CREJ - Office Properties Quarterly - July 2015
Denver’s office investment sales market saw robust activity during the first five months of 2015 with capital coming from national institutional buyers and private capital investors in Denver and elsewhere around the country. This activity continues from 2014, creating an imbalance of supply-demand and resulting in multiple, competing offers in this arena. For many institutional investors, acquisition parameters put Denver in the forefront of searches due to the region’s thriving economy and attractive climate. Local owners, users and investors are betting on Denver as well, making it an incredibly tight market. A number of significant office sales took place during the first and second quarter. This includes a new record sale of the Village Center Station in Greenwood Village that sold to KBS REIT for $326.50 per square foot, the highest price per sf in the southeast market. The property is a mixed-use office and retail space with an attached parking structure. The price may seem high to some onlookers but, with rising construction prices and downtown’s highest sale price north of $600 per sf for the office buildings flanking Union Station, this may be considered a deal. Cap rates for office investments averaged around 7.1 percent in 2014 and, so far in 2015, remain at 7.1 percent, according to Real Capital Analytics. Value-add buyers are prevalent in the marketplace; however, the demand for assets with higher vacancy rates and properties in need of significant renovations has peaked. Some properties are being marketed with pro forma higher cap rates, trying to capitalize on the low office investment inventory and promising potential buyers that leasing will improve. A recent transaction in the southeast suburban market was the sale of Park Meadows Corporate Campus, a vacant building just south of Park Meadows Mall. The property was vacant since its 2009 construction. A local private investor recently purchased the property for $118 per sf, recognizing the low cost of the property compared with its replacement cost. The new owner will lease the property to medical and general office tenants. Downtown, 1515 Wynkoop recently traded for $560 per sf. This office and retail building, which houses restaurant Fogo de Chao and office tenants include Chipotle, Policy Studies Inc., and Green, Manning and Bunch, is approximately 370,000 sf and was 97.5 percent leased at the time of sale. The building received multiple offers, and exemplifies true institutional demand for core assets, not only in Denver, but also in the Western United States, said Geoff Baukol of CBRE, who represented the seller. It is well known that Denver is growing, with the population increasing 1.74 percent in 2014. This growth is attracting many companies that want to hire the talented workers who move to Denver for the lifestyle. Many companies prefer to own rather than lease, yet it is a difficult task to buy when there is this much competition. There are still owner-user deals in the market, and though some properties are highly competitive, others are available and remain good investments. The office investment sales trends should continue through 2015 if interest rates remain favorable. Concerns affecting investment sales include multiple construction projects coming on to the market and excess space returning to the market for sublease from the oil and gas industry.