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— Office Properties Quarterly — January 2015
D
enver has established itself
as a primary market for real
estate capital. Foreign and
domestic institutional capital
has confidence in Denver.
This is due to the diversification of
our economy, the
in-migration of mil-
lennials, our highly
educated workforce,
our growing mass
transit system and
Colorado’s outper-
formance of the
national economy in
terms of job growth
and unemployment
rate.
In 2014, we experi-
enced a new bench-
mark in sales price
per square foot in
the central business
district. Class A office
lease rates reached
record levels in the
CBD and the south-
east suburban mar-
ket, and investors’
yield requirements
continued to com-
press as new capital
flooded into the mar-
ket. Denver’s office
market fundamen-
tals will continue to
gain momentum this
year. We are fortunate to have several
years of upside and runway ahead of
us.
Economic Trends
Foreign and domestic capital is tar-
geting Denver due to the diversification
of our economy, and the job growth we
have experienced in energy, technol-
ogy, health care and financial services.
No single standard industry clas-
sification code represents more than
16 percent of the state’s job market.
Additionally, Colorado has one of the
most diverse energy economies due to
its significant employment in natural
gas, renewable/clean technology and
liquids/oil.
Through October, Colorado created
close to 70,000 jobs, and the state’s
preliminary unemployment rate esti-
mate is 4.3 percent versus the national
average of 5.8 percent. Our year-to-
date job growth is 2.7 percent, making
us the seventh-fastest growing state in
the county.
Denver continues to receive positive
press and encouraging economic rank-
ings. The media coverage enhances
and supports capital’s desire to be here.
Recent press includes Urban Land
Institute’s ranking of Colorado as the
No. 4 state for commercial investment
in 2015, Business Insider’s forecast
of Denver being the No. 1 economic
growth city in 2015, and U.S. News and
World Report’s ranking of Colorado as
the fifth-best state to do business in.
Capital and Transaction Trends
New foreign and domestic capital
continues to pursue acquisitions in
Denver. Through November, there have
been 27 office transactions above $15
million. Fourteen acquisitions have been
with new investors to Colorado, and
nine of them have been with a foreign
capital source. The most active foreign
capital has been Canadian via Second
City Capital, Artis REIT and Slate Street
Capital. Out-of-state domestic capital
has come from coast to coast. Investors
are hoping to generate 50-100 basis
points more yield in Denver than they
can find in the gatewaymarkets for core
and core-plus assets.
Total transaction volume for 2014 will
be close to $3.25 billion, a 35 percent
increase over 2013. The most notable
transactions will be the north and south
wing buildings of Union Station. Both
properties traded just above $600 per sf
with going-in yields close to 5.25 per-
cent. Union Station is one of the coun-
try’s largest multimodel development
areas and has contributed significantly to
Denver’s millennial in-migration.
More than 25 percent of Denver’s
population growth since 2000 has been
millennial, which is attractive to com-
panies wanting to hire the brightest and
best young talent. Other notable CBD
transactions include a 50 percent inter-
est in Republic Plaza toMetLife for $240
million ($260 per sf), and the $212.8
million purchase of Park Central at $381
per sf, close to replacement cost. Prior
to year-end, another Gateway to Lower
Downtown office building is expected
to transact close to $400 per sf, which
will set another record price per sf for
western CBD assets built in the 1980s.
Thewestern CBD is defined as Stout to
Market streets and Speer Boulevard to
20th Street.
Core and core-plus capital’s primary
targets are Denver’s CBD, LoDo and
Cherry Creek. There continues to be
a lack of product for sale in our most
desired locations, and yield compres-
sion for these locations has been more
than 100 bps over the past 18 months.
Going-in yields for core assets in LoDo
and the western CBD range from 5 per-
cent to 6 percent.
Some investors are transitioning into
Denver’s primary suburban office loca-
tions to find more yield with a focus on
walkability to light rail and/or restau-
rants. The core suburban assets to trade
this year include Broadway Station
($73.25 million, $150 per sf), Waterview
I-III ($66.85 million, $183 per sf), and
1st Avenue Plaza in Cherry Creek ($75
million, $183 per sf). Core yields in the
suburbs can range from 5.75 percent
to 6.5 percent. However, Cherry Creek
pricing is as aggressive as LoDo.
Prices per sf for office product in
Denver are at levels never seen before.
This is due to new benchmark lease
rates achieved in the CBD and suburbs.
Class A leases have been achieved in
the CBD close to $30 per sf triple net in
existing assets and new construction
rents can range from $32-$35 per sf
triple net lease. In the SES submarket,
existing Class A assets have achieved
rents in the low $30 per sf gross and
forecasted rates for new construction
will be $22-$25 triple net lease. With
enhanced lease rates and cap rate
compression, prices per sf are higher
than in past cycles. That said, proper-
ties continue to trade at a significant
discount to rising replacement costs,
and the market continues to have tre-
mendous upside potential in values.
Denver’s future is bright. Job growth
and millennial in-migration are expect-
ed to continue. Institutional capital
“needs” will be invested in Denver as
our diversified economy continues
to outperformmany of the gateway
markets. New construction is occur-
ring downtown and in the suburbs,
but not at levels that cause concern of
overbuilding. All the new construction
is at prime locations. Class A space is
needed in our market as construction
has been limited since the 1980s. The
momentum in Denver’s economy and
office market will continue. There are
several years of upside and runway in
our futures.
s
Office investment market hits new benchmarksInvestment Market
Patrick
Devereaux
Executive vice
president, capital
markets, JLL,
Denver
Jason Schmidt
Executive vice
president, JLL,
Denver