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.

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M A R K E T H I G H L I G H T: C O L O R A D O 38 • May 2018 • Western Real Estate Business www.REBusinessOnline.com Denver industrial assets are achiev- ing record pricing as cap rates com- press well below 5 percent for Class A product. As this is happening, devel- opers are taking on hefty projects, sig- naling that Denver's industrial real es- tate cycle is stretching its legs instead of winding down. Among the headlines: • Denver's single largest investment transaction on record occurred in the first quarter of 2018. The Pauls Cor- poration sold 14 Class A, highly func- tional assets totaling 1.9 million square feet to Clarion Partners in the Airport submarket. • The largest speculative build of 701,900 square feet is underway by Majestic Realty. Prologis is building more than 500,000 square feet in the Central submarket, while Hyde De- velopment kicked off the 1.8-million- square-foot 76 Commerce Center project in the "less than proven" I-76 Corridor. • Industrial land pricing has doubled in recent years to now double-digit pricing as triple-net asking lease rates approach $8 per square foot. Despite these impressive headlines, here are three reasons we expect fur- ther expansion in Denver's industrial sector into 2019. Investor Preferences Align CBRE's 2018 Americas Investor In- tentions Survey revealed a dramatic increase in the popularity of industrial investments compared to years prior. Half of investors in the Americas are seeking industrial investments this year, up from 32 percent in 2017 and 23 percent in 2016. Industrial is also the most preferred property type among investors. Denver is also raising its stature among investors and attracting new capital sources. Denver stacks up as the seventh most desirable market among investors in 2018 — the highest position on record for the 19th largest market in the U.S. The convergence of the strong pref- erence for industrial and Denver's high rank among markets is driving record investor pricing. This is evident at Hub 25, a Class A infill distribution offering that's recently under contract. Record pricing and heightened sales activity are also increasing liquidity in the market, which has been a historic critique of some investors who have not yet entered this market. The rela- tive spread in yields — 50 to 75 basis points — between Denver and tradi- tional primary markets is a key driver behind increased investor interest in Denver's industrial product. Fundamentally Solid Positive market fundamentals are at the core of ongoing sector growth. Average per-square-foot asking lease rates have increased sharply to nearly $8 triple net overall and $6.01 triple net in the Airport submarket. Vacancy edged up to 6 percent but is still within historic levels due to responsive devel- opment activity. Balance between the construction pipeline and demand is key to maintaining positive rent trends in the near term. Emerging E-Commerce Supply Chain Colorado has seen impressive pop- ulation and job growth since 2010 and is one of the youngest states due to the influx of Millennials. E-commerce companies have increasingly sought out Denver locations to the tune of a 2.7-million-square-foot footprint among a handful of facilities. That footprint is expected to grow signifi- cantly as e-commerce users build out their same-day delivery and reverse logistics supply chains. The outlook for Denver's industrial sector is bright, with more headlines sure to come this year. DENVER CITY COUNCIL APPROVES ZONING AMENDMENTS PERMITTING CONSTRUCTION UP TO 16 STORIES IN RINO NEIGHBORHOOD On Feb. 12, 2018, the Denver City Council voted 11-1 to approve chang- es to the Denver zoning code and municipal code with the intent of implementing the 38th & Blake Sta- tion Area Plan Amendments. These changes will allow property owners to building structures up to 16 stories tall around the 38th & Blake Light Rail Station. When the University of Colorado A Line opened in April 2016, it con- nected the 38th & Blake Station to both Denver Union Station and Den- ver International Airport. At that time, the 38th & Blake Station area was located within the jurisdiction of five separate small area plans pro- mulgated by the City of Denver, re- sulting in inconsistency with respect to building height recommendations for future development. In an effort to capitalize on the potential transit- oriented development opportunities at the new station, the Denver City Council adopted the 38th & Blake Station Area Plan Amendments in September 2016 to refine the existing small area plans and clarify the guid- ance with respect to building heights. While the 38th & Blake Station Area Plan Amendments provide the vision for increased density and height- ened design requirements in River North (RiNo), revisions to both the Denver zoning code and Denver re- vised municipal code (DRMC) were required before site development plans and building permits for new structures could be approved by the city. The newly adopted ordinances create two new overlay districts un- der the zoning code and offer height incentives allowing developers who provide affordable housing or other community benefits to build higher than the maximum permitted height in the underlying zone district, and implement new design criteria and requirements. Summary of Revisions to Denver Zoning Code and Municipal Code Below is a summary of key chang- es to both the Denver zoning code and DRMC implemented by the city council: • The River North Design Overlay (DO-7) District establishes enhanced design review criteria for all struc- tures located within the boundar- ies of the district. Features include elimination of the minimum parking requirement within one-half mile of the 38th & Blake Station, increased requirements for screening/mitigat- ing structured parking and designa- tion of the Platte River for treatment as a "primary" street. • The 38th & Blake Station Area Overlay (IO-1) District permits prop- erty owners to exceed the base height permitted by the underlying zone district as long as the property own- ers satisfy affordable housing and community benefits requirements. IO-1 is the first Incentive Overlay dis- trict in Denver, and the city is clearly laying the groundwork for replica- tion of this overlay district in other parts of Denver. • In addition to creating the DO-7 and IO-1 overlay districts, the city council approved the creation of the Incentive Fee Fund, which allows the city to fund various types of afford- able and low-income housing, and revised the DMRC to permit devel- opers to construct buildings in the IO-1 overlay at heights in excess of the base zoning — between eight and 16 stories — as long as they build a certain amount of affordable units in the 38th & Blake Station area. In the case of nonresidential buildings, de- velopers need to provide community benefits commensurate with the cost to build affordable housing units, or otherwise pay fees to be contributed to the Incentive Fee Fund. In the IO-1 overlay district in RiNo, the amount of affordable units re- quired for those portions of any building constructed above the base height permitted by the underlying zone district is four times what is required under the city's current af- fordable housing linkage fee provi- sions, which were passed in fall 2016 ("Linkage Fee Ordinance"). • Unlike the Linkage Fee Ordinance, residential and "mixed use residen- tial" developers in the IO-1 overlay are not permitted to pay a fee in lieu of building units — they must con- struct affordable residential units, either on-site or off-site. If residential developers elect to build affordable units at an off-site location in an IO-1 overlay district, they must provide affordable units of similar tender to those developed on their site. In oth- er words, a market-rate, for-sale proj- ect must build (either on- or off-site) affordable for-sale units, and a mar- ket-rate, for-rent project must build (either on- or off-site) affordable for- rent units. • Another critical difference from the Linkage Fee Ordinance is the fact that developers of nonresidential projects within the IO-1 district can build up to the incentive heights by paying the fee required under the Linkage Fee Ordinance and signing a "Communi- ty Benefits Agreement," which is an agreement entered into between an applicant and the city, administered by OED, allowing an applicant to provide community-serving uses for a portion of the proposed structure in place of payment of the incentive height linkage fees. INDUSTRIAL INVESTORS, DEVELOPERS TURN UP THE HEAT IN DENVER Jessica Ostermick Director, CBRE M S International, North America's leading supplier of premium surfacing products, opened its showroom and distribution center in Aurora in late 2016.

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