CREJ

Page 4 — Office Properties Quarterly — June 2019 www.crej.com Market Update For further information please contact: AlecWynne, Principal, Managing Director alec.wynne@avisonyoung.com 720.508.8112 Partnership. Performance. A Di erent Approach to Denver Commercial Real Estate Solutions and Services Our professionals deliver exceptional service in today’s complex real estate environment. Through deep insights into the o ce, industrial, retail and multifamily, our professionals o er a full range of real estate solutions including: • Tenant and landlord representation • Capital markets and investment management • Advisory services • Debt capital solutions • Marketing and research services Learn how our approach might help you at: avisonyoung.com Experience the Di erence O ffice financing transaction volume is starting to pick up after being sluggish over the past 12 months. Inves- tors continued underwrit- ing more conservative assumptions for rent growth and exit cap rates due to escalating political and eco- nomic uncertainty in an overtime real estate cycle. The rapid growth of coworking office space in Denver and throughout the country also has created uncertainty in how future office demand will look for average Class B product built in the suburbs prior to the last recession. WeWork is the largest tenant in Denver. The majority of office assets in the Denver central business district have traded over the past three years and the investment sales brokers with the largest market share now have more suburban office listings on the market. The most sought- after office buildings are located in areas where the coworking tenants want to be like Cherry Creek North, Lower Downtown, east downtown and River North as well as some suburban in-fill pockets with transit- oriented developments. Following are the office properties seeing the highest demand and pre- mium pricing: • New construction with credit tenants on long-term leases; • Walkable amenities with numer- ous restaurant options; and • On-site amenities such as collab- orative lobbies, upgraded conference rooms, delis, exercise facilities and bike storage. For older Class B product, in addi- tion to walkable and on-site ame- nities, the highest demand from long-term investors is achieved with properties that have: • Recent lobby and common area renovations; • Minimal deferred mainte- nance and ideally recent replacement or upgrades to ele- vators, mechani- cal systems and roof(s); • Upside with renewing leases at more conservative underwritten market rents; • Staggered lease expirations with no near-term risk of losing a major tenant; and • Minimal major tenant risk during the holding period. Rent growth has continued to increase for Class A office but Class B and particularly Class C rent growth is now on a more moderate pace compared to 2014-2016, when rents spiked 10% per year on aver- age. Long-term (seven-year holds or longer) equity investors generally are focusing on office assets that are positioned to outperform their peer group during the next recession. Val- ue-add investors know they need to reposition an office asset that meets this buyer pool’s criteria to achieve their exit cap rate. These two differ- ent types of buyers essentially are focusing on the same properties at different stages of occupancy and building quality. Stabilized office properties over 20 years old cur- rently on the market with only a few of the characteristics above have been getting stale, but this is start- ing to change. Sellers are recognizing their asset is more commodity prod- uct and they need to reduce their expectations on resale value. Tenant improvement costs have significant- ly increased over the past several years and investors buying stabilized office haven’t reduced their return requirements even though the demand for office in Denver exceeds the supply of properties on the mar- ket. Recent declines in Treasury rates also are anticipated to decrease the gap between office buyer and seller expectations. The average 10-year fixed rate is down 60 basis points from the beginning of the year to plus/minus 4% currently for a non- recourse insurance company loan Denver office financing transactions ramp up Peter Keepper Principal, Essex Financial Group Please see Keepper, Page 21 Essex Financial Group Average expectations for different kinds of available loans