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Page 8 — Office Properties Quarterly — September 2017
B oisterous headlines do
not capture the full story
of office availability rates
throughout metro Denver.
To the untrained eye, every
crane in the skyline may appear to
be another office building and not
one of the many residential struc-
tures actually being built. If we are
not overbuilding office space and
1,000 people per month are mov-
ing to Denver, how can pockets of
office availability be as high as 23
percent?
There are undeniable highs and
lows in every submarket across the
city, especially in southeast subur-
ban Denver. Whenever office inves-
tors stumble upon such unfavorable
market data, they immediately look
for trends to explain away high
availability rates. Negative submar-
ket trends in SES point in every
direction from lead tenant mergers,
acquisitions and consolidations,
to urban migration to light-rail
proximity. There is not one evident
culprit for 19 percent availability
in SES, but there is a compelling
dumbbell curve theory to consider.
The flat part of the dumbbell
curve is at Village Center Station
(Arapahoe Road and Interstate 25).
This area is an “urb-suburban set-
ting,” which National Real Estate
Investor identifies as “one way to
describe the mash-up of suburban
office locations in walkable settings
with easy access to urban-style
amenities like transit, housing, res-
taurants and retail.”
The office availability rate in
Village Center Station is 14 per-
cent, thanks to companies such as
CoBank, Charter
Communications,
CSG and Fidel-
ity, which have
been attracted to
its urb-suburban
vibe. Suffice it to
say, Village Cen-
ter Station office
buildings also
have fetched the
highest historic
investment sales
prices in SES. For
example, Shea
Properties will sell Charter Plaza
to KBS for approximately $395 per
square foot when construction is
completed in first-quarter 2018.
Furthermore, there are limited sites
for future office development in
Village Center Station, so rents will
continue to rise beyond $30 gross
per sf there, while the rest of the
SES submarket remains stagnant.
North and south of Village Center
Station – the lobes of the dumb-
bell curve – are not urb-suburban
destinations. Instead of embracing
rising rents, these owners are con-
ceding to abated rent, expensive
work letters, rent credits and bonus
commissions. What a difference an
intersection or two can make!
In the North Denver Tech Center
(Belleview Avenue and I-25), where
the average rent is $25 gross per sf,
owners have engaged in an ameni-
ties war to address the preferences
of today’s tenants. Time will tell if
it is enough to add a fitness center,
conferencing facilities, food-truck
spaces, outdoor seating and a con-
cierge to attract new tenants.
Further south in Meridian (Lincoln
Avenue and I-25), corporate cam-
puses of the 1990s – like those of
Teletech, Western Union and Starz
– are coming to market in droves at
a time when pastoral settings must
compete with rousing live-work-
play options.
Few owners have beaten the odds
at a “lobe” location. For instance,
Denver Corporate Centers II and
III have experienced record leas-
ing activity this year in the North
Denver Tech Center. DPC Develop-
ment Co. with Bridge Investment
Group Partners bought these two
buildings for a low basis of $109 per
sf in March 2016. After much col-
laboration between the ownership
partners, property management,
JLL brokers and Gensler architects,
a $3.5 million renovation was
executed with no detail spared.
Instead of just meeting the ameni-
ties war, the joint decisions/design
went above and beyond to include
a group fitness room and a tenant
game lounge. Most importantly,
another $4.5 million was invested
in an aggressive spec suite program,
focused on delivering 4,000- to
6,000-sf turnkey spaces. Ownership
met the market demand by inking
deals at $25 gross per sf, scooping
up virtually every tenant within a
4-mile radius. To enhance urb-sub-
urban appeal, some retail develop-
ment is being added to the site in
2018.
Delivering a good value propo-
sition in a submarket with high
availability creates a magnet effect
– every tenant wants to be in the
building. If the same matrix is
applied in a tight submarket, such
as Village Center Station, owners
will achieve higher rents. Case in
point: Keep an eye out for the com-
ing transformation of Tuscany at
Village Center in 2018 by Crescent
Real Estate Partners and OZ Archi-
tecture.
On a final note, traffic congestion
is beginning to push some tenants
into “lobe” locations in SES. The
inverse of urban migration is lead-
ing to satellite offices in SES. The
next time you are stuck in traffic
on I-25, consider commuting via
the light rail to an urb-suburban
location or settling for an economic
office deal closer to home. s
Market Update
Whitney Hake
Director, Cushman
& Wakefield,
Denver
Cushman & Wakefield
An aerial of the southeast suburban
dumbbell curve, with the flat part cen-
tered around Village Center Station.