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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 benchmarks

Investment Market

Patrick

Devereaux

Executive vice

president, capital

markets, JLL,

Denver

Jason Schmidt

Executive vice

president, JLL,

Denver