CREJ

September 2018 — Office Properties Quarterly — Page 5 www.crej.com BIG OPPORTUNITIES ARE AVAILABLE IN DOWNTOWN SUPERIOR. Just outside Boulder and a short commute from Denver, a vibrant, new Downtown Superior is taking shape. This urban hub offers land for office and mixed-use residential/ retail, plus new office and retail space built to suit. The area offers competitive economics, easy access to Denver International Airport, an educated employment pool and a sought-after location. It will be an energetic, eclectic mix of retail, shopping, dining, entertainment and living— walkable, sustainable and surrounded by acres of gorgeous Colorado open space. Fully entitled for up to 817,600 square feet of office, retail and restaurant space; 1,400 residential units; and 500 hotel rooms. Visi t DowntownSuperior.com FRESH OPPORTUNITIES FOR BUSINESS, RESTAURANTS, RETAIL AND MORE. That’s a Superior idea. Market Update P ositive demographic trends continue to entice compa- nies to the Mile High City, supporting strong employ- ment growth and building demand for office space. Because of this, Denver’s office properties attract a plethora of local buyers, as well as West Coast investors seeking more favorable yields than those found in their home markets. • Demographics. Over the past year ending in June, the metro’s office-using employment expanded by 3.3 percent while adding nearly 14,000 workers. Many of these new positions were created by tech, oil and gas and alternative energy companies. In fact, many tech com- panies continue to migrate from the Bay Area to Denver largely due to the market’s lower cost of doing business while still offering a similarly talented labor pool from which to recruit. With 40 percent of the metro’s residents holding a bachelor’s degree or higher, compa- nies’ decisions to move inland have been strongly justified. This trend should remain a key driver of the metro’s office market in the coming years. • Property fundamentals. In 2018, Denver will record its cyclical high completion total as 3.5 million square feet is slated for delivery. Roughly three-quarters of that sum already has been finished this year with developers focusing heavily on downtown Denver and the adjacent Highlands and River North Arts District neighborhoods. Combined, these areas received about 1.4 mil- lion sf of office space during the past six months with the largest completion being the 1144 Fifteenth building. This 672,000-sf project boasts 40 floors of Class A office space near Larimer Square, allow- ing tenants in the building to provide their employees with a live-work- play lifestyle. Another area of focus for devel- opers this year has been the Denver Tech Center. This section serves as the metro’s secondary business district as sev- eral large corporations like Merrill Lynch, Oracle and PepsiCo have operations here. Quick access to the Regional Transportation District light rail and Interstate 25 make this submarket attractive to work- ers employed in the area. Also, the nearby Park Meadows shopping mall and other retail establish- ments add to the area’s appeal. So far this year, about 620,000 sf of office space has been delivered to this locale with most of the new inventory preleased, illustrating the area’s heightened office demand. Here, developers also are focused on offering a live-work-play life- style, and the Denver Tech Center gives them the opportunity to do so. Through the rest of 2018 and in the coming years, develop- ers will continue to focus on the urban core and the DTC as favor- able demographic trends support elevated demand for office space. Additionally, developers will look toward Cherry Creek to build on the tremendous growth the neigh- borhood has already experienced. Broomfield, and specifically the Interlocken area, will record strong office development in the near future as well. This part of the metro is beginning to catch the eye of more developers as companies get priced out of Boulder, partially due to Google recently setting up shop in the city. Because of this, some companies are moving south down Highway 36 to Broomfield in search of more affordable space. With more than 3.2 million sf of office space delivered during the past year ending in June, mar- ket vacancy rose 40 basis points to 15 percent. Several suburban submarkets served as key factors in the vacancy bump as some of these areas registered small surges in construction since June 2017. For example, Broomfield and West Denver received 196,000 sf and 278,000 sf of office space, respec- tively. More notably, southeast Den- ver, which includes the DTC, expe- rienced an 80-basis-point increase to 12.1 percent during the same time thanks to a significant wave of development. These submarket vacancy jumps contributed to the market’s overall suburban measure climbing 120 basis points to 14.8 percent. Over the past year, asking rents continued to advance at a steady pace, increasing 2.9 percent to $26.15 per sf as office demand remained relatively strong. The Colorado Boulevard-Glendale sub- market witnessed the most sub- stantial rent gains as landlords performed many space upgrades and operational improvements. Aurora also posted stout rent growth, however, its average asking rent remains about $6 per sf less than the metro average, suggesting more room for growth. Here, strong household formation, particularly on the submarket’s east side, is boosting demand for office space and bringing in a number of new companies. • Investment trends. During the past year ending in June, new con- struction served as a primary focus for institutional capital. Investors of this class looked to downtown Denver for many of their deals, netting cap rates in the 4 per- cent band. Some of these buyers expanded their search parameters to southeast Denver to zero in on the Denver Tech Center. Here, ini- tial yields in the upper-4 to lower-5 percent range may be attained. Additionally, local and West Coast investors scoured areas just out- side of the urban core. Glendale and the Virginia Village neighbor- hood attracted many investors looking for assets in the 30,000- to 50,000-sf range with cap rates hov- ering around 7 percent, slightly lower than the metro average. Moving forward, the Denver office market should continue to strengthen, attracting developers and raising investor sentiment. In addition, the metro likely will welcome numerous more com- panies in the coming years as strong demographic and economic trends support a healthy business climate. ▲ Urban core and DTC drawmajority of interest Brian C. Smith, CCIM, SIOR First vice president investments, Marcus & Millichap