OIQ_091521

Page 18 — Office & Industrial Quarterly — September 2021 www.crej.com OFFICE — LENDING aggressive on 55%-60% suburban office loans. Our point here is: Lend- ers are willing to finance office deals – they’re just very selective. Here are some recent takeaways from deals that are getting done: n Operational history matters. Lend- ers are laser focused on operations. They’re doing deep dives into his- torical asset management to ensure landlords are experienced with office products and have maintained their reserves prudently. n A diversified rent roll is more attractive than ever. From a lender’s perspective, diversification of the rent roll and rollover mitigates a lot of risk. While this always has been the case, a varied tenancy is carrying more weight today than it has in the past. n Smaller tenants are in favor. Smaller tenants are more inclined to return to the office setting, com- pared to corporations, which tend to have more elaborate, large-scale plans for returning to the office. Smaller tenants are more nimble and better able to accommodate the working parent who wants to be in the office away from the distractions at home. n Medical office tenants are uniquely alluring to lenders. Medical office remains in favor with lenders. At the onset of the pandemic, medical office was uncertain due to the rise in tele- health. However, now more than 1.5 years into the pandemic, patients have returned to the doctor’s office, proving the asset class to be somewhat reces- sion resistant. The inelastic nature of medical services and the sticky ten- ancy are highly attractive to lenders. Until investment committee mem- bers can ditch their sweatpants and Zoommeetings themselves, it will remain difficult to envision a rush to the office market. However, financing for the right office product is available and still attractive. The pool of inter- ested lenders has shrunk, but life com- panies are actively quoting office loans for good operators at sub-60% leverage with a good tenancy story. Likewise, debt funds flush with cash are finding good yield on value-add stories up to 80% loan to cost. s ariggs@essexfg.com bbutler@essexfg.com amehlem@essexfg.com Continued from Page 1 is that landlords are holding to their asking rates and providing reduced concessions in the form of tenant improvements, and base rental abate- ment is offered more sparingly.While some deals remain to be had, pri- marily in single-story product in the north I-25 submarket, we anticipate lease rates to hold steady or escalate throughout the balance of 2021; and with a significant delta between rates for existing product versus new con- struction, there remains room for sig- nificant growth in rates over the com- ing years. n Absorption. All submarkets posted negative absorption in the first half of 2021, albeit the north I-25 market bore the brunt of this with approximately 52,000 sf of negative absorption. Both the airport and CBD submarkets had minimal negative figures, and overall the market remains healthy. COVID-19 clearly had an impact on new require- ments in the market, and so, while you expect some inherent churn in tenancy, there was no activity to take the place of those spaces vacated. As things hopefully start to get back to normal, and more employees go back into the office, we do not anticipate this trend to continue and forecast 2022 to reflect some very healthy posi- tive figures. n Medical office market overview. The medical office market has remained very strong through all of 2020, despite a very uncertain time in the general economy and health care.With the last speculative construction being almost 12 years ago in 2008-2009, the existing MOB market has remained very tight with sub-9% vacancy rates for the last several years.With the steady improvement in the market (pre-COVID-19), we are seeing multiple projects that are ready to break ground on a speculative basis with 30%-60% prelease requirements. These proj- ects are what attribute to the slight increase in vacancy for 2021. Given the market demand, we expect many of these projects to do very well in their lease-up despite the fact that the costs likely will be 30% higher than current market. In addition to a vibrant leasing mar- ket, the appetite for quality medical investments has remained strong from both the medical real estate investment trusts as well as private capital investors, and we anticipate that to continue throughout 2021. s pscoville@coscommercial.com gphaneuf@coscommercial.com Scoville Continued from Page 6 the terms and conditions to consider if a hybrid concept is adopted. These include items such as: • Salary, job responsibilities and benefits; • Work hours, overtime and vaca- tion; • Equipment requirements; and • Office supply requirements. With these specifications and guidelines in place, companies and their employees can set expecta- tions and determine what the best approach is for both. It also provides a valuable opportunity for compa- nies to track and measure results on multiple fronts (including every- thing from employee performance to how much a company is helping to reduce its carbon footprint). Obviously, companies want their employees to be able to perform at their best. Finding ways to pro- vide safe and productive options for those who want to work in an office setting or from a