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— Office Properties Quarterly — June 2016
E
veryone is flocking to Denver
– millennials, hippies, boom-
ers and, of course, real estate
investors. Not only is Denver
the No. 1 place for business
and careers, according to Forbes,
and one of the fastest-growing cit-
ies in the U.S., but also the barrier
to entry for real estate investors is
relatively low compared to other
major office markets such as New
York City, Washington, D.C., Chicago
and San Francisco.
Denver’s record-high sales price of
$600 per square foot for IMA Finan-
cial’s building at Union Station is 70
percent less than top office building
sales in New York City, 40 percent
less than San Francisco and D.C.,
and 10 percent less than Chicago.
What has long been a regional play
for investors who were born and
bred in Denver now is gaining the
national and international attention
it deserves.
International investment.
Foreign
investors have sought out real
estate investments in the states for
decades, primarily in the coastal
cities. Investing in the U.S. for for-
eign capital often has been com-
pared to a savings account. Even in
downtimes, the U.S. office market is
extremely attractive to foreign money
given its long-term stability. Despite
the American tendency to think the
sky is falling during a recession, for-
eign investors see a short-term dip as
an opportunity to get in at a price that
will increase their exit returns, how-
ever long it takes.
Canada’s Brook-
field Properties is
one of the largest
owners in down-
town Denver and
has invested in
Denver since the
1980s. While Den-
ver has been popu-
lar with Canadian
investors for some
times, investors
from Asia Pacific
and Europe, the
Middle East and
Africa are catching on.
In the past five years, Denver
has seen investments from Bah-
rain, South Korea, Hong Kong, Ger-
many, Chile, Mexico and Canada,
to name a few. The international
capital invested in Denver has been
steadily growing each year – $230
million in 2013, $330 million in
2014, $420 million in 2015, and $230
million year-to-date 2016. In the last
12 months, 27 percent in Denver’s
office building investments have
come from overseas, broken out as
22 percent AsiaPac and 5 percent
EMEA.
Domestic investment.
Denver also
is seeing a slew of new investors
coming from other parts of the
country. Those who previously
thought of Denver as merely a stop-
over on the way to Aspen are catch-
ing on to Denver’s appeal. They
have seen the potential, proven by
the massive population growth seen
in 2015 and projected for 2016, and
want to get in while they still can.
Investors see the diversification in
the economy. While Denver is still a
major player in the oil and gas sec-
tor, it does not pull the strings for
Denver’s economy anymore. Oil and
gas and related sectors were the
economic drivers in town before the
1980s recession. Today, the largest
industry is professional and busi-
ness services with over 18 percent
of Denver’s employment, mean-
while natural resources and con-
struction is closer to 6 percent.
The combination of a diverse
economy and job growth higher
than the national average paints
Denver in a very favorable light,
and investors are eager to be a part
of a different, more stable picture.
Since 2011, Denver has seen 11
new investors from the West Coast
totaling close to 30 transactions
and $800 million, 10 from the East
Coast totaling more than 60 trans-
actions and $1.2 billion, four from
Chicago totaling more than six
transactions and $260 million, and
four from Texas totaling more than
15 transactions and $140 million.
In the last 12 months, 73 percent
of investment in Denver’s office
buildings came from domestic
investors, broken out as 36 percent
new-to-Denver since 2011 and 37
percent Denver natives or estab-
lished in Denver before 2011.
Tenant impact.
Tenants, alongside
their advisers, need to do exten-
sive due diligence on existing and
prospective landlords before final-
izing a plan of attack. Each land-
lord has a different philosophy,
be it to maintain occupancy, keep
rates high, or value-add and sell.
Some landlords are looking for a
long-term hold. Some are looking
to push rates and sell as soon as
possible. There can no longer be
a one-size-fits-all approach with
such a diverse ownership base and
mentality.
There are many factors in play
for each owner and, often, within
owners’ different funds. Each situ-
ation must be evaluated on a case-
by-case basis. Many international
investors want to keep their build-
ing fully leased, so it may be diffi-
cult for a tenant to downsize or do
a short-term lease.
Domestic users vary greatly, and
a deep dive into their portfolio is
the only way to understand how
they operate. For instance, a certain
fund is nearing the end of its life
cycle and sale of the fund’s assets
are imminent. If a building is part
of that fund, the tenant needs to
be prepared for the impact of that
sale. Measures need to be taken
to ensure the tenants’ current and
future needs will be met, regardless
of sale or new ownership. This can
be done a few different ways, such
as options in the lease or stop gaps
to keep things in check. Either way,
tenants must come to the negotiat-
ing table with an arsenal of infor-
mation and a clear strategy in order
to succeed.
s
Ashley Elkin
Assistant director,
Savills Studley,
Denver
Market Update
