CREJ - Office Properties

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January 2015 — Office Properties Quarterly — Page 9
F or the past 20 consecutive
quarters, Denver has seen an
unprecedented rise in rental
rates in downtown and subur-
ban office markets. Currently,
rents downtown are at record highs,
with no clear relief in sight. For ref-
erence, the median asking rate for
a central business district Class A
space today is $33 per square foot,
which represents an 18 percent
increase from the previous cycle’s low
in 2009, when CBD vacancy hit 19
percent. Since then the CBD submar-
ket has absorbed 2 million sf.
Hear me now, and believe me later:
There is still value to be had in this
historically hot office market. But
first, some color.
The market has seen major upticks
in the past, specifically between
2003 and 2007, when investment
sales activity was at a then all-time
high. During this period, when com-
pared with today’s landscape, we
didn’t see the level of demand and
absorption, the changing dynamic of
tenants in the market or the overall
popularity of downtown Denver as a
new home for companies (e.g., Ardent
Mills, DaVita, Transamerica, On Deck
Capital). Furthermore, historically low
interest rates have given investors
the confidence to “stretch” to acquire
assets, driving values higher.
Since the previous cycle’s trough
in 2009, many factors have led to
Denver’s slow and steady climb to
prominence. Activity in the energy
sector improved with new oil and
gas discoveries in the Bakken and
Niobrara shale plays. Venture capital
firms looked to place their money in
startup companies, taking advantage
of new developments in technol-
ogy. Many of these
employers who
incubated in Boul-
der have moved to
downtown Denver
for a deeper tal-
ent pool (e.g., Send
Grid, Rally Soft-
ware). Amenities
in the form of new
restaurants, hotels
and transportation
gave businesses
more to offer their
employees. B-cycle
and ride-sharing
programs have made it easier to
navigate the growing downtown area.
And last, but certainly not least, the
renovation of the historic Union Sta-
tion put Denver on the global map
as a major player in the competition
for large corporate offices (e.g., IMA
Financial, Antero Resources, First
Western Trust, Hogan Lovells).
Similar to previous growth cycles,
investors are finding great opportu-
nity in the form of rent growth, and
have begun to pick off the low-hang-
ing fruit, sometimes even reaching
for the tops of the trees, as evidenced
by the sales of the two Union Sta-
tion wing buildings for $600 per sf.
There is now more than 1.4 million sf
of speculative office product under
construction downtown or will be by
the middle of 2015. All of these new
projects are commanding lease rates
in the $45 per sf full-service neigh-
borhood, which allows the existing
buildings to “draft” off these prices
and raise their own rates.
All of the above improvements
spelled trouble for those tenants
who basked in the glory of their rela-
tively inexpensive
overhead for the
previous five years
or so. In addition
to the competitive
hiring landscape
facing most com-
panies, they are
now confronted
with an even more
daunting challenge:
how to find a spot
that won’t inflate
the second-largest
expense item in
the budget. We suggest the following
eight considerations:
1. Rethink the way you approached
office space in the past. Traditional
industries, such as legal, financial
services, oil and gas and even…ahem…
commercial real estate houses, are
finding new and creative ways to
maximize efficiency, while keeping
employees happy and engaged. Con-
sider the value of a more open layout
with less enclosed offices, more open
and collaborative workspaces, and
even hoteling options for those who
spend less than 50 percent of their
time in the office.
2. Keep an eye out for landlords who
bought low, thus giving them the
opportunity to “reach” for tenants
that are currently occupying space in
buildings that have recently sold at
those higher value numbers.
3. If you’re a technology firm or other
Lower Downtown type, consider this
– buildings in the central core and
Uptown, which often are less expen-
sive than LoDo, can create an envi-
ronment that fosters creativity by
tearing out ceiling grids and tiles, and
installing new and clean spiral duct-
work similarly found in the renovated
warehouses. One traditional office
building is taking a unique approach
by adding a patio with pingpong
tables and corn hole sets; another is
adding a rooftop deck.
4. Believe it or not, the investment sales
market could work in a tenant’s favor by
finding landlords who need to lock
down that one last tenant before they
put the building up for sale.
5. On that note, seek out landlords who
have significant tenant turnover on the
horizon and could use more stability.
6. If you don’t absolutely need to be
downtown, look to the periphery in
areas such as the Golden Triangle,
River North, Highlands, Santa Fe Arts
District or other areas that offer more
relief in the way of base rents, operat-
ing expenses and parking.
7. If you’re a startup, keep in mind that
landlords aren’t thrilled about the pros-
pect of dumping loads of money into
building out space, so keep it simple,
unless your investor is ready to come
up with some form of a guarantee.
Find space that can be re-used or
re-purposed and still suit your needs.
Get creative with flexible furniture
that you can take with you along the
way.
8. Most importantly, get into the market
early and don’t get caught scrambling
at the last minute. It’s a fast-moving
environment with surprises around
every corner.
In short, there are still compelling
reasons for landlords to compete for
tenants. Open your mind, protect your
bottom line and leverage the expertise
of those who do this on a daily basis.s
Leasing Market
Matt Davidson
Managing director,
Newmark Grubb
Knight Frank,
Denver
Andrew
Blaustein
Managing director,
Newmark Grubb
Knight Frank,
Denver
Central business district Class A office historical median (full-service) rental rates