CREJ - Office Properties Quarterly

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April 2015 — Office Properties Quarterly — Page 9
Developer Market
D enver has a long history of
boom-and-bust cycles – or
cycles of rapid expansion
followed by crushing retrac-
tion – created in part by the
once heavy emphasis of the oil and
gas industry in our economy. But
the metro area is moving away from
this trend, with a more diversified
market, including strong activity in
the finance and technology sectors.
While Denver currently has nearly 2
million square feet under construc-
tion or renovation, this represents a
less than 2 percent increase to total
supply. Market forces are encourag-
ing restraint so the market is not
overbuilt.
Denver’s central business district
is one example of restrained devel-
opment – despite what appears to
be major activity in the market,
especially in Lower Downtown and
Central Platte Valley. New develop-
ment projects underway include
1601 Wewatta, the Triangle Building,
1401 Lawrence, the LAB at 17th and
Platte, and Z Block, which is located
along Wazee and Blake streets
between 18th and 19th streets.
For the first time in the history of
many development cycles, Denver’s
market is experiencing significant
preleasing success – each of the
buildings are 30 to 40 percent pre-
leased prior to completion with
substantial activity on the balance
of each property.
The market diversification is evi-
dent by the strong activity in the
finance and technology sectors,
providing additional insulation
from potential downsizing while
oil prices remain
low, and producing
a vibrant, active
and heterogeneous
market. At year-
end 2014, the CBD
reported overall
vacancy of 12.62
percent, well below
the 35-year histori-
cal average. This
activity resulted
in strong full-year
absorption of
453,266 sf, leading
the metro Denver
submarkets.
The office market is a barometer
of the health and vitality of the
overall market.
Office rental rates are rising
steadily throughout the metro
area, with an average increase of
21 percent over the last four years.
Part of this increase is due to the
restraint in development – scarcity
of high-class product is creating a
strong demand, which pushes rents
upward. Landlords are upgrading
assets to maintain market relevan-
cy, also driving rates upward.
This trend is so powerful in some
markets that Class B buildings are
now experiencing strong occupancy
and accelerating rates. Southeast
suburban Class B properties in
many cases are achieving over $20
per sf, a new high for Denver. Even
Class C buildings are feeling the
impact, achieving lease rates that
reach former Class B prices.
Many factors are encouraging this
shift away from the severities of
boom and bust. The Metro Denver
Economic Development Corp. spent
the last 12 years diligently working
to make history for Denver, consis-
tently recruiting new industries and
companies, expanding the area’s
international draw, and growing the
Denver metro area. As a result, Den-
ver is now recognized as a top city,
ranking fourth among U.S. markets
to watch in 2015 in the prestigious
Emerging Trends in Real Estate
report, which cited its popularity
with millennials, concentration of
technology and energy firms, strong
local economy and active develop-
ment community as reasons for the
ranking.
Additional positive influences
include very high in-migration
for the metropolitan area, with a
growth rate ranked ninth in the
nation by Forbes magazine. The
Denver metro area’s emphasis on
mass transit is also a game changer,
and encouraged suburban and CBD
development. Through the chal-
lenging years of 2008-2010, transit-
oriented development provided the
only real wins in the metro area
– as Palazzo Verde, Village Center
Station I, Panorama IV and Lincoln
Station highlight. Finally, market
diversification created a positive
impact, insulating Denver from the
fluctuations of one industry.
Technology industries, in particu-
lar, have been a growth engine for
the area, with Denver ranking third
in the nation (for the sixth consecu-
tive year) for high-tech workers
per capita. Corporate and regional
headquarters are expanding; recent
announcements include Arrow Elec-
tronics, Nationwide and CoBank.
Additionally, companies are in
growth mode, with many insurance,
health care and engineering com-
panies expanding, such as Allstate
Insurance and Kiewit Construction.
The CBD, SES and Northwest mar-
kets have seen the most expansions
and corporate relocations. In par-
ticular, companies are looking again
at the CBD as a vibrant and positive
location, as evidenced by recent
announcements by Liberty Global
and Transamerica.
It is expected this trend will
continue, and many economists
predict the future looks bright for
Denver’s economy. The University of
Colorado’s Leeds School of Business
forecasts that Colorado will gain
61,300 jobs in 2015, a level of growth
that will place the state among the
top 10 in the nation for job cre-
ation. The professional and busi-
ness services sector, one of the top
office-occupying industry sectors,
is also projected to grow a robust
3.3 percent next year, adding 12,800
jobs. The stage is set for continued
expansion in 2015.
Newmark Grubb Knight Frank
Research forecasts the momentum
achieved in 2014 will continue in
2015, with positive absorption in
most markets meeting or exceed-
ing 2014 levels; rental rate increases
continuing in the CBD, NW and
SES submarkets; speculative TOD
development breaking ground in
the SES; and continued job creation
and falling unemployment driving
expansion.s
Tom Lee
Executive
managing director,
Newmark Grubb
Knight Frank,
Denver