Office Properties

6 / 28

Page 6 — Office Properties Quarterly — July 2015
Development Market
A robust job market and
increasing population boost-
ed Denver’s office market
to the point that developers
are adding new buildings at
a rapid pace. Consider this: In 2014,
Colorado was the fourth-fastest-
growing state for the second consec-
utive year with a population increase
of 1.6 percent, or 84,000 people,
according to the Brookings Institute.
And despite the rapidly increasing
population, the state’s unemploy-
ment rate remains low as the state
continues to add jobs. Over the last
year, Colorado added 63,200 jobs
and has an unemployment rate of
4.2 percent, well below the U.S. aver-
age of 5.4 percent, according to the
Colorado Department of Labor and
Employment.
Even with all the new buildings
coming on line, vacancies are down
and lease rates are up, signifying a
demand that has not been seen since
before the Great Recession began in
2007. Metro Denver’s vacancy rate
ended the first quarter at 10.2 per-
cent, down from 10.4 percent during
the fourth quarter last year. Aver-
age rental rates quarter over quar-
ter ticked up slightly to $23.50 per
square foot, representing a 1 percent
increase over the fourth quarter,
when rates stood at $23.27 per sf.
Among the largest lease signings in
the past 12 months are the 251,000-sf
lease by CoBank at Village Center Sta-
tion III, the 111,877-sf lease by Aircell
in Broomfield, and the 99,000-sf lease
by Transamerica Corp. at 1801 Cali-
fornia St.
The redevelopment of the historic
Denver Union Sta-
tion spurred a flur-
ry of development
activity in the sur-
rounding area. Last
year IMA Financial
Group set the pace
by moving into
its new 108,000-
sf headquarters
at 1705 17th St.
Union Tower West.
A 100,000-sf office
and hotel proj-
ect broke ground
recently at the cor-
ner of 18th andWewatta streets, and
1601 Wewatta, a 10-story, 280,000-sf
office building under construction,
signed a 15-year lease with law firm
Hogan Lovells LLP for about 70,000 sf
on the top 2½ floors.
Union Station’s influence reaches
farther into downtown than just
the 17.5 acres considered part of
the redevelopment project. Z Block,
an office, hotel and retail develop-
ment along Wazee and Blake streets
between 18th and 19th streets,
recently broke ground, attracting Pro-
logis from its campus near Denver
International Airport.
One big coup for the region is the
news that Panasonic is building a
hub for its business solutions opera-
tions near DIA. The campus will cre-
ate about 300 jobs and will be com-
pleted by the middle of next year.
The market is increasingly attrac-
tive to investors. Last year, 126 build-
ings sold for a total volume of $2.2
billion, compared with 124 buildings
sold in 2013. One of the largest deals
last year was the sale of 370 Seven-
teenth Street for $240 million, or $361
per sf.
It’s impossible to ignore the flurry
of development activity underway
in Cherry Creek that will increase
the neighborhood’s office market
by about 15 percent by 2016, from
roughly 2 million sf to more than
2.3 million sf. That figure does not
include the recently announced
Civica Cherry Creek, which will add
another 90,000 sf of Class A office
space and 10,000 sf of street-level
retail space. Other projects in the dis-
trict include:
• 3300 E. First Ave., the redevelop-
ment of the former KeyBank building
that will include refurbished office
space in addition to 20,000 sf of retail
and 172 apartments.
• 3033 E. First Ave., a retail and
office building developed by Don
Sturm, chairman and CEO of ANB
Bank.
• 100 St. Paul, a 150,000-sf office
building developed by Pauls Corp.
and FirstBank.
In addition to typical markets,
developers are building office prod-
uct in areas overlooked traditionally,
such as the stretch of Platte Street
sandwiched between Denver’s trendy
Lower Highlands neighborhood and
Lower Downtown. Three office build-
ings are under construction, and sev-
eral more sites on the boutique- and
eatery-heavy street are ripe for devel-
opment.
The Lab, a 125,000-sf office building
at 17th and Platte streets, is nearing
completion, and The Nichols Build-
ing landed tenants like Galvanize,
Pivotal Labs and Knoll, the office fur-
niture company. Though considerably
smaller at 10,400 sf, the Boathouse
is likely to be an attractive option for
tenants seeking a boutique feel.
Many developments are aimed at
appealing to the millennials flock-
ing to the city – Denver ranks second
behindWashington, D.C., in the in-
migration of millennials between
2009 and 2012. That demographic is
accustomed to telecommuting, flex-
ible work schedules and locations,
and co-working spaces. Also Denver
boasts the fourth-highest concentra-
tion of sole proprietors in the U.S.
and consistently ranks in the top five
cities for entrepreneurship, which
explains why the average office user
in downtown Denver is 5,000 sf or
less.
The trend toward smaller office
spaces is fueling demand for col-
laborative workspaces such as Gal-
vanize, Industry and Thrive. Shift
Workspaces announced it will spend
$30 million to add another 71,300 sf
of collaborative office space over the
next 10 months.
Though the market still has plenty
of traditional large users, the belea-
guered oil and gas industry is likely
to leave some large blocks of avail-
able space as crude prices drop. Still,
Denver’s employment base is more
diversified than the boom-and-
bust oil market of the 1980s that
left downtown Denver awash with
empty office space after a building
spree overbuilt the market. So even
with today’s declining oil prices, it’s
unlikely that Denver’s downtown
office market will feel much impact
Matt Ritter
Principal, Pinnacle
Real Estate
Advisors LLC,
Denver