CREJ

June 2020 — Office Properties Quarterly — Page 23 www.crej.com reversing the trend toward more urban locations. On the sales activity front, investment sale brokers who specialize in office have been reporting there is pent-up buyer demand for office properties, but it’s anticipated pricing discovery will remain difficult until a vaccine(s) is widely available or antibody test- ing indicates a herd immunity has occurred. Office investment brokers are indicating some buyers are willing to transact at cap rates approximately 50 basis points above where they were at the end of 2019, which indicates the gap between buyer and seller expecta- tions isn’t too far apart and transac- tion activity should pick up in the later part of the year.Transactions getting done now typically are motivated by an agenda such as a 1031 exchange, a maturing loan or an equity recapi- talization. Otherwise, most sellers are anticipated to wait on the sidelines and avoid selling at a discount until buyers become more comfortable underwriting sustainable rent growth and vacancy rates that more closely match year-end 2019 numbers. From a lending perspective, office properties still rank in the middle of preferred property types for lenders, as it did prepandemic, but we expect lend- er demand for office product to increase in the second half of the year as they reallocate their capital away from retail and hospitality property types, which have seen the greatest impact from the shift in consumer activity as a result of the pandemic. Based on an overview of the loans serviced by our group, office landlords have been experiencing much lower rent-relief requests from tenants compared to hotel and retail landlords, with the exception of administrative offices for the restaurant, hotel and health club industries. Most lenders have changed their approach to underwriting office assets. These changes include: • Any office tenant that has requested rent relief most often will be underwrit- ten similar to month-to-month tenancy (vacant space). • Tenants such as oil and gas com- panies, and administrative offices for restaurant chains and health clubs will be heavily scrutinized as sustainable tenants. A positive story is required for a lender to underwrite the rent. • Structuring around tenants of con- cern likely will be required and could take the form of leasing capital and debt service reserves. • A greater importance is being placed on sponsor strength and experience, especially with bridge loan requests. • Lenders are trying to anticipate shifts in office occupancy by underwrit- ing higher market vacancy rates. • The most recent effective rents on new leases and renewals will be scru- tinized more compared to the average rent in place vs. market. • There has been little change to minimum underwritten debt yields: Average of 9.5-10% for suburban office and 8.5-9% for CBD. • Lenders are limiting proceeds, with overall loan to values down 5-10% from year-end 2019. In general, most lenders are bull- ish on Denver and believe it is well positioned to weather the economic impacts from the pandemic. Denver is ranked in the top 10 metropolitan sta- tistical areas for office investments and very few balance sheet lenders, such as life insurance companies, are overal- located to office mortgage or equity. Current fixed rates aren’t too far from where they were at the beginning of the year but loan proceeds are down across the board by 5-10% with all types of lenders. See the table on Page 5 for more details on how lending criteria and metrics have changed since the beginning of the year. s Keepper Continued from Page 5 and ArcherDX closed on $55 million of Series C and also expanded in its current building in Flatiron Park West. Boulder has demonstrated its dynamic and diverse economy, which historically has provided for a quicker recovery than most of Colo- rado and certainly outperforming the country. Most real estate insiders and CEOs all believe being in Boulder is a gift and feel cautiously optimis- tic as we tip toe into the reopening phases. One fact about Boulder that you won’t find in the real estate data but does matter is about our community of incredible people. Worth noting: • Brad Feld: Appointed on Gov. Jared Polis’ Economic Stabiliza- tion and Growth Council. (Feld is a venture capitalist, entrepreneur, co- founder and partner with Boulder- based venture firm Foundry Group and co-founder of Techstars.) • Dave and Dana Query: Owners of BigRedF Restaurant Group raised enough money to donate 6,000 meals to the likes of Frontline Boul- der, Boulder Food Rescue and EFFA. • Tim Miller: Heading up the Citi- zen Software Engineers as a part of the Innovation Response Team appointed by Gov. Polis. (Miller is former CEO and chairman of Rally Software.) There are countless more Boul- derites (truckloads of papers could be filled listing all the generous people across Colorado) who have stepped up and volunteered to help the com- munity; but more to the point, is the business people in Boulder really