CREJ - Office Properties Quarterly

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Page 8 — Office Properties Quarterly — April 2015
Investment Market
D enver’s office market and
economy continues to thrive
in 2015. Colorado’s 2014 year-
end unemployment rate was
4 percent. Denver was the
No. 1 city in the nation for millennial
population growth in 2014, and it is
estimated that 22 percent of Denver’s
population is made up of millennials.
Colorado had approximately 1.65
percent population growth in 2014
(fourth in the nation) and is now
ranked the No. 2 city for number of
bachelor degrees per capita. The 2014
year-end job growth was approxi-
mately 60,000 jobs. These dynamics
resulted in Urban Land Institute rank-
ing Denver the No. 4 market for com-
mercial real estate investment in 2015,
and Business Insider Magazine ranks
Denver as the most comprehensive
city for economic growth.
Denver’s office investment market
started rebounding in 2010. Some
of the investors that were willing
to make acquisitions early in the
recovery are now harvesting profits.
Two examples of this are The Triad
at Orchard Station and Offices at The
Promenade.
M&J Wilkow purchasedThe Triad in
2012 for $63 per square foot at 72 per-
cent occupancy. The asset was retrofit-
ted and rebranded by the ownership
over a two-year period. At the time of
purchase, market rents were $16-$17
per sf; today they are $21-$22 per sf
gross. The Triad is back on the market
for sale and will prove to be a case
study on market timing and value
enhancement execution.
There are currently several office
listings that were purchased between
2006 and 2008, and the holding peri-
ods were extended due to the Great
Recession. Denver
weathered the
downturn better
than most mar-
kets. Numerous
office owners were
successful in hold-
ing through the
recession, and they
can now exit with
upper-teen returns.
Occupancies are
nearing 90 percent,
and rents are at lev-
els exceeding past
cycles.
Upside potential
today in Denver is rolling existing
leases to market in an improving
rental market. It’s typical today to see
rents in place at $3-$5 per sf below
current market rents in the primary
suburban markets. Core-plus capital is
aggressively pursuing assets in Denver,
and they target 60 percent roll or more
in the first three years of the holding
period.
Cap rates continue to compress as
new capital pursues Denver office list-
ings. There were 18 office trades above
$15 million in fourth-quarter 2014; 11
of them sold to new investors to Den-
ver. The capital pool spans from New
York to California domestically, and
Canadian capital is the most active
foreign capital. Cap rates continue
to compress as the depth of buyers
increases. The 10-year bond has been
below 2.25 percent since the end of
November. At the time of this article,
the 10-year is at 1.94 percent; it was as
low as 1.67 percent on Feb. 2 (volatile).
This has resulted in interest rates for
long-term debt being plus or minus 4
percent.
Most conduits and
life companies are
offering between
two and 10 years of
interest-only rates,
depending on the
loan to values and
the creditworthiness
of the borrower.
Bank or fund bridge
debt can be in the
mid-3 percent.
Hence, a 6 percent
cap results in a posi-
tive leverage return
of 10 percent during the interest-only
period. Commercial real estate is the
preferred investment vehicle as the
risk and reward can provide higher
returns than alternative investments.
Denver’s most preferred core and
core-plus markets are the infill loca-
tions of Lower Downtown, Cherry
Creek and Boulder. There is about 1.25
million sf of new construction under-
way in LoDo and the west central
business district. LoDo has a vacancy
rate under 4 percent, and leases that
were signed in 2008-2009 can be $7-$8
per sf below market today. Cap rates
can be in the upper-4 percent for tro-
phy assets constructed during the last
cycle to mid-5 percent for redeveloped
historic brick and timber properties.
Prices per sf can range from $300 per
sf for core-plus properties to mid- or
upper-$500 per sf for trophy and core
opportunities in LoDo.
Cherry Creek is transforming from
a dominant retail destination to a
live, work, play environment. Cherry
Creek is becoming a LoDo/millennial
environment that caters to adults with
some of the highest incomes in Den-
ver. Due to the recent zoning change,
there are two office assets, two mul-
tifamily properties and a hotel under
construction. Leasing activity is strong
and rents for new office product are
in the mid-$30s per sf triple net. First
Avenue Plaza (55 Madison and 44
Cook) recently traded for $285 per sf
and under a 5 percent cap rate.
Boulder is in the midst of a transfor-
mation due to a significant amount of
value-add capital being infused into
the market over the past three years.
Unico and Goff Capital Partners both
made significant investments into
portfolios of older assets in Boulder’s
core and eastern markets.With the
repositioning of these properties, Boul-
der became even more attractive to
technology and biotech companies.
Office rents are increasing significant-
ly, and the downtown core of Boulder
can be in excess of $40 per sf triple
net.
Due to the lack of opportunities
in Denver’s CBD and the low yields
of assets in LoDo, investors are fully
engaged in pursing core and core-plus
listings in the southeast suburban
market. Twelve office sales occurred
in the fourth quarter above $15 mil-
lion. Prices ranged from $66 per sf for
a vacant call center facility to $210 per
sf for a core-plus Class A multitenant
building.
Overall, Denver continues to be one
of the most preferred locations in the
nation for office investment capital.
Transaction flow continues to increase
as new domestic and foreign investors
pursue upside in a rising rental rate
environment. The Denver office mar-
ket is experiencing benchmark prices
per sf as lease rates exceed peak levels
of previous cycles, and cap rates con-
tinue to be at historical lows.s
Patrick
Devereaux
Executive vice
president, capital
markets, JLL,
Denver
Jason Schmidt
Executive vice
president, capital
markets, JLL, Denver
colliers international would like to congratulate legacy partners on the
expansion of their 1.8m sf denver area portfolio, with these additions:
highland park
9359 E. Nichols Ave.
Englewood, CO 80112
greenwood plaza
5350 S. Roslyn St.
Greenwood Village, CO 80111
400 inverness pky.
Englewood, CO 80112
72,610 SF
100% LEASED
63,488 SF
100% LEASED
111,482 SF
•Outstanding location
•Amazing views
•Upgrades coming soon
The Legacy Continues
EXPANDING
14,235 SF AVAILABLE
$25-$26/SF FULL SERVICE
ROBERT WHITTELSEY
+1 303 283 4581
JOHN HUTTO
+1 303 283 4592
KATY SHEEHY
+1 303 283 4563
COLLIERS INTERNATIONAL I DENVER ·
For leasing information on these properties or additional available Legacy properties contact: