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Page 10 — Office Properties Quarterly — September 2017
Investment Market
E arlier this year, I was speak-
ing with a client who owns
extensive commercial real
estate holdings in Colorado,
including two large office
buildings, and he said he would
be nervous to buy another office
property today. He was voicing a
concern about the office invest-
ment sector that I have been hear-
ing often lately: The evolution of
technology has allowed machines
to fill the roles of people (requiring
businesses to lease less office space)
and prompted many employees to
work remotely by phone, video and
internet (which, again, requires less
office space).
The result is that office proper-
ties, similar to big-box retail, as a
long-term investment have become
stigmatized as lacking in relevancy.
Consequently, many former office
investors have shifted their attention
to multifamily properties (everyone
still needs a place to live) and indus-
trial properties (goods come from
shipping distribution hubs instead of
retail locations in the age of online
shopping). Don’t get me wrong, the
logic behind investing in multifam-
ily and industrial makes sense. But,
as we have seen that retail is still
important (exemplified by, for exam-
ple, Amazon’s acquisition of Whole
Foods), I argue that the office sector
is here to stay and presents, perhaps,
the best value for investor capital in
Colorado today. Following are three
reasons why.
First, the office remains a crucial
component to successfully running
most businesses. While we have all
witnessed the rise in the remote
workforce, companies large and
small are reversing
work-from-home
policies because
there is no substi-
tute for the benefits
of in-person col-
laboration. Further-
more, the increas-
ingly competitive
job market is
prompting decision
makers to further
define their compa-
ny image through
its office space.
This is beneficial
not only for clients
who visit but also for recruiting and
retaining the best talent.
Nearly 100 percent of my office
lease tours start with a client-led
conversation about the image the
company wishes to achieve in its
new office, because the client wants
his employees and recruits to be
excited about coming to work. And
offices are cool again! Collaborative
office concepts are popping up every-
where – even in “regular” office build-
ings – and existing operations like
WeWork are expanding into more
office space at greater velocity than
ever. Although individual offices in
these co-working facilities are effi-
cient, consider the massive common
areas that tips the scale back toward
more old-fashioned square-foot-per-
employee figures.
Next, consider office properties’
relatively high return on investment.
Margins are thinning for commercial
real estate investments across the
board in Colorado, but my percep-
tion is the nonoffice asset classes are
doing so more rapidly. These days it
is nearly a guarantee that on-market
multifamily investments are offered
at sub-6 percent or even sub-5 per-
cent cap rates. Industrial and retail
investment properties often are
offered at sub-7 percent rates. Com-
pare these figures to the 28 Denver
County office buildings over 10,000
sf listed for sale on Costar in late
August, of which 78 percent had a
cap rate advertised at 7 percent or
higher.
Whereas five years ago, when full-
service office leases without expense
reconciliation provisions were preva-
lent, office landlords more frequently
are switching to a triple-net platform
or requiring a hardline expense rec-
onciliation policy for full-service leas-
es. The result is the landlord’s lack
of responsibility to eat rising tax and
common area maintenance expenses
– and a clearer path to profitability.
And lastly, consider Denver office
leasing trends in recent years.
Office rates exceeding $50 per sf
in Union Station and Cherry Creek
have pushed tenant demand to
the east side of downtown, Glen-
dale and the Denver Technological
Center, where you would be hard
pressed to find a full-service Class
B offering for less than the high
$20s (downtown) and mid $20s (in
Glendale and Cherry Creek) – rep-
resenting a double-digit increase in
just the last few years. In the first
two quarters, leasing absorption
is positive despite nearly 1 million
sf of deliveries per quarter, while
the vacancy rate has decreased by
over 5 percent since 2009. Aver-
age rental rates and cap rates each
have increased by 1 percent in the
second quarter over first quarter.
Factor in Colorado’s expected popu-
lation growth and the increasing
strength of the entrepreneurial and
tech scenes, and it would appear
the Denver investment office mar-
ket is on solid ground.
In summary, while the office
market is evolving, it is not dying.
The office place will maintain its
importance in American commerce;
higher returns are readily available
for office investors; and the office
market remains healthy in Denver.
A quality I admire most in my cli-
ents is their motivation to go where
the profits are, regardless of their
asset type comfort, and what I have
noticed is those willing to keep an
open mind or, better yet, buck the
current trend often enjoy the most
success.s
Alexander F.
Becker
Vice president, Real
Estate Consultants
of Colorado LLC,
Greenwood Village
Margins are thinning
for commercial real
estate investments
across the board
in Colorado, but
my perception is
the nonoffice asset
classes are doing so
more rapidly.