Page 18
— Office Properties Quarterly — March 2016
B
etween 2010 and 2014, over
100,000 people moved to
Denver, with many of these
new transplants consisting
of the millennial generation.
Widely recognized as the most-
educated workforce in our history,
these young people are changing
the way we live and work. Go into
any grade-school classroom and you
won’t find rows of individual desks,
but clusters of desks intended to
facilitate collaboration and sharing.
With over 3,200 businesses open-
ing over the past four years, rising
rents in traditional office space and
the boundaries of the central core
of Denver pushing outward, several
office developers are responding
with a new way to conduct business
that appeals to the younger, collab-
orative, tech-savvy generation – the
creative office.
Pioneering developers target old
warehouses and convert them to
cutting-edge office space, with sev-
eral expanding to cluster retail and
multifamily uses in order to create
highly diversified live-work-play
projects. The intention of many of
these developments is to create
a synergy between tenants, and
developers maintain a hands-on
style of management long after the
last concrete seal dries.
Creative office users are look-
ing for space that incorporates
sustainability with re-use of older
buildings, energy efficiency and
support for the latest technologies.
Proximity to public transportation
is important, and on-site amenities
and neighborhood characteristics
are strong considerations.
When developing
opinions of value
for this type of
property, apprais-
ers are entering
into uncharted ter-
ritory where the
particulars that
drive value vary
from property to
property, and there
is very little hard
data from which to
draw conclusions.
Rental rates for
creative office
space have increased at paces that
far exceeded expectations. Prop-
erties that six months ago were
achieving rental rates in the high
$20s to low $30s per square foot, are
seeing new deals signed at $45 per
sf, triple net.
National brands are setting up
corporate and regional headquar-
ters alongside new startups. Outside
brokerage and third-party manage-
ment services are less common,
making research on lease trends
more difficult to track. The flex-
ibility of the space, with an open
concept, movable walls and month-
to-month desk rentals, can change
the overall layout and rentable area
within a matter days. Large open
areas, common conference and
huddle rooms, and kitchens stocked
with kegs and gourmet coffee
machines can lead to higher operat-
ing costs.
Developers of these properties are
heavily vested in ensuring the con-
tinuing success of these projects.
Many are Colorado natives and are
active in commu-
nity organizations
and governmental
initiatives to target
future redevelop-
ment areas. The
relative newness of
this property type
means there are
few, if any, sales of
similar properties.
The success of
existing projects
has encouraged
more proposed
development,
which could easily lead to an over
supply of similar space with a
limited tenant pool from which to
draw. Capitalization rates and dis-
count rates for this type of special-
ized property are generally 50 to 100
basis points higher than well-locat-
ed Class A office buildings.
Land costs for these new develop-
ments can be significantly lower
than core areas of downtown. And
while it’s not always cost beneficial
to repurpose old buildings, the open
floor plans and exposed building
components desired by creative
office users cost significantly less
to build out than traditional Class
A office space. Construction costs
are significantly lower than market
values.
Even general office users are tap-
ping into the design concepts of
creative office space. The classic
model of perimeter offices around
an open cubicle pit is changing as
telecommuting, co-working and
flexible hours become the norm.
Digital data storage and cloud-based
technology are eliminating the need
for in-suite file storage and server
rooms. Multitenant office buildings
are incorporating common collab-
orative spaces that include a variety
of conference and meeting rooms,
open work areas and outdoor space.
New suburban office buildings are
designed with higher open ceilings,
hotel-style lobbies with clustered
seating areas, and outdoor compo-
nents such as balconies and rooftop
terraces. As a result, tenants have
less need for communal space with-
in their suites. Operating expenses
can be expected to increase, though
much of that will be recovered with
triple-net lease rates. Investors in
Class B office buildings are looking
at the integration of these modern
space designs desired by tenants as
a value-add opportunity.
Changing office dynamics driven
by a younger, more collaborative
workforce are opening opportunities
for local developers and investors
to provide adaptive space that will
continue to drive the small- and
medium-sized employers who
helped make Denver one of the
leading destinations for a strong in-
migrating workforce.
Institutional investors and value-
add opportunists are capitalizing
on the changing requirements of
traditional office users, and Class B
office properties stand to benefit the
most from adaptive redesign initia-
tives. Market values of office build-
ings will continue to be influenced
by design considerations, changing
tenant space requirements and
overall supply.
s
Brad Weiman
Senior managing
director, Integra
Realty Resources,
Denver
Laurel Barsa
Senior director,
Integra Realty
Resources, Denver
Market Drivers
