CREJ - Office Properties Quarterly - July 2015
A robust job market and increasing population boosted Denver’s office market to the point that developers are adding new buildings at a rapid pace. Consider this: In 2014, Colorado was the fourth-fastest growing state for the second consecutive year with a population increase of 1.6 percent, or 84,000 people, according to the Brookings Institute. And despite the rapidly increasing population, the state’s unemployment rate remains low as the state continues to add jobs. Over the last year, Colorado added 63,200 jobs and has an unemployment rate of 4.2 percent, well below the U.S. average of 5.4 percent, according to the Colorado Department of Labor and Employment. Even with all the new buildings coming on line, vacancies are down and lease rates are up, signifying a demand that has not been seen since before the Great Recession began in 2007. Metro Denver’s vacancy rate ended the first quarter at 10.2 percent, down from 10.4 percent during the fourth quarter last year. Average rental rates quarter over quarter ticked up slightly to $23.50 per square foot, representing a 1 percent increase over the fourth quarter, when rates stood at $23.27 per sf. Among the largest lease signings in the past 12 months are the 251,000-sf lease by CoBank at Village Center Station III, the 111,877-sf lease by Aircell in Broomfield, and the 99,000-sf lease by Transamerica Corp. at 1801 California St. The redevelopment of the historic Denver Union Station spurred a flurry of development activity in the surrounding area. Last year IMA Financial Group set the pace by moving into its new 108,000- sf headquarters at 1705 17th St. Union Tower West. A 100,000-sf office and hotel project broke ground recently at the corner of 18th and Wewatta streets, and 1601 Wewatta, a 10-story, 280,000-sf office building under construction, signed a 15-year lease with law firm Hogan Lovells LLP for about 70,000 sf on the top 2½ floors. Union Station’s influence reaches farther into downtown than just the 17.5 acres considered part of the redevelopment project. Z Block, an office, hotel and retail development along Wazee and Blake streets between 18th and 19th streets, recently broke ground, attracting Prologis from its campus near Denver International Airport. One big coup for the region is the news that Panasonic is building a hub for its business solutions operations near DIA. The campus will create about 300 jobs and will be completed by the middle of next year. The market is increasingly attractive to investors. Last year, 126 buildings sold for a total volume of $2.2 billion, compared with 124 buildings sold in 2013. One of the largest deals last year was the sale of 370 Seventeenth Street for $240 million, or $361 per sf. It’s impossible to ignore the flurry of development activity underway in Cherry Creek that will increase the neighborhood’s office market by about 15 percent by 2016, from roughly 2 million sf to more than 2.3 million sf. That figure does not include the recently announced Civica Cherry Creek, which will add another 90,000 sf of Class A office space and 10,000 sf of street-level retail space. Other projects in the district include: • 3300 E. First Ave., the redevelopment of the former KeyBank building that will include refurbished office space in addition to 20,000 sf of retail and 172 apartments. • 3033 E. First Ave., a retail and office building developed by Don Sturm, chairman and CEO of ANB Bank. • 100 St. Paul, a 150,000-sf office building developed by Pauls Corp. and FirstBank. In addition to typical markets, developers are building office product in areas overlooked traditionally, such as the stretch of Platte Street sandwiched between Denver’s trendy Lower Highlands neighborhood and Lower Downtown. Three office buildings are under construction, and several more sites on the boutique- and eatery-heavy street are ripe for development. The Lab, a 125,000-sf office building at 17th and Platte streets, is nearing completion, and The Nichols Building landed tenants like Galvanize, Pivotal Labs and Knoll, the office furniture company. Though considerably smaller at 10,400 sf, the Boathouse is likely to be an attractive option for tenants seeking a boutique feel. Many developments are aimed at appealing to the millennials flocking to the city – Denver ranks second behind Washington, D.C., in the inmigration of millennials between 2009 and 2012. That demographic is accustomed to telecommuting, flexible work schedules and locations, and co-working spaces. Also Denver boasts the fourth-highest concentration of sole proprietors in the U.S. and consistently ranks in the top five cities for entrepreneurship, which explains why the average office user in downtown Denver is 5,000 sf or less. The trend toward smaller office spaces is fueling demand for collaborative workspaces such as Galvanize, Industry and Thrive. Shift Workspaces announced it will spend $30 million to add another 71,300 sf of collaborative office space over the next 10 months. Though the market still has plenty of traditional large users, the beleaguered oil and gas industry is likely to leave some large blocks of available space as crude prices drop. Still, Denver’s employment base is more diversified than the boom-andbust oil market of the 1980s that left downtown Denver awash with empty office space after a building spree overbuilt the market. So even with today’s declining oil prices, it’s unlikely that Denver’s downtown office market will feel much impact