CREJ

Page 14 — Office & Industrial Quarterly — December 2021 www.crej.com core. Honeywell has leased an addi- tional 64,000 sf in Broomfield, and Lockheed Martin Corp. has expanded after leasing more than 200,000 addi- tional sf in Highlands Ranch. Addi- tionally, during the second half of 2021, Deloitte, Datadog and PNC Bank signed leases to fill a combined 70,000 sf of office space downtown, signal- ing a return of some demand in the central neighborhoods. At the same time, many established businesses have chosen to downsize offices to fit their needs more efficiently. Two such firms, Sherman & Howard and DCP Mainstream, have signed leases show- ing a nearly 50% reduction in used office space as a result of long-term hybrid work models. Development is down from pre- pandemic levels, despite the return of leasing activity, particularly among speculative projects. Many of those facilities that are moving forward are concentrated downtown and in the rapidly developing River North neighborhood, while build-to-suit developments continue to be focused in the suburbs. One of the largest projects underway is phase II of the Kiewit regional headquarters in Lone Tree, with over 130,000 sf of already filled space to open in late 2021 or early 2022. Additionally, Vectra Bank is slated to finish its 105,000-sf head- quarters in DTC by late 2022. Builders delivering less space, both speculative and accounted for, should help lower available sublease space downtown while also aiding vacancy declines and rent increases in areas outside the core. Amid diminishing uncertainty, a return of transaction activity down- town has driven the quantity of exchanges above even 2019 levels. Much of this investor confidence comes from the metro area’s ability to attract new firms heading into 2022 and the scheduled return to office for many of Denver’s largest companies. Several of the most prominent trans- actions recorded in 2021 were with first-time buyers in the area, from both out of state and international origin, looking to capitalize on yield potential not seen in other tech hubs. This is evidenced by the average cap rate on office trades remaining in the high 6% range in Denver, compared with mid-6% yields in Austin, high 5% in Seattle and high 4% in San Francis- co. Entry costs are significantly lower in Denver than in these other metro areas, allowing a more diverse pool of investors to target the area. Grow- ing suburban employment hubs like Broomfield, Aurora and the southeast corridor provide prospective buyers with a variety of options. Offices in Denver will continue trending toward pre-pandemic per- formance levels in the coming year, supported by company arrivals and expansions. While the way firms use offices may have shifted structurally to some degree, many businesses still have return-to-office plans in place. As leasing improves amid a lull in construction, sublease space will return to much more typical levels, potentially falling over the coming years back into the 2 mil- lion sf range seen prior to the health crisis. Expecting a full return to 2019 vacancy and rent growth next year is unlikely, but the trend is certainly heading in that direction. Compara- tively low costs for both firms and investors will continue to bring both to the metro area for the foreseeable future. s brian.smith@marcusmillichap.com Continued from Page 1 OFFICE — MARKET UPDATE terra in Loveland. n Greeley and Weld County. The Greeley/Weld County office market is comprised of 5.8 million sf of inven- tory, compared with an inventory of 12 million sf of office in Fort Collins/ Loveland. Over the last 12 months, net absorption in Greeley was nega- tive 110,008 sf. The vacancy rate in Greeley was 2.44% at the beginning of 2020 and currently stands at 7.4%; after considering sublease space, the availability rate is 13.4%. State Farm put 150,000 sf on the market at its Promontory location, representing the largest block of office space avail- able in Greeley in the past several years; one of the largest lease trans- actions took place when JBS Swift leased 48,000 sf of this space. With over 90% of the 2021 lease transac- tions being for space of less than 5,000 sf, the JBS Swift lease repre- sents a significant win for the Gree- ley office market. Greeley has not traditionally been an active investment market for office space. In 2021, the largest office sale was for a 20,000-sf building for $2.9 million. Of the 37 sales over the last 12 months, the average sales price was approximately $137 per sf. n Northern Colorado in 2022. Although the current preference among employees is to work from home, after the pandemic subsides, employers will reevaluate their “at home” options based upon costs, productivity, ability to attract and retain talent, and the effect on stra- tegic growth plans. It is anticipated that some businesses will begin to fully open up their offices in 2022 as well as continue to mold their work-from-home business models. In Northern Colorado, we anticipate that the in-person office environ- ment will outweigh the preference to work at home, particularly among smaller businesses occupying 5,000 sf or less, which is the primary occupancy group for the area. Inde- cisiveness on occupancy strategies will continue in the near future and companies will continue to seek shorter-term leases to accommodate a hybrid model consisting of 20% to 30% of employees working from home, at