu- pied upon delivery. New developments are not only transforming Denver's skyline, but it's also transforming how tenants and investors view the Mile High City. Na- tional and regional firms, high-credit tenants and premium corporations are taking notice as higher-quality real estate that is architecturally big in scale, with larger floorplates, high- end materials and world-class ameni- ties is added to the region. Examples include Prologis, Antero, DaVita and Liberty Global, all of which have re- cently relocated to and/or added square footage in Downtown Denver. This class of tenant is willing to pay a premium — up to 20 percent — for the identity and prestige of ideally located new construction, while still finding Denver a reasonably priced market compared to coastal markets. New construction rents typically put upward pressure on best-of-the-best rents, a trend most pronounced in Denver's CBD and SES submarkets. In the SES, new construction rents are 28 percent higher on average than ex- isting product. This is driven by the sheer size of the market, along with the fact that the average age of exist- ing stock is more than 40 years old. In the CBD, the spread between new construction and best-of-the-best isn't as pronounced at 14 percent. How- ever, many owners are investing sub- stantial dollars into building improve- ments to upgrade amenity packages and attract tenants that may otherwise look to new construction. This development cycle has forever transformed Denver's office mar- ket and our reputation as a world- class city, validating the interest of national and international investors and tenants. Quality tenants create investment stability for owners, and investors increasingly see Denver as a favorable income market with a diverse mix of premium tenants and stable income streams. Expect strong leasing and investor interest in 2017 and beyond. John Jugl, Jr. Vice Chairman, Western Region Capital Markets, Newmark Grubb Knight Frank Jamie Gard Executive Managing Director, Newmark Grubb Knight Frank COLORADO'S RETAIL INVESTMENTS REMAIN HOT, BUT MACROECONOMIC CONDITIONS COULD CAUSE A COOLING The Colorado retail market, par- ticularly in metro Denver, has been strong over the past few years. One major factor of this strength has been torrid population growth in the state. Denver continues to be at or near the top of the lists of fastest-growing cit- ies. Millennials have been flocking here due to the state's growing econ- omy, high quality of life and relatively low cost of living,especially com- pared to coastal markets. Additionally, retail developers have largely stayed away from speculative construction, which has helped keep retail vacancies low. According to CoStar's first quarter 2017 retail report, metro Denver's vacancy stood at 4.6 percent,the same as the fourth quarter of 2016, with av- erage rental rates of $16.84 per square foot, per year. This is up from $16.08 in the fourth quarter of 2016. Colorado Springs has seen a slight increase in retail vacancies from 5.6 percent in the fourth quarter of last year to 6.1 percent in the first quarter of 2017, although rental rates have increased over that same period from $12.47 per square foot, per year to $12.68. As far as general economic conditions go, every Colorado metro area ex- perienced a decline in unemployment in the past year. All metro areas have unemployment rates below the national average, according to the Colorado Office of State Planning and Budgeting. Despite these positives, non-urban agricultural areas have suffered due to lower commodity prices and lower incomes. Colorado is also beginning to become a victim of its own success in that the state's tight labor and housing markets are putting a slight damper on economic growth. Despite the generally positive Colorado news, increasingly stringent un- derwriting standards and rising interest rates are beginning to affect cap rates and pricing on the investment side. In addition, political uncertainty is making some investors nervous. This is especially true when the prospect of enforcing federal marijuana laws comes into play since marijuana dispensa- ries have taken on a lot of retail space at high rents. While these factors may create a slightly quieter market in the short-term as buyers and sellers take time to recalibrate their expectations, a major change in the market is not expected to be on the horizon unless there is a major shock to the market. The current retail investment market has been marked by low inventory and a surplus of buyers — many coming out of 1031 exchanges in the still- hot multifamily market. It has been this way for some time now, making it unlikely those dynamics will change overnight. Investors looking for stable returns in growing markets will continue to keep Colorado retail invest- ments on their short list. While the torrid price growth may be behind us, prices are more likely to flatten out than significantly rise or fall this year. Justin Krieger Principal, Pinnacle Real Estate Advisors THE NEXT BIG THING... IT'S ALREADY HERE. BRIGHTON COLORADO BrightonEDC.org We'll see you at ICSC RECon! Stop by booth N2568 to learn more about Brighton, CO