CREJ - Office Properties Quarterly - April 2015
Denver has a long history of boom-and-bust cycles – or cycles of rapid expansion followed by crushing retraction – created in part by the once heavy emphasis of the oil and gas industry in our economy. But the metro area is moving away from this trend, with a more diversified market, including strong activity in the finance and technology sectors. While Denver currently has nearly 2 million square feet under construction or renovation, this represents a less than 2 percent increase to total supply. Market forces are encouraging restraint so the market is not overbuilt. Denver’s central business district is one example of restrained development – despite what appears to be major activity in the market, especially in Lower Downtown and Central Platte Valley. New development projects underway include 1601 Wewatta, the Triangle Building, 1401 Lawrence, the LAB at 17th and Platte, and Z Block, which is located along Wazee and Blake streets between 18th and 19th streets. For the first time in the history of many development cycles, Denver’s market is experiencing significant preleasing success – each of the buildings are 30 to 40 percent preleased prior to completion with substantial activity on the balance of each property. The market diversification is evident by the strong activity in the finance and technology sectors, providing additional insulation from potential downsizing while oil prices remain low, and producing a vibrant, active and heterogeneous market. At yearend 2014, the CBD reported overall vacancy of 12.62 percent, well below the 35-year historical average. This activity resulted in strong full-year absorption of 453,266 sf, leading the metro Denver submarkets. The office market is a barometer of the health and vitality of the overall market. Office rental rates are rising steadily throughout the metro area, with an average increase of 21 percent over the last four years. Part of this increase is due to the restraint in development – scarcity of high-class product is creating a strong demand, which pushes rents upward. Landlords are upgrading assets to maintain market relevancy, also driving rates upward. This trend is so powerful in some markets that Class B buildings are now experiencing strong occupancy and accelerating rates. Southeast suburban Class B properties in many cases are achieving over $20 per sf, a new high for Denver. Even Class C buildings are feeling the impact, achieving lease rates that reach former Class B prices. Many factors are encouraging this shift away from the severities of boom and bust. The Metro Denver Economic Development Corp. spent the last 12 years diligently working to make history for Denver, consistently recruiting new industries and companies, expanding the area’s international draw, and growing the Denver metro area. As a result, Denver is now recognized as a top city, ranking fourth among U.S. markets to watch in 2015 in the prestigious Emerging Trends in Real Estate report, which cited its popularity with millennials, concentration of technology and energy firms, strong local economy and active development community as reasons for the ranking. Additional positive influences include very high in-migration for the metropolitan area, with a growth rate ranked ninth in the nation by Forbes magazine. The Denver metro area’s emphasis on mass transit is also a game changer, and encouraged suburban and CBD development. Through the challenging years of 2008-2010, transitoriented development provided the only real wins in the metro area – as Palazzo Verde, Village Center Station I, Panorama IV and Lincoln Station highlight. Finally, market diversification created a positive impact, insulating Denver from the fluctuations of one industry. Technology industries, in particular, have been a growth engine for the area, with Denver ranking third in the nation (for the sixth consecutive year) for high-tech workers per capita. Corporate and regional headquarters are expanding; recent announcements include Arrow Electronics, Nationwide and CoBank. Additionally, companies are in growth mode, with many insurance, health care and engineering companies expanding, such as Allstate Insurance and Kiewit Construction. The CBD, SES and Northwest markets have seen the most expansions and corporate relocations. In particular, companies are looking again at the CBD as a vibrant and positive location, as evidenced by recent announcements by Liberty Global and Transamerica. It is expected this trend will continue, and many economists predict the future looks bright for Denver’s economy. The University of Colorado’s Leeds School of Business forecasts that Colorado will gain 61,300 jobs in 2015, a level of growth that will place the state among the top 10 in the nation for job creation. The professional and business services sector, one of the top office-occupying industry sectors, is also projected to grow a robust 3.3 percent next year, adding 12,800 jobs. The stage is set for continued expansion in 2015. Newmark Grubb Knight Frank Research forecasts the momentum achieved in 2014 will continue in 2015, with positive absorption in most markets meeting or exceeding 2014 levels; rental rate increases continuing in the CBD, NW and SES submarkets; speculative TOD development breaking ground in the SES; and continued job creation and falling unemployment driving expansion.