Page 4
— Office Properties Quarterly — September 2016
A
s the end of the summer is
quickly approaching, we enter
the fall with a real estate
market that is in transition.
But it is hard to pinpoint
exactly why. As you look at metro
Denver from a macro view, the funda-
mentals are very strong.We continue
to outpace the nation in unemploy-
ment and job growth, and the city
remains one of the best in the coun-
try for net migration. At the same
time, there is a rise in vacancies and a
slowdown in the investment market.
Job growth in metro Denver contin-
ues to outpace national growth, mak-
ing it the third-easiest city in which
to find a job, according to Forbes
Magazine in 2015. There have been
65,900 jobs introduced to the market
between July 2015 and July 2016, cre-
ating a 4.53 percent rise in job growth
for the trailing 12 months. The high-
est growth occurred among jobs that
create office (5.8 percent) and flex
(5.2 percent) space. The information,
leisure and hospitality, and profes-
sional and business service industries
appear to be experiencing the highest
job growth rates, moving up 6.6 per-
cent and 8.8 percent in the 12-month
time period.
Although job growth is increas-
ing, unemployment rates also have
increased from 3.1 percent in Feb-
ruary to 3.8 percent now. However,
unemployment rates still remain sig-
nificantly lower than the national rate
at 4.9 percent. Currently ranking third
for net migration, Denver continues to
add residents at an approximate rate
of 80 per day. Unlike many other large
cities, millennials have such confi-
dence in the market that they are
moving to Denver with the hopes of
finding a job once they arrive, rather
than necessarily planning ahead.
To accommodate for this popula-
tion growth and business expansion,
developers are under construction
on 16 office projects in metro Denver,
totaling 3.6 million square feet. Of this
space, 29 percent is preleased to com-
panies like DaVita, Comcast, Prologis,
Antero Resources and Polsinelli. As
more space is supplied to the metro
Denver market, average asking rates
have slightly decreased along with
a negative 106,982 sf of direct net
absorption.
Downtown Denver experienced
negative 82,789 sf of net absorption.
Vacancy rates in the market rose
to 10.98 percent and 8.58 percent
for Class A and B office properties,
respectively, while asking rates have
declined over the
previous month.
Asking rates for
Class A and B office
properties in the
downtown Denver
market are $35.45
full-service gross
and $33.95 FSG,
respectively. There
currently is 1.2 mil-
lion sf of sublease
space available on
the market, which
is down slightly
from the peak in
second-quarter
2015.
In the southeast
Denver submar-
ket, Class A office
properties vacancy
rates have dropped
to 7.79 percent and
average asking rates
have increased over
the previous month
to $26.76 FSG. How-
ever, Class B prop-
erties have experi-
enced an increase
in vacancy rates to 14.43 percent
with average asking rates decreasing
to $21.90 FSG. The southeast Denver
submarket also experienced negative
net absorption of 486,717 sf through
July year to date. There is 1.18 million
sf of sublease space available, which
appears to be trending upward.
As the market fluctuates, invest-
ment sales have started to slow in
comparison to 2015. In the trailing
12-month period fromAugust, there
were a total of 75 transactions for
office properties 20,000 sf and above,
totaling $1.8 billion ($178.34 per sf).
The majority of these transactions
took place in the southeast (28) and
west (14) submarkets, while only 11
office properties transacted in down-
town Denver.
In comparison, transactions that
took place throughout the previous
12-month period (August 2014 to
August 2015), the number of transac-
tions decreased by 38 percent and
sales volume dropped by $565 mil-
lion. The average cap rate among
metro Denver transactions also ticked
upward 44 basis points from the 6.28
percent to the current 6.72 percent.
In addition to the change in trans-
action volume, the buyer pools have
altered. Large institutional buyers and
equity funds are choosing to invest
money in other markets, while pri-
vate capital has ticked up. In terms
of who is investing, investor dollars
fromTexas have dropped 12 per-
cent between August 2015 trailing
12 months and August 2016 trailing
12 months. In the same time period,
international investment in metro
Denver increased by 10 percent, main-
ly due to the CoBank building sale in
Greenwood Village.
While challenging to completely
understand, the Denver metro mar-
ket is ripe with opportunities for the
savvy investor. The slowdown in both
the investment and leasing market
seems to be due to factors outside
the typical fundamentals one would
expect. Uncertainty in commercial
mortgage-backed securities markets,
a perception of the effect of the weak-
ened energy industry and general
sentiment due to an unprecedented
presidential election seem to be the
main drivers slowing the market.
With job growth and other indices
well above the national average, Den-
ver is poised to see only a blip from
the turmoil and will remain a solid
market for investment for the fore-
seeable future.
s
Brad Cohen
Managing director,
Transwestern,
Denver
Corinne Helms
Financial analyst,
Transwestern,
Denver
Market Update
Transwestern
Transwestern
Transwestern
Transwestern
