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Page 16 — Office Properties Quarterly — September 2017
Denver Highlight
O ur Denver outpost covers
the office market day in and
day out. We study properties
that run north from Long-
mont and south to Lone
Tree, spanning nearly 1,200 individ-
ual buildings and encompassing 110
million square feet. In fact, the Mile
High City is the nation’s 10th larg-
est office market – one of only 10 to
surpass the 100 million sf thresh-
old. In other words, and in simpler
terms, there’s a lot of office space
all around us and the supply stock
only grows. Through mid-2017, how
many markets boast more office
inventory under construction than
Denver? The answer: Only seven.
Regardless the size of any metro’s
office market, there exists that
niche of core, urban-area crème-de-
la-crème product – an exclusive set
of buildings that can brand its city.
Herein lies the collection that often
first represents the cross-section of
an office market, signaling a gener-
al sense of strength or lethargy. Typ-
ically speaking, from cycle to cycle,
this collection of prized properties
leads recoveries and downturns
apropos to investment and leasing
fundamentals. We call this our “sky-
line” – the urbanized micromarket
comprised of trophy and Class A
assets that serve as true drivers for
developers, owners and occupiers
alike.
Here at home, what makes up
the aforementioned market? The
Denver skyline market is trophy
and Class A product spanning the
entirety of the central business dis-
trict, fromWells Fargo Center across
town to the Union Station wings,
from a high-rise
tower being built
(i.e., 1144 15th St.)
to the newly built,
low-rise office
component of the
transformative
Dairy Block project.
In all, our skyline
claims 35 existing
or under construc-
tion buildings
totaling 16 million
sf.
In our seventh
annual examina-
tion of the Denver skyline, some
statistical highlights included:
• Skyline direct vacancy, at 14.9
percent, remains above the national
average and is statistically the high-
est it’s been since 2009.
• Tenant demand has rebounded,
driving annual net absorption back
into the black after a one-year hia-
tus and posting in positive territory
for the fourth time in the last five
years.
• Asking rents, measured nomi-
nally, are at a record high ($39.78
per sf).
• After adding more than 1.1 mil-
lion sf from 2014 to 2016, develop-
ment continues to hum along; two
projects under construction will
add another 1.1 million sf of trophy
space upon completion.
During the last six to nine
months, our skyline occupancy rate
fell to its lowest level in some eight
years – a cyclical low at just around
82 percent. It’s not necessarily sur-
prising when you consider the gen-
eral dynamics taking shape within
the overall Denver office set: Market
momentum continues to shift more
toward tenants’ favor, thanks, in no
small part, to the introduction of
new inventory. Nearly every square
foot presently under construc-
tion or delivered so far this year is
skyline-quality product and, for the
third consecutive year, we’re north
of 1 million sf being built right
now. Three straight years of more
than 1 million sf being built – that’s
unprecedented since we started
tracking skyline. In other words,
tenants who still want that skyline
caché (and who, of course, are will-
ing to pay) have more options in
Denver’s best office buildings than
ever before.
We believe our skyline to be at
an inflection point. Given the sig-
nificant increase in new supply,
landlords are making concessions,
even if they’re not lowering face
asking rates. Work allowances and
free rent offerings remain elevated
while vacancy has ticked up. Our
figures suggest that on a 10-year
new lease transaction, occupiers
can negotiate, on average, for a $50
to $55 per sf tenant improvement
allowance and 10 months of free
rent. It’s why we’re calling 2017
“neutral” in terms of market lever-
age, but that pendulum swings
more toward tenants with each
passing quarter.
Still, we’re not projecting a sky-
line oversupply risk. Despite the
lofty-seeming number, direct asking
rents within skyline-quality prod-
uct haven’t moved much. A note to
occupiers: Believe it or not, adjust
for inflation, and today’s average
asking rent is only about 5 percent
more than a full decade ago. Across
50 skyline markets nationwide,
Denver’s $39.78 per sf asking price
ranks as the 20th most expensive.
Investors are increasingly look-
ing to secondary markets, Denver
included, for skyline acquisitions.
Furthermore, owners and investors
already know that occupiers con-
tinue to gravitate to buildings with
the latest and greatest amenities.
It’s why we’ve seen a slew of capital
improvements made to properties
throughout the entire CBD during
the past several years.
Capital’s focus will firmly remain
on skyline properties; their ability
to provide stable value places them
atop the list of “most attractive
assets.” Business’ desire to attract
and retain the best possible talent
has a high correlation with best-in-
class and top-tier office space. For
years, that’s benefited skyline-qual-
ity product with consistent leasing
activity. Outperforming its suburban
counterparts, new construction is
attracting foreign capital at aggres-
sive yields and record prices per sf.
Finally, what about our house
view looking forward? Our analysis
suggests that construction will con-
tinue at a more muted pace in 2018.
Skyline-quality leasing volume,
along with investment trades, will
remain subdued during the next 12
to 18 months as the market enters
the latter innings of the real estate
cycle. And though tenants will pay
more for the prestige of a skyline
address, rents should plateau as
vacancy bumps up thanks to new
deliveries.s
TJ Jaroszewski
Vice president,
director of research,
JLL – Rocky
Mountains, Denver