home office is a delicate balance. Denver South is helping the companies we work for and represent to find ways to strike this balance and continue to thrive. s sheryl@denver-south.com erin@denver-south.com Machado Continued from Page 11 when working remotely because we lose the meaningful transfer of information between workers. These loosely defined areas typically have some food or beverage service, have more people around and are less formal than the standard conference room. However, isolating these areas from the quiet and communication zones serves to make these areas less disruptive if the noise levels increase. When possible, these are great areas to have next to break rooms because they can double up as internet cafes. These zones will not necessarily reduce the office footprint – but they will make the office space more effi- cient and attractive to workers who need to adapt to the hybrid office environment. The collaborative office was created to provide a new sense of energy to the office and to provide an environment of shared humanity. We just didn’t anticipate all the rules that would come with a pandemic. We still need our office environ- ment. As with other times in history, we evolve into better situations given the chance, and this new hybrid work experience will provide flexibility for remote and in-house workers. s tjenkins@kieding.com Jenkins Continued from Page 12 quoted in the bid and the actual price of delivered materials if that is what is specified in the contract. In this case, both parties are protected from the kind of market volatility we’re seeing now. Owners and landlords, too, have ways of adapting to short-term cost increases. Some simply will seek bids from new or untested construction firms that they would not have engaged in an otherwise stable market. Some firms hire temporary in-house construction managers to deal specifically with short-term cost spikes in tenant build- outs. Others contract with third-party outfits that perform similar duties. Again, creativity and communica- tion can bear fruit for both general contractors and their clients if markets can self-correct with at least some measure of predictability. COVID-19 was and is the exception to that rule. Markets don’t like uncertainty, and the delta variant is clearly stalling a more robust return to the office. Granted, vaccinations have helped ease the panic we experienced during the early days of the pandemic, but the delta strain is proving to be a formi- dable barrier to tenants in the market already buckling under the strain of cost volatility, the anti-vaxxers and the continued uncertainty infecting both short- and long-term project planning. Owners and users are free to remove those employees not willing to be vac- cinated, but that is not always easy, and it doesn’t resolve the larger issue of marketwide fear – and potentially holding off on fiscal decisions, includ- ing those affecting real estate. Hopefully, the lingering effects of the pandemic will level off sooner rather than later. Office leasing activity here is on the rise, albeit more deliberately than ever before. Denver is a more resilient and diversified market than most others of similar size. Colorado’s quality of life is intact. Cost increases will ease because they always do.With fewer intangibles and unforeseen failures, the office market should be approaching pre-pandemic heights by this time next year. s pbrumley@aberdeenconstruction.com Brumley Continued from Page 14 world and these trends aim to keep employees safe and allow employees to feel comfortable as they return to the office. Collaboration, flexibility and early planning are the keys to moving for- ward. Designers often are leading the charge in the progression of the mod- ern office space, with insights from stakeholders, and team synergy in the earliest stages of the project between the owner, designer and contractor is more important than ever to carry these advancements forward.We have heard it many times over the past year that we are all in this together, and to move toward the future of office envi- ronments it is apparent that we must work in concert to meet the needs of businesses and their employees. s joel.pennick@jedunn.com Pennick Continued from Page 15 and reduce pavement maintenance; and incorporating trees, shrubs and ground covers can reduce the amount of impervious paving, reducing heat island effect – all of which reduce over- all operating costs. Established plantings and shade trees are desired aesthetics that beautify a building site.To have established and mature planting on the site takes time for growth and the design professional to select the right material. Purchasing young plant mate- rial is one way of achieving cost savings since younger plant material adapts quicker and with less initial care than older, more mature material. If you ever had an arborist assess a tree’s value and cost for replacement, you know that established/healthy aged trees are costly to replace. Creating high-performance land- scapes that are resilient and regenera- tive are imperative to our environment and a key step in creating long-term success for healthy communities.They benefit both natural and human sys- tems in a multitude of ways, and the cost savings accrue over time. s jpetro@eypae.com Petro Continued from Page 16