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— Office Properties Quarterly — December 2016
Founded in 1953, Unico Properties LLC is a real estate investor and
full-service operator of office andmixed-use assets. Unico’s Colorado
portfolio consists of more than 2 million square feet of commercial
property in Denver and 1.4 million square feet in Boulder.
Local Commitment. Shared Goals. Superior Execution.
www.unicoprop.comAustin Kane
VP, Regional Director
303.832.1660
AK@unicoprop.comF
or many commercial real
estate investors, the ever-
evolving Denver market may
appear to be in its prime for
office properties. Topping the
Forbes list of best places for busi-
nesses and careers for the second
year in a row and still experiencing
a surging tech boom, an investment
in office properties seems likely
to pay off. However, there may be
cause for reconsideration. While the
business climate in Denver remains
strong, the market for commercial
office properties does not.
•
New properties threaten invest-
ments.
The current supply for office
properties in downtown Denver is
rapidly outpacing the demand. In
the first three quarters of 2016, we
saw absorption of 61,486 square feet
of new office space in the down-
town area.
Parallel to that, there’s currently
more than 2.1 million sf of office
space under construction, with
365,000 sf set to be delivered the
fourth quarter. That means in the
fourth quarter alone, almost six
times the amount of office space
absorbed all year will be delivered
to market.
Even with numerous companies
relocating headquarters to Denver,
the forecast for returns for commer-
cial office investors and developers
does not look strong. Furthermore,
the majority of new office construc-
tion in the downtown Denver area
is Class A, oversaturating that asset
class and market.
•
Sublease availability soars.
In
addition to all of the new office
construction coming on line, the
amount of sub-
lease office space
available on the
market cannot
be ignored. Den-
ver has long been
a haven for oil
and gas compa-
nies and, with
the decline of
this industry, it is
unsurprising to see
that a majority of
the office sublease
space available is
from that sector.
What is surprising, though, is just
how much sublease space is out
there. Sublease availability remains
above 1.3 million sf in Denver, with
the energy sector accounting for
over 900,000 sf of it.
While it is good news that many
tech companies are moving to the
Denver area, it is unfortunate that
the space build out for a tech com-
pany differs greatly from that of an
oil and gas company. Tech compa-
nies tend to favor large, open work
spaces for their employees, while
the oil and gas industry is known
for a more traditional office setup
with individual offices. While many
subleases are offered at a discount
of normal lease rates, the tenant
improvements required to convert
an oil and gas office into a tech
office often offset any discount in
rent.
Between the 2.1 million sf of
office space under construction and
the 1.3 million sf of sublease avail-
ability, it’s hard not to see that the
office market in downtown Denver
is entirely oversaturated. This is
good news for relocating companies
who are hoping to get affordable
lease rates, but for the Denver com-
mercial investor – not so much.
•
What about co-working spaces?
In the midst of the growing office
market in Denver, co-working
spaces have established themselves
as the latest trend in office space.
Despite their recent popularity, an
investment in co-working spaces is
still fairly risky. Co-working spaces
are a relatively new concept, mak-
ing the long-term profitability of
this asset class still unpredictable.
As a real estate investor, vacancy is
your biggest cost and co-working
spaces are built around a short-
lease tenant situation, which leaves
a lot of vulnerability for vacancy.
Additionally, co-working spaces
serve a niche population right now.
That’s not to say the market look-
ing for co-working space might not
grow and turn it into a stable asset
class but, for now, it’s too early to
tell exactly what the demand will
look like for the spaces in a few
years.
Lastly, many new co-working
spaces continue to try to “out cool”
each other, sometimes resulting in
making the space feel more like a
frat house and less like an office.
While these features might help
garner initial interest, they usually
do not help investors get a higher
return on investment.
•
Growing business market, declin-
ing office value.
Colorado is deemed
one of the best states for new entre-
preneurs. Many might argue that
absorption of vacant square footage
will increase due to businesses relo-
cating to or opening offices in the
Denver area.
In the Denver market, third-quar-
ter unemployment numbers were
strong, sitting at 3.6 percent. While
this is great news for residents
and the economy, it’s not neces-
sarily good news for commercial
real estate. With fewer people look-
ing for work, there are likely to be
fewer businesses relocating to the
area. Combine this, along with the
glut of new construction and sub-
lease availability, and you can see
why asking lease rates are on the
decline, resulting in low profitabil-
ity of commercial development for
office spaces in Denver.
•
Not office space, not now.
With
the business market and job market
both strong, Denver certainly will
continue to grow. While this paints
a rosy picture for the future of
office space, the reality is that the
amount of product on the market
already is outpacing the demand,
without even including the office
product under construction. You
don’t need to rely on reports and
statistics to see this; it’s right in
front of your eyes in many of these
gorgeous new office buildings with-
out lights on and no tenants in
place.
Next time you’re driving through
downtown, take a look around at
these empty office buildings, fac-
tor in the new inventory coming
to market and decide for yourself
if investing in downtown Denver
office space is a good idea right
now.
s
Why we are not buying office product in DenverJason Shepherd
Co-founder, Atlas
Real Estate Group,
Denver
Investor Insights