Western Real Estate Business

MAY 2018

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/978056

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Page 38 of 66

M A R K E T H I G H L I G H T: C O L O R A D O 36 • May 2018 • Western Real Estate Business www.REBusinessOnline.com DENVER'S DYNAMIC OFFICE MARKET AND THE CHANGING FACE OF DOWNTOWN DENVER'S MULTIFAMILY MARKET TESTS ITS LIMITS Denver's office market has been riding a wave of expansion, entering its ninth straight year of growth, with net absorption totaling 186,826 square feet in the first quarter of 2018. While vacancy ticked up — ending at 15.9 percent, up from 15.1 percent in the prior quarter and from 14.6 percent one year ago — it is expected to fall over the next several quarters as ten- ants continue to absorb space in both new and existing buildings. The Den- ver office market's impressive expan- sion has lasted 33 consecutive quar- ters, resulting in a total of 9.7 million square feet of absorption, 7.4 million square feet of new deliveries and a 409-basis-point plunge in vacancy. The majority of the 9.7 million square feet absorbed between the first quarter of 2010 and the first quarter of 2018 occurred in three key submar- kets. This included the Southeast Sub- urban (SES), Downtown and North- west (NW) markets, which recorded 3.3 million, 2.9 million and 1.3 million square feet of absorption, respectively. The Downtown market ended the quarter with absorption of 214,317 square feet, and Class A median ask- ing rates were up 39.5 percent from year-end 2009 to $39.76 per square foot. Asking rates in some of the new- est super premium buildings have breached $50 per square foot, a level unprecedented in Denver. Activity in the Lower Downtown/ Central Platte Valley (LoDo/CPV) micromarket, which has been riding its own development boom centered around the redevelopment of Union Station, is now slowing down. Af- ter eight years of positive absorption totaling a little less than 2.3 million square feet, absorption in the first quarter of this year was flat, at a nega- tive 29,990 square feet. Big blocks and scalable tenant options for larger us- ers are scarce in LoDo. This is conse- quently moving Downtown activity to the Uptown and Skyline micromar- kets. Skyline logged strong activ- ity in 2017, with annual absorption of 163,000 square feet, followed by absorption of 103,000 square feet in the first quarter of 2018 alone. Recent deliveries are leasing up quickly, at- tracting anchor and mid-size tenants from trendy LoDo. An asset at 1401 Lawrence reached full occupancy in the second quarter of 2017, just nine months after its commissioning. A building at 1144 15th Street was just delivered 84 percent pre-leased, with key tenants Chipotle and Gates mov- ing to the office tower later this year. Uptown's positive first quarter ab- sorption of 137,000 square feet follows three years of stagnant growth. This micromarket is on the cusp of a resur- gence, with tenant activity extending beyond traditional tenants to technol- ogy firms, creative uses and cowork- ing providers looking for scalable op- tions not found in LoDo. The vitality of the Denver office market has attracted corporate ex- pansions, a new, diverse tenant base and new ownership, such as Dallas- based Ramrock Real Estate, the re- cent buyer of One Belleview Station. Denver's momentum will continue through 2018 with moderate rental rate increases, transit-oriented devel- opments in high demand by both em- ployers and employees and a contin- ued appetite for scarce new product. Downtown's traditional core offers large blocks, scalability and value, continued growth in the technology sector and rebounding oil and gas firms all fueled by population gains and job creation. An interesting metric was reached in the Denver multifamily market during the first quarter of 2018 — and that's re- cord absorption. The city already boasts accolades for quality of life, talks of strong in-migra- tion and speculation of becoming the location for the second Amazon head- quarters. After these, the most common topic of conversation for multifamily professionals is the unprecedented con- struction pipeline and just when will we hit an inflection point where the market won't accept any more Class A, market- rate apartments. It seems we're still not there. As of the first quarter of 2018, the trailing 12-month absorption was more than 10,000 units. That's more units than what was completed in 2017 and the highest absorption on record. The result was metro-wide vacancy dipping year-over-year to 5.79 percent, limited concessions and metro-wide annual rent growth at 3.8 percent. Denver's average rent now stands at $1,405 per unit and $1.62 per square foot. The Central Business District (CBD) experienced the most absorption this quarter, accounting for nearly 25 percent of total metro absorption. Annual rents also grew by 2.7 percent, leading the CBD to regain its title for most expen- sive rental submarket in Denver with rents per-unit averaging $1,835. But de- velopment is occurring all around the metro. With more than 30,000 units cur- rently under construction and another 23,000 units in the planning stages, developers are hoping these statistics aren't an aberration. The most active developers in the Denver Metro are Embrey Partners, Trammell Crow Residential and Lennar Multifamily. The most interesting devel- opment currently under construction, however, is perhaps the St. Paul Col- lection in Cherry Creek by BMC Invest- ments. The St. Paul Collection is posi- tioned to test the high end of the luxury rental market in Denver with amenities, finishes and rents that will rival luxury rentals in Manhattan. Though some doubt exists regarding the depth of the ultra-luxury rental market in Denver, BMC has a very strong development track record in Cherry Creek and is the obvious authority to prove out this con- cept. Concern for the large pipeline and the growing cost of construction still remain, but the overall housing shortage in Den- ver and its positive outlook for economic and population growth should give developers confidence in the Colorado front range for years to come. Jeff Castleton Executive Managing Director, Newmark Knight Frank Craig Stack Senior Vice President, Colliers Bill Morkes Vice President, Colliers INVESTORS CONTINUE TO PAY A PREMIUM FOR STNL RETAIL PROPERTIES IN COLORADO Single-tenant, net leased (STNL) retail properties con- tinue to be among the most highly sought-after real estate investments. This is particularly true in Colorado and California where supply and demand con- straints have created sales with significant premiums. Investors are accustomed to paying low cap rates for single-tenant assets within California as these properties have historically traded for a significant premium in com- parison to the rest of the nation. However, the premium associated with Colorado STNL retail properties is a fairly new phenomenon. This Colorado premium can be attributed to a considerable supply and demand imbalance. There are very few available STNL properties with- in Colorado, and substantial capital actively chases this product type. California-based 1031 exchange investors seeking higher yields and Col- orado-based 1031 exchange investors selling multifamily properties at historic pricing (due to significant appreciation in rents and historically low cap rates) are spurring the increased demand. Colorado's strong economy and recent population growth has also led to a lot of new de- velopment. This has impacted the quality of available properties, many of which are new construction with long-term leases. The median sold cap rate for a STNL retail property in Colorado was 6.02 percent in 2017. This represented a 38 basis point premium in com- parison to the USA (excluding Colorado and California properties). The same product type in California traded for a 105 basis point premium in comparison to the USA (excluding California and Colorado properties). Over the past five years, the Colorado premium has continued to ex- pand. From 2013 to 2017, the year-by-year basis point premium for Col- orado properties (in comparison to the USA) was 26, 0, 20, 31 and 38, respectively. During this same period, the premium associated with Cali- fornia properties has slightly contracted with a year-by-year premium of 130, 120, 110, 115 and 105, respectively. The supply of newly constructed, long-term leased properties will like- ly remain robust as retailers continue to expand in Colorado to meet the needs of a growing population. This supply of high-quality STNL assets will continue to be a driving force behind the Colorado premium. With a vast pool of buyers targeting assets in Colorado, the demand is expected to significantly outweigh the supply and even further contribute to a con- tinued widening of the premium for Colorado STNL retail assets. Zach Wright Advisor, Pinnacle Real Estate Advisors

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