CREJ - Office Properties Quarterly - January 2015
As 2014 closed, Denver continues to demonstrate that it can compete at the same level as the country’s big six markets – Boston, Chicago, Los Angeles, New York, San Francisco and Washington, D.C. The Mile High City boasts one of the healthiest economies in the nation, led by a diverse blend of industries, impressive job growth and an influx of inbound migration. As a result, Denver’s economy fueled increasing interest over the years from capital sources both domestic and foreign, creating a diverse investment pool for commercial real estate throughout the metro region. The U.S. dominates the country rankings for most stable and secure investments by a wider margin than any year since the global financial crisis. The U.S. ranks first among countries providing the best opportunity for capital appreciation (U.S., Spain, U.K., China, Australia, Mexico and Brazil). It also leads the global rankings for planned real estate acquisitions in 2015. Additionally, U.S. cities hold three of the top five positions for the world’s top cities for investment: New York, London, Tokyo, Los Angeles and San Francisco. Domestic and foreign investors take into account numerous measures when looking to strategically deploy capital, but the criteria generally can be summed up by one chief driver: the economic fundamentals of the target city. While gateway cities generally are the preference for foreign capital, secondary markets with robust economies recently have sparked interest overseas. Secondary markets saw an impressive level of investment activity, about $140 billion year to date. Of that $140 billion, 64 percent was focused on faster-growing locations, such as Denver, which instills confidence for future investments in these areas. Throughout 2014, Denver displayed tremendous job growth, which is evidenced by an exceptional 3.6 percent unemployment rate for October 2014, 280 basis points lower than the national average. Additionally, 58 companies have announced major relocations and/or expansions in the Denver metro area, while the city has added about 40,800 jobs, driving employment growth to a healthy 2.9 percent. Meanwhile, the metro area’s population growth rate consistently outpaces the national average, evidenced by a 1.88 percent growth rate in 2013 compared with the national growth rate of 0.72 percent. From 2010-2013, the Denver metro area population grew 5.52 percent, the highest growth rate of the 20 most populated metropolitan statistical areas outside of Texas. Experts project the population will grow to about 4.8 million people by 2040, net growth of more than 59.6 percent, or 1.8 percent per year. A snapshot of the capital flows in 2014 clearly depicts the domestic and foreign investment activity we can expect to see in 2015 as a result of a booming economy. As of third-quarter 2014, Denver experienced a total volume of approximately $1.65 billion in office investment sales activity throughout the metro region, slightly exceeding the transactional volume of $1.63 billion for the same period in 2013. With another $520 million already executed in the fourth quarter and approximately $110 million under contract, Denver’s total transactional volume for office assets is forecasted to eclipse $2.2 billion for 2014. An average price per square foot of $190 surpasses historical highs while an average cap rate of 7.05 percent is the lowest recorded in the past six years, according to Real Capital Analytics. Values are verifiably increasing in Denver and foreign and domestic capital groups are certainly taking action. Of the $1.65 billion that has been transacted so far in 2014, approximately $532 million, or 32 percent, has come from overseas capital, while cross-border domestic capital represents an additional 44 percent. Foreign investments account for 10 transactions in the Denver metro area, with Canadian capital taking credit for seven transactions for a sum of $390 million. Ivanhoe Cambridge, a Canadian-based firm, purchased a 40 percent interest in two landmark towers in the central business district, U.S. Bank Tower and Tabor Center, resulting in a $200 million transaction. German capital also held a large presence in 2014 with approximately $133 million in activity. GLL Real Estate Partners, a German-based real estate fund management group, acquired the two Union Station wing buildings, the IMA North Wing Building and Antero South Wing building. Both buildings traded at a record-high price per sf of $602 and $601, respectively. While these two notable transactions were in the form of direct foreign investment, the larger contingency of foreign capital is generally performed through a U.S.-based adviser or operator. For foreign investors, operators and advisers provide an efficient way to identify potential investments and place capital, because money from overseas typically has multiple approval layers that are slow to react to domestic investment funds’ timing. Denver continues to hit the radar of many domestic and foreign investors who are looking to expand beyond the coasts in search of quality investment opportunities. There are more investors seeking real estate acquisitions than there are opportunities in the coastal cities, which gives Denver great exposure. Investors are recognizing the city’s presence among primary real estate markets and have identified Denver as a market that offers the opportunity to achieve returns that exceed those realized in the gateway cities. With the economy’s strength and promising outlook, Denver is bound to attract an even deeper pool of capital, domestically and globally