OIQ_091521

Page 8 — Office & Industrial Quarterly — September 2021 www.crej.com OFFICE — MARKET TRENDS W hile Denver’s office leasing fundamentals have been jolted by the effects of COVID-19, the owner-user office building and condo sales markets have weathered the storm with increased demand and pricing reaching all-time-high levels. Owner-user office buildings and condos generally are defined as properties owned and occupied either solely by the owner’s busi- ness or in conjunction with other tenants to whom the owner leases. The benefits for tenants to own their own office space are numer- ous. Instead of being tenants subject to volatile and increasing lease rates during lease renewals, they can take advantage of the opportunity to provide their businesses with clear, fixed occupancy costs through locking in a long-term commer- cial mortgage. Coinciding with this idea is the concept that owners pay themselves rent instead of making their landlord wealthy. Addition- ally, the money put into an owned property has the potential to add value when selling versus that value benefiting the landlord when the space is leased again. Many owners associate owning their office space with retirement savings as history shows their property will appreci- ate over time while the loan balance is being reduced. Lastly, a business can leverage tax advantages such as depreciation and interest deduc- tions. The COVID-19 era has brought on additional benefits and opportu- nity for buyers. Low interest rates, aggressive owner-user financing and U.S. Small Busi- ness Administra- tion incentives have provided the opportunity for buyers to own at a lower monthly cost while taking advantage of long- term fixed interest rates. Landlords of multitenant office buildings imple- mented various levels of protocols during the height of the COVID-19 lockdowns. These protocols often restricted tenants on how and when they could access their space along with imposing elevator capacity limits, mask mandates and other safety measures, oftentimes beyond the state’s or Centers for Disease Control and Prevention’s recom- mendations. While this often was appreciated by most, there is a loss of control that concerned some business owners. Additionally, while businesses can control how they operate in their own space, there is no controlling how other ten- ants in the building function. This has spurred a desire by businesses to own their own space in order to achieve autonomy. Whether seeking a building that is occupied solely by the business with its own entrance to offer complete control or an office condo where there is a greater say in establishing the building’s protocols, the desire not to be sub- ject to others’ rules has motivated a significant number of recent buyers. Attractive financing and the desire for autonomy, coupled with the more traditional reasons for pur- chasing an office building or condo, have spurred demand – contrary to what the work-from-home narrative would suggest. This demand plus a lack of inventory, specifically for smaller properties, have created a robust seller’s market. Similar to the leasing market, the fundamentals are better in the suburban markets than the urban core. Suburban office buildings and condos have seen near average or better sales volume, prices-per- square-foot and sales-to-asking price differential metrics in 2020 and year-to-date 2021. The owner- user sales volume in 2020 was $145 million, just off the yearly average of $153 million over the last five years. Sales price per sf averaged $151 per sf and is $163 per sf year to date, just below the average of the prior year and well above the previous five-year average of $137 per sf. The sales-to-asking price differential, a key market indicator, was 8.7% in 2020 and 6.6% year to date, near the all-time low of 5.5% in 2017 and well above the worst differential, which occurred at the tail end of the Great Recession in 2012 at 17.7%. While the average historic sub- urban office owner-user sale is approximately 9,000 sf, the average office condo sale is 2,400 sf, which caters to a much larger pool of buy- ers. The sales volume of suburban office condo sales hit $24 million in 2020, a peak since 2008-2009. The sale price per sf also hit a new record at $229 per sf, 17% higher than the previous high in 2008 and well above the average over the pre- vious five years of $163 per sf. The sales-to-asking price differential was only 4.3% in 2020, near the all- time low of 2.7% in 2018. For com- parison, the worst sales-to-asking price differential was 16% in 2009. While pricing for urban owner- user properties continued to rise overall, the sales volume in 2020 took a big plunge. There was $31 million in sales volume in 2020, compared with an average of $51 million for the previous five years. Urban office condos sales suf- fered in particular with an average sales price of $250 per sf in 2020 as opposed to an average of $266 per sf over the previous five years. The sales-to-asking price differential sky rocketed to 13.7% on average. History provides a cautionary tale. During the Great Recession, a soft leasing market and conserva- tive business strategies stunted demand for owner-user properties. Today, threats of a prolonged shift into a tenant’s market, potential rise in interest rates, work-from-home initiatives gaining greater adop- tion, and COVID-19 or economy- related delayed decision-making could broadly quell demand and affect owner-user office sales at some point. Until then, owners with changing space needs or business objectives, those nearing retirement, or those just wanting to be oppor- tunistic should consider their exit strategy and capitalizing on a hot market. s jeremy.reeves@colliers.com Owner-user office sales represent a bright spot Jeremy Reeves Vice president, office division, Colliers