CREJ - Office Properties Quarterly - April 2015
If Boulder is 25 square miles surrounded by reality, then the Boulder office market is similarly surreal. Dramatic changes in ownerships and prairie fire demand have conjoined with municipally limited development to produce the prospects for a massive price upheaval. This change in lease rates moved by as much as 45 percent in certain suburban pockets in the last three years alone, with the majority of the increase coming in the last six months. Let’s walk through the reasons this is now taking shape by exploring some catalysts. First, in 1967 Boulder voters approved one of the first open-space tax initiatives in the country for the purposes of limiting growth and creating buffers within and around the city. This set the stage for Boulder to become one of the more unusual communities in the nation. Jump to 2006 when three random events prepared Boulder to take off in terms of office space demand. An unassuming former motocross rider turned advertising genius, Alex Bogusky, gets a wild hair down in Miami and decides he wants to pick up most of his entire 800-person advertising agency, Crispin Porter + Bogusky, and move it to Boulder. It’s hard to overstate the impact this move had on the Boulder business community. The major advertising player redesigned a 60,000-squarefoot indoor soccer arena into one of the hippest and most unusual office environments Boulder has ever seen. Articles in AdDesign, Wired and the Wall Street Journal created a deafening buzz. Design firms, public relations firms and advertising agencies across the country took notice and opened satellite offices. These people were collectively known as “creatives,” and create they did. People left larger firms to open new firms, and existing design and advertising groups found themselves more “on the map” than ever before. Demand for space surged. All of the sudden Boulder had a whole new kind of cool associated with it. Around this same time, Brad Feld and David Cohen, a pair of high IQ venture capital nerds, formed TechStars, a business incubator and accelerator to coach and grow inchoate technology startups. Their motto is, “Do more faster.” They have succeeded and then some by plowing over a billion dollars, along with their venture capital partners, into over 500 new businesses, most of which were located in downtown Boulder. Filtrbox, Graphicly, Socialthing, Sphero and hundreds of others are actively working, changing everything from our social media applications to toilet technology in developing nations. Google built its presence in Boulder through the purchase of @Last Software, also in 2006. What was it about 2006 – solar flares? The Googlers now number almost 200 in Boulder and plan to grow into a large campus at Pearl and 30th Street that has Boulder’s antigrowth doomsday cultists positively soiling themselves. Add to the witch’s brew LogRhythm, Kapost, Sendgrid, Quick Left, Albeo and so many others that have flourished in this educated and cutting-edge environment and it’s no wonder why we’re running out of office space options. Collaboration spaces started to manifest in less desirable basement spaces, and do-it-yourselfers joined with other small businesses to fill even more vacancy. In 2011, longtime owner of most of the buildings in Flatiron Park, Larry Frey, sold his assets to – cue the scary organ music – a big national real estate investment firm, Goff Capital Partners. Other than Swedish Pension Fund Alecta, which owns three buildings in downtown Boulder, very few national players had ventured here because most felt safer investing in larger metropolitan areas. And why wouldn’t they? This community seems to take special pride in being antibusiness, but the more antibusiness they project, the more businesses thrive. Go figure. So our quiet little debutant of a town has come out, exposed to the national real estate investment community as worthy of their serious courtship. In 2012 another national investor, Unico Properties, bought into J Midyette’s downtown Boulder portfolio and became his partner in the 20 or so buildings that he developed with the late Don Rieder. Unico almost immediately began to court Bill Reynolds, the patriarch of Boulder office space development and builder of millions of feet of commercial real estate. So, with a sizable measure of Adam Smith’s invisible hand, all of these events slowly marinated over the next few years, quietly boiling in the pressure cooker of market dynamism and limited-growth local politics. Predictably, the vacancy rates plunged lower and lower, from 10 percent to 8 percent, to 5 percent … Meanwhile, in the last few years our little berg was recognized by all categories of national media (thanks Wikipedia): • The 10 Happiest Cities – No. 1 – Moneywatch.bnet.com • Top Brainiest Cities – No. 1 – Portfolio.com • Ten Best Cities for the Next Decade – No. 4 – Kiplinger’s Personal Finance magazine • Gallup-Healthways Well-Being Index – No. 1 – USA Today • Best Cities to Raise an Outdoor Kid – No. 1 – Backpacker Magazine • America’s Top 25 Towns to Live Well – No. 1 – Forbes.com • Top 10 Healthiest Cities to Live and Retire – No. 6 – AARP magazine • Top 10 Cities for Artists – No. 8 – Business Week • Lesser-Known LGBT Family Friendly Cities – No. 1 – Wearegoodkin.com • America’s Foodiest Town – No. 1 – Bon Appetit magazine • Queerest Cities in America 2015 – No. 10 – Advocate.com All of which brings us to what is supposed to be the point of this tangential mess of a column, the Boulder office space market, circa 2015. In a move that rocked the city, Bill Reynolds finally sold all of his suburban office space, over a million sf, to Unico in the largest sale in Boulder’s history. Upon closing the transaction, Unico immediately raised the rates by some 35 percent across the board for virtually all renewal and new lease transactions. This amounts to a near cornering of the office space market due to the increasingly finite supply of this scarce commodity. Even now, tenants that exceed 20,000 feet have distressingly few options, countable on one hand. This information is so new that most of Boulder’s tenant base has no idea what is coming down the turnpike. This will have a muscular influence on the rest of the office space market, and the pricing and values of Boulder office buildings will certainly jump. Outlying communities including Broomfield and Louisville also will feel the impact. It’s fair to say that Boulder’s office market is in for a precariously wild ride in the next couple of years as tenants shift and try to make sense of the extremely low vacancy market. More than ever, sound and clever real estate representation will be critical to helping tenants navigate responsible office space decisions.