least part time. While the hybrid occupancy model will reduce near-term future absorption, modest absorption is predicted throughout 2022. s ronk@realtec.com jamiek@realtec.com Kuehl Continued from Page 6 Although office absorption as a whole has remained negative in the preceding 12 months, with 2.7 million sf of negative absorption, according to CoStar’s third-quarter Office Market report, the giant in the room is the delivery of the Kiewit regional headquarters building in Lone Tree. This property accounted for 260,121 sf of space, and it’s a user property. The Kiewit property may very sell to an investor later, but for now it’s a large user-developed suburban office. That Kiewit Corp. would have the confidence to build a regional headquarters building in metro Denver attests to the confi- dence in this market as evidenced by the employment gains described above. Most user transactions are of much smaller scale and consist of small businesses looking to own real estate to house their small staffs of employees. Again, it’s typi- cal for industrial users to own their real estate, but it’s refreshing to see an increase in office users emerg- ing as a force. For a 5,000-sf to a more-than-30,000-sf building owner, even if it’s multitenant with some vacancy, a user sale may result in a higher price per sf than a pure cap rate investment sale, as the buyer is getting the utility of occupying the building, which often is more valu- able in its mind, and in the seller’s pocket. Speaking of multitenant office build- ings with some vacancy, another investment strategy employed by user office building owners is that of the user-investor buyer.This user-employer diversifies its portfolio by acquiring a multitenant office building with enough vacancy to accommodate its office needs, all the while having the remaining tenants in the building pay rent to offset its occupancy costs.The user-employer not only evolves into a commercial real estate owner but also diversifies again into the role of a land- lord.This strategy is not for everyone, as running a business with a payroll is hard enough, and adding ownership, plus landlord and asset and property management can challenge even the most energetic multitasker.The diversi- fication tools employed by these strate- gies most certainly would offset the energy used but ensure a well-diversi- fied requirement portfolio for a small to medium businessperson. The evidence of the viability and robust market activity in user-acquired office buildings is strong.The Den- ver economic situation continues to improve, and acquisition of user office buildings attests to consumer confi- dence that this positive trend will con- tinue as we emerge from our COVID-19 induced economic slump. s jbecker@fullerre.com Becker Continued from Page 10 have” safety feature for office build- ings. In 2020, our company enhanced the indoor air quality portfoliowide, including in our Denver buildings, by installing the clean air technology Needlepoint Bipolar Ionization into HVAC systems and elevators. We also retrofitted touch-free fixtures on entry doors and in restrooms. While focusing on wellness and sustainability builds a healthier envi- ronment for our communities and customers, it also is a sound financial decision. A recent MIT study found that “healthy building effective rents transact between 4.4% and 7.7% more per square foot than their nearby non- certified and non-registered peers.” There also are cost savings associ- ated with sustainable buildings as they consume less energy, carbon and water, and cost less to operate. The majority of our office buildings are LEED certified as well as Energy Star rated, which we believe is important to their long-term performance. While some may see wellness in the corporate setting as a fleeting trend, we embrace these improvements as critical to the customer experience and financial performance of our buildings. We look forward to welcom- ing more people through our doors in 2022 and are eager to see the positive impact our many wellness initiatives have on our building communities. s slawrence@graniteprop.com Lawrence Continued from Page 12 is a revisiting of how they use office space. Our firm has been at the fore- front of workplace strategy for years. Five years ago, we revamped our downtown Denver office to a free- address, tech-enabled system – the same type of system many compa- nies are now considering as part of their plans for a hybrid work envi- ronment. Our company’s greatest minds agree that the office will continue to play a critical role as we emerge from the pandemic, but the way employees use the office will change. With exceptions for certain indus- tries, offices will become hubs for collaboration and culture building. More square footage will be dedicat- ed to “we” spaces designed to bring employees and clients together, with more of the heads-down “me” space relegated to home. Perks like in- building fitness centers, restaurant offerings, outdoor space and meeting areas will grow in demand. Health, wellness and sustainability also will become even bigger priorities for owners and tenants. No one would say the last 18 months have been an easy time to be an office broker, but we now stand at one of the most exciting junctures for the sector. And few places are better poised for the office’s next chapter than metro Denver. s chris.phenicie@cbre.com Phenicie Continued from Page 8