CREJ - Office Properties

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January 2015 — Office Properties Quarterly — Page 7
T he outlook for long-term growth
in Denver’s northwest submar-
ket remains healthy. Overall
economic improvements and
stable demand from industries
with strong employment growth are
allowing landlords to maintain direct-
asking lease rates at higher levels com-
pared to other metro suburban submar-
kets. Increased activity in the northwest
market has exemplified owners’ abilities
to maintain elevated rates during 2014.
The northwest posted positive net
absorption of 188,442 square feet in the
third quarter of 2014, due to increased
new tenant/expansion occupancy and
approximately 154,309 sf of tenant
occupancies in Class A product. This
is driven by a balance between cur-
rent tenant expansions and new ten-
ants in the market. Paralleling strong
third-quarter absorption figures, 2014’s
positive net absorption figures reached
222,826 sf, the highest levels since
year-end 2007.
Future positive absorption in the
market will be driven by Exempla, cur-
rently at lease to expand in Oracle’s
campus bymore than 100,000 sf and
ICAT’s signing of a 37,067 sf deal at 385
Interlocken. These tenant transactions
exemplify growth and recovery in the
submarket. Increased current activ-
ity, year to date, is bolstered by organic
growth from existing tenants in the U.S.
36 corridor, including the previously
mentioned tenants as well as Reed
Group, Ball Corp., Epsilon, Biomet and
Datalogix.
A strong labor pool, solid technology
infrastructure, established amenity base
and large office projects with ample
parking continue to make the northwest
submarket attractive to corporate users,
particularlywith technology-related
businesses. The
technology indus-
try as a whole has
displayed strong
economic growth
and employment
has grown steadily
in the sector, ben-
efitting the office
submarket. Although
large corporate users
remained cautious,
the steady and con-
tinued improvement
in corporate balance
sheets, the strong performance of the
tech industry and improving employ-
ment conditions are expected to drive
improvements to office fundamentals in
the northwest in 2015.
As activity gains momentum, the
average direct-asking lease rates are
expected to maintain current levels. The
northwest’s newer product and proxim-
ity to strong labor pools are the primary
reasons its Class A product remained
$2.90 per sf above Class A Southeast
product, $7.49 per sf above Class A
Colorado Blvd. Midtown product and
$6.68 per sf above Class AWest prod-
uct. In contrast, cost-conscious tenants
in the Boulder submarket are increas-
ingly evaluating northwest options
because Class A product in the north-
west remains $7.88 per sf below Class A
Boulder product.
In the third quarter, the overall aver-
age direct-asking lease rate on a
full-service gross basis decreased to
$23.97 per sf, down 2.3 percent quarter
over quarter. Overall, the submarket
observed a year-over-year decrease
in asking lease rates of 2.8 percent;
diverging from overall Denver mar-
ket increases, but remaining at levels
above other suburban markets follow-
ing significant increases that occurred
in 2012. Class A direct-asking lease
rates decreased to $29.20 per sf, mark-
ing a 2.5 percent decrease quarter over
quarter, and a 3.5 percent decrease year
over year due to Class A availability
and competition. Specifically, the large
amount of space leased at EOS caused
Class A rates to decrease, because a sig-
nificant amount of quality space is no
longer available. Class B space observed
an increase in lease rates to $23.16 per
sf, marking a 1.5 percent increase year
over year.
Reflecting the strongest positive
absorption of any Denver submarket in
the quarter, direct vacancy decreased
to 17.3 percent, a decrease of 246
basis points quarter over quarter and
a decrease of 364 bps year over year.
Momentum in direct vacancy decreases
quarter over quarter and year over year
is expected to continue in the final
quarter of 2014 and into 2015 as mul-
tiple completed deals and active ten-
ants execute deals and occupy space.
While small users’ activity continues to
be resurgent, larger user activity gained
momentum, a sign that larger users are
starting to gain confidence from steady
economic growth and the prospect of
future economic growth.
At the end of 2013, strong investment
office sales activity in the northwest
was capped off with the owner-user
purchase of 305 Interlocken (47,444 sf)
by the U.S. Department of Agriculture.
There were no investment sales in the
northwest submarket in the first three
quarters. Despite restrained activity
in 2014, outside forces driving invest-
ment activity in the overall Denver
office market (such as the low interest
rate environment) and overall strong
capital interest in the Denver market
are expected to contribute to activity
in the final quarter of 2014 and into
2015. Additionally, as prices continue
to increase for core assets in Denver’s
downtown submarket, investors are
looking outside the central business
district towards suburban submarkets
in order to find lower-priced assets with
competitive returns. This trend is exem-
plified by the two notable projects on
the market in the northwest: 385 Inter-
locken and Superior Point. Strong leas-
ing activity in 2014 allowed landlords to
stabilize assets in preparation for future
investment activity.
As the only suburban submarket with
speculative development in the last
three years, the northwest saw demand
outstripped by new supply, resulting in
a challenging leasing environment for
landlords. However, this new product
provides large floor plates and the abil-
ity for new, efficient workspace plan-
ning, which is a requirement among
many large corporate users. Further
development will remain constrained
until existing inventory in the market is
absorbed.
It is predicted that future develop-
ment in the submarket will be driven by
build-to-suit activity rather than specu-
lative development. Long-term growth
possibilities stem from improvements
to U.S. 36 (providing the infrastructure
needed for adequate transportation), a
strong labor force, improving amenity
bases and well-located retail and resi-
dential developments. Headwinds such
as lackluster macro-economic growth,
a supply and demand mismatch and
a developing infrastructure are finally
subsiding in the region and 2015 prom-
ises to be a positive year for northwest
office market fundamentals.s
Leasing Market
Frank Kelley
Senior vice
president, CBRE,
Denver
Avison Young is pleased to celebrate our
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