CREJ - Property Management Quarterly - February 2015
Last year certainly flew by, and it was a year of strong sales and improving market fundamentals in many, if not all, segments of the real estate industry, including the multifamily, office and industrial segments. Of course, with all the positive indicators from the real estate market, I had to wonder, what could make this great feeling go away? And then I thought, property taxes – argh! Record prices were paid last year for apartment complexes, office buildings, hotel properties, industrial properties and others. Coupled with increasing rents, income and occupancy, and decreasing capitalization rates, we believe that the actual values placed on properties by the assessing community will be increasing and, in some segments, increasing significantly. Multifamily segment. In the multifamily segment, the largest per unit transactions, including Commons Park West, Verve and Cadence Union Station, took place in Lower Downtown and the Central Platte Valley. These transactions will be the springboard for the Denver Assessor’s Office to increase values for all, or at least most, multifamily properties in the area. There also was significant transaction activity in Boulder, Denver West, Westminster and the Denver Tech Center that will allow the Adams, Arapahoe, Boulder, Broomfield, Douglas and Jefferson counties’ assessor’s offices to increase multifamily properties in their county as well. Sales prices on a per-unit basis and per-squarefoot basis will drive values in the multifamily segment, because the Colorado Revised Statutes only allow counties to assess properties using the market approach to value or using a gross rent multiplier. As the gross rent multiplier is derived from similar market transactions, the market approach is really the only valuation methodology available to the assessment community to value these properties. Office segment. We also saw significant changes in the office market dynamic, whether the property was a single-tenant property outside of Denver’s central business district or a multitenant property, either in the CBD or in one of the suburban submarkets. As many real estate surveys reported, overall rents were increasing and vacancy was decreasing for all office classes. In addition, there were a significant number of office buildings delivered to the market, and more than 1.7 million sf of office space is under construction as well as more in the planning stages. The positive dynamics led to acquisitions that our assessing community will gravitate toward. In Denver’s CBD and LoDo submarkets, these transactions include the astonishing acquisitions of the Union Station “wing” buildings, located at 1705 17th St. and 1615 Wynkoop St., as well as Millennium Financial Center and Park Central Office. Outside downtown Denver, there were remarkably high sales prices per sf in many counties. Adams County saw high sales prices for medical office buildings; Arapahoe County (DTC) for multitenant and single-tenant office properties; Douglas County saw high sales prices around the Parkridge area and in Meridian; and lastly, Jefferson County office sales were strong for buildings in Westmoor, the Union Boulevard corridor and in Golden. Industrial segment. In the industrial segment, similar to the office market, rents are trending up for warehouse/distribution properties and for research and development/ flex product, while vacancy and cap rates are trending down for these property types. There were a number of large-space tenants, such as CareTek/Colorado Timberline, Larsen Warehousing & Distribution and Magna Bestop, that took occupancy in early 2014 prior to the end of the 18-month base period June 30, 2014. 2013 and 2014 also saw some healthy levels of investment sales as well as owner/user sales activity. This activity remained elevated at prerecession levels, if not surpassing the 2007 levels. There were a couple of notable sales, including the United Natural Foods transaction at around $84 per sf and a transaction in Inverness where a R&D/flex building sold for over $95 per sf. In all three real estate segments, market conditions are providing evidence that a significant increase in actual and assessed values is probable. To what extent the various county assessors will increase these values will vary based on the submarket and micro-market specifics, but increases in value will happen throughout the Denver metro area. Shifting gears, as most everyone knows, the actual property “tax” comprises the assessed value and the mill levy. While market conditions are showing signs of value increase, taxing jurisdiction budgets typically are limited by the Taxpayer Bill of Rights amendment. Of course, there are many jurisdictions that have “de-Bruced” and are no longer governed by TABOR, including the city and county of Denver, which went to the voters in 2012 and received approval to de-Bruce. In Denver, there is much discussion over the antispiking provisions that were included in the discussions, and how they are going to be interpreted when values are increasing as significantly as we expect them to in 2015. It is our opinion that the values for most multifamily, office and industrial properties will be increasing at, or near, double-digit pace, while the mill levies will be pared back in most locations. However, we believe that the mill levy decrease will only be in the single digits. 2015 will be interesting and we will know more when the values are released May 1, and even more when the tax rates are known in January 2016; stay tuned.