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— Office Properties Quarterly — June 2016
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D
enver is experiencing
extraordinary growth, which
is drawing major compa-
nies to move headquarters
to the city. International
private equity giant Partners Group
is relocating its North American
headquarters to the Denver metro
area, Uber opened a major office off
of Brighton Boulevard and TIAA is
going to substantially increase its
presence in the city.
Denver’s population and job
growth continues to attract the
interest of real estate investors.
Colorado added nearly 102,000
people in 2015, representing a 1.9
percent growth rate. Denver dis-
proportionately attracted 18,600
of those people, with a 2.7 percent
growth rate. Those who are moving
to metro Denver benefit from a 3.3
percent unadjusted jobless rate for
the 10-county area, with Boulder
County’s unemployment rate stand-
ing at 2.9 percent in April, which
has remained relatively flat.
For properties $10 million and
greater, Denver’s year-to-date 2016
office sales volume decreased 35.4
percent to $582 million from $900
million against the same period in
2015. The suburban market only
experienced a 22.3 percent decrease
to $473 million from $608 million
in 2015. The greatest contribution
to lower transaction volumes came
from the central business district
office properties, which experienced
a 62.5 percent decrease to $110 mil-
lion from $293 million in 2015.
Denver’s investment sales trends
mirror what is occurring across the
country. Nationally, suburban office
sales showed a
greater decrease of
20.6 percent in vol-
ume, but CBD sales
only decreased by
12.8 percent. Given
the relatively small
size of Denver’s
CBD, only one or
two CBD office
transactions would
move Denver’s sta-
tistics substantial-
ly to the national
averages.
Denver’s emer-
gence since the Great Recession has
rewarded office investors who are
experiencing strong rent growth
driven by solid fundamentals. New
construction combined with rein-
vestment in existing office build-
ings has resulted in a stronger asset
base that is better equipped to meet
the changing demands of today’s
office users. Affordable office
options remain available through-
out the metro area while new
construction and renovated assets
are able to meet the standards of
demanding tenants seeking cutting-
edge office space.
Across the entire metro area,
vacant and available office space
stood at a healthy 10.9 percent with
an average rent of $22.01 per square
foot. This represents a nearly 3 per-
cent annual growth since bottom-
ing in 2010. In the CBD and Lower
Downtown, vacant and available
office space stands at 11.4 percent
with an average gross rent of $32.52
per sf, representing a 5.1 percent
annual growth since the bottom.
During this same period, metro
Denver inflation averaged 2.5 per-
cent.
Given the fact that Denver is
entering year six of its economic
recovery, we have seen investors
take a more cautious approach to
underwriting in many instances.
Scarcity value, as evidenced by
newer assets or those with location-
al or other competitive advantages,
continues to provide strong pric-
ing with a look toward continued
pro-forma growth. Other less dif-
ferentiated assets are being priced
on an “in-place” basis with existing
returns expected to modestly grow
over time.
The transition between “pro-
forma” and “in-place” underwriting
styles can produce some disruption
in transaction volumes, which has
been evidenced in 2016 during peri-
ods of price discovery. Debt remains
attractively priced and continues
to be available – if used prudently
– as most lenders are not willing to
assume undue risk.
The baseline returns that inves-
tors are demanding for their capital
continue to produce strong pricing
but with a greater reliance on in-
place cash flows, which are known
and measurable.
Many investors who acquired
earlier in this economic cycle
made educated observations on
future rent growth and absorption
that were subsequently rewarded
through market-based performance.
When we look at 2016 vintage office
underwriting, it is our strong opin-
ion that office investors will find
an attractive risk-reward profile,
given that rent growth and exit cap
rate assumptions have moderated.
While we recognize that real estate
always will be a cyclical business,
those investors who seek to acquire
quality assets often are proven right
over time.
s
John Jugl
Senior managing
director, HFF,
Denver
Market Update
Debt remains attractively priced and
continues to be available – if used
prudently – as most lenders are not
willing to assume undue risk.