do make a difference and are why this market will recover sooner, learn from the experience and be better for it. s Gamble Continued from Page 8 clauses. The insurance industry cer- tainly will respond with the creation of new products, carve outs and cover- ages for the results of biohazard pan- demics. The commercial real estate industry adapted to the 9/11 attacks with signif- icant and effective changes to building operations. Commercial property man- agers and owners have responded to the COVID-19 pandemic in similar fash- ion.There are many unresolved issues to sort out over the near and mid-term, but we are confident that the changes will be significant and permanent and will certainly result in increased operat- ing and capital expenses. Newton’s law is irrefutable! s Kennedy Continued from Page 11 incorporate nature or mimic natu- ral systems are linked to decreased stress, enhanced creativity and accelerated recovery from illness. In the workplace, it also can lead to financial benefits such as a reduc- tion in use of sick days. At Western Union’s headquarters, the ceil- ing design at the communal hub features Artisan Moss, which is sustainably sourced and naturally preserved, embodying the character of the landscapes that are found through the expansive views of the Front Range. 4. Rethink floor plans. We also can rethink floor plans to provide room for people to provide a more hygienic environment. While many companies are considering ways to de-densify their offices in the short term, there may be more permanent ways to achieve this goal by alter- ing how we think about flexibility in the workplace. Furniture systems that allow for adaptability in layout and footprint could become more common. Designing our workplaces around neighborhoods that flex in size from open to private is a strat- egy that could help them adapt as future crisis may require it. n Optimism for the future. Let us use this time as an opportunity to prioritize our personal health and wellness. We should begin our con- versations on design solutions with an ingrained value around well- being and utilize buildings as a tool to realize the values we wish to pro- mote. It has been over 100 years since our society was faced with a similar struggle to confront such a rapid change to our everyday lives. Let’s do our part to be resilient against the next crisis, improve on the norms of our pre-COVID past, and embrace the challenge to envision and build a better world together. s Philipsen Continued from Page 13 Gensler The communal hub ceiling at Western Union’s headquarters features Artisan Moss, which is sustainably sourced and naturally preserved, embracing biophilic design elements. impossible to predict when office properties will operate again at full capacity, let alone with the buzz and energy that attracted many of us to the property management pro- fession in the first place. But with the right mix of operational and mechanical changes, paired with outside-the-box thinking, we’re hopeful the transition back to work is a seamless one. There might even be a new suite of amenities for tenants to utilize. In June, for example, we partnered with People Growers of America, a corpo- rate wellness provider, to offer on- site Food and Drug Administration- approved COVID-19 antibody testing for interested tenants. The voluntary testing program is covered by most health insurance policies and was extended to immediate family mem- bers of building tenants. In many ways, COVID-19 has taught us to lean into our strengths as a nimble and flexible firm with a passion for building strong relation- ships. We’ve also learned that dur- ing a time like this, it’s critical that we support one another and adopt new measures and habits that will inspire tenants to feel confident in their decision to return to the office – whenever that day comes. s Cole Continued from Page 17 is upsized or downsized, new doors, frames and hardware should be seamless in presentation. Designs, colors, finishes and brands of locks, handles, knobs, hinges and other door hardware are constantly changing – and being discontinued by manufacturers. Property managers must maintain relationships with vendors and manufacturers to provide standard, quick-ship items if stocking on site is not an option. n Restroom equipment. Arguably, restrooms are the most used spaces in any given building. Engineers must be able to quickly replace infrastruc- ture items like stall dividers, toilets and urinals while cleaning personnel must have easy access to refill hand soap, paper towels, toilet tissue and others. These are standard items, as well. n Flooring. Any given building might have a variety of floor coverings like carpet tile, Luxury Vinyl Tiles, stone and others. It is vital that property managers maintain a stable of reli- able vendors with quick-ship capabili- ties and consistent price points. n Signage. Clear, consistent and well-designed signage is important for tenant spaces and building com- mon areas. s Jenkins Continued from Page 18