CREJ - Office Properties Quarterly - July 2015
The Colorado technology sector is experiencing record-breaking growth, which greatly affects the office properties landscape. Technology is the second-most active industry within the Denver market, according to a report by CBRE. Today’s technology community is vibrant, said Erik Mitisek, CEO of Colorado Technology Association. The largest tech sector is businessto-business companies, which are companies that produce software and products to help run businesses. Many national companies locate regional offices in Colorado – such as Google, which is growing to over 1,500 employees, Oracle, which has over 4,500 employees in the state, and IBM, with over 6,000 – and there is also a vibrant startup community, said Mitisek. “I would say our secret sauce is the breadth of our middle market; the majority of our tech economy that’s really successful is between 10 and 50 employees,” he said. “And we’ve got a really great service economy, great software service businesses and a lot of middle-market technology companies.” In addition to mature companies, Colorado is home to a strong mix of entrepreneurial startup businesses. This active group of startup office users has different requirements than the legacy office users, said Jessica Ostermick, CBRE’s research and analysis director. “There are really two parallel tracks when I look at the tech sector from a research standpoint – there’s the startup community that can quickly grow and change into heavier office users,” she said. “And then there’s the more traditional, larger firms like HP that occupy larger footprints and campuses.” In the early 2000s, the tech industry saw rapid growth due to the Internet boom, but when that bubble burst, Colorado was hit fairly severely, said Mitisek. After that, the market experienced four or five years of quiet. Software developers were the first to come back, and from 2007 to 2009, the industry saw movement upward. “I would say, in the last three years, you’ve seen explosive growth – and you’ve seen it from a real estate perspective and from a funding and venture capital perspective.” While tech-leasing activity is very active, the sector is a growing market, rather than market leader in terms of square footage, and there are several submarkets. The Boulder market is home to the full spectrum of tech companies, from startups to mature, legacy companies, while the northwest market – Broomfield, Louisville and Westminster – houses companies that want to be near Boulder, but require a larger footprint, according to the CBRE report. Colorado Springs is home to small startups and other industries involved in high-tech manufacturing and aerospace and defense. And Fort Collins, with strong connections to Colorado State University, cultivates startups in software, biotechnology and energy sectors. Boulder, which is known for its entrepreneurial environment with a deep-rooted investor community, sees the most clustering of tech companies of all the submarkets, which can be exemplified by Google’s decision stay in Boulder when the company needed to expand. Google recently signed off on a $100 million design-build campus that will be located at 30th and Pearl streets. While Boulder is bursting at its seams, one of the major real estate trends the tech industry is witnessing is a shift in desired location that is moving to Denver, specifically in the central business district and Lower Downtown areas. “The CBD will see a bigger footprint next year and the year after that from tech tenants,” said Ostermick. “There is such an interest in being downtown and being around all the amenities and the tech culture that is evolving there. So that 2 percent [on the graphic], which seems really small right now, will absolutely go up.” Tech companies like to cluster for a variety of reasons, but one of the main reasons is for access to a strong pool of talent. The industry is waging a war for talent, which makes access to Denver’s thriving employee pool all the more appealing. “One of the trends that we’re seeing is companies choosing to bifurcate offices in order to access that talent,” said Alex Hammerstein, senior vice president, CBRE. “Whereas before, companies were leery of splitting operations and upsetting the culture that they built, now they are looking at where they need to be in order to capture that labor pool. And so we’re seeing a trend, specifically with Boulder companies that have been in Boulder for a while, looking at LoDo as an optimal place to have a second location.” In terms of recruitment, the Denver area offers the convenience and cost savings associated with its mass transit system, the CBRE report states. The transit system is helping widen the metro area. “Along with increased leasing activity downtown, tech firms, particularly startups, are also spreading into emerging markets like River North, Golden Triangle and South Broadway,” the report states. Why Colorado Colorado is the second-most educated state and ranks second for in-migration of millennials from 2009 to 2012, enhancing the appeal for new tech companies to locate in the state. “I think it’s a labor issue to have access to a young, vibrant, educated workforce and then also access to the investor community in Colorado,” said Hammerstein. “It’s a very appealing place to locate a business.” In addition to attracting techsavvy talent, it is also fairly easy to get people to relocate to Colorado, said Kevin Foltz, managing director for Forum Real Estate Group. “I think they can certainly attract the best and the brightest and bring them to Colorado easily.” Also Colorado is relatively affordable compared with other tech hubs around the nation. “We have a very educated work force, but it’s not quite the scale of those markets like New York, Chicago or Silicon Valley, and it’s certainly a lower-cost market to operate in,” Hammerstein said. The Colorado Technology Association did a cost analysis comparing Denver and San Francisco. “A Series A financing of $5 million in San Francisco is equivalent to a Series A financing in Colorado of $3 million,” said Mitisek. “So when you add up real estate taxes, overhead, incentives and cost of doing business, it’s almost 65 cents on the dollar cheaper to build an equivalent enterprise.” In the CBRE report, Denver is listed as having the 13th highest office lease rates of fourth-quarter 2014, with an average asking office lease rate of $23.15 per sf full service gross, which is 37 percent of San Francisco’s overall asking rate. Fostering a lot of startup companies drawn to this lower-cost environment does make for a more fluid community due to acquisitions. “There’s always a give and take but, on trend, we’re a net in-migrator of tech companies,” said Ostermick.