Colorado Real Estate Journal - August 5, 2015
The median asking lease rate for office space in Denver’s southeast suburban submarket has reached an all-time high of $26 per square foot full-service, and the vacancy rate is at its lowest level in 15 years. But tenant demand isn’t what’s driving rental rate increases, according to Jeff Castleton, executive managing director of Newmark Grubb Knight Frank “What’s happening southeast is investment activity is driving the increases in rental rates – not tenant demand, per se,” Castleton said at NAIOP Colorado’s annual Mid-Year Forecast Breakfast in Denver. Village Center Station I, for instance, sold for $327 per sf, and 7601 Technology Way sold for $265 per sf. While there are 10 blocks of office space of 100,000 sf or larger, Castleton said there is pent-up demand for new space, so it will be interesting to watch One Belleview Station, the first speculative office building to break ground since 2008. “I think all eyes are on Belleview to see what’s going to happen,” he said. In downtown Denver, asking rates for trophy office properties have reached records highs in each of the last four quarters and are up 10.1 percent from their prerecession peak, according to JLL Senior Vice President Michael Crane. The current asking rent for new construction downtown is $46.35 per sf. Despite record high asking rates, Crane said there still is room for rental rate growth in downtown’s office market. Approximately 60 percent of the approximately 500,000 sf of space oil and gas companies have put on the market has been subleased, but Crane noted it will take a greater number of workers to absorb that space as oil and gas companies typically lease 421 sf per employee vs. non-energy users’ 234 sf per employee. Among “headwinds” to watch next year are higher assessed valuations and, thus, property taxes, which will make space more expensive for tenants, and escalating housing prices, Crane said at the NAIOP forecast. Industrial Denver’s industrial vacancy rate has reached a record low of 4.3 percent, compared with 6 percent during the previous peak, and speculative development has been measured. Of the 3.68 million sf in development this cycle, 60 percent is leased and the other 40 percent is either under letter of intent or in serious negotiation, according to CBRE Senior Vice President Tyler Carner. Class B and C industrial product have seen the sharpest rental rate spikes year over year: 22 percent vs. 6 percent for Class A space. What is lacking in Denver’s industrial market is new space for users under 200,000 sf, which is notable considering the average size of a Denver industrial user is 31,000 sf. Although lease rates haven’t justified construction of “small-bay” product, Carner said that is likely to change over the next several months. He also projects e-commerce to be a growing force in the Denver market. Retail “Overall, I would say that the retail market in Colorado is very strong,” said Daniel Miller, CBRE senior vice president. Although Denver has its lowest vacancy rate in more than a decade at 5.9 percent, Miller said one area of concern is escalating asking lease rates in hot markets like Colorado Boulevard, Park Meadows and Cherry Creek, where some spaces are priced as high as $70 per sf. Multifamily The Denver metro area is on track to best last year’s $3.5 billion in apartment sales transactions, according to CBRE Vice President Matt Barnett. Apartment absorption has exceeded the number of completions every year for the past five years, leaving the state’s overall vacancy at 4.13 percent. Despite escalating apartment rents, Barnett said Denver still is a relative bargain compared with West Coast markets like Portland, Seattle and San Diego. While foreign capital typically is attracted to coastal markets, Barnett said a large multifamily asset in Denver will be purchased this year by an international investor. Investment Investment activity continues to be very high across the country and in Denver, with core real estate yielding higher returns than Treasurys, bonds and other investments, said CBRE Vice Chairman Tim Richey. Prices are at all-time highs, and cap rates at all-time lows. Investment in the Denver market has “not missed a beat” due to the slowdown in the oil and gas industry, and foreign capital has begun pushing into suburban markets in seek of assets – especially transit-oriented development opportunities. Richey predicted investment activity will remain strong into 2016, cap rates in the mid-5 percent range will become the norm for core, Class A product in the central business district, and a Lower Downtown asset will trade at a sub-5 percent cap. Land DTZ Associate Vice President T.J. Johnson said there’s no reason to believe commercial development land will not remain in favor in the foreseeable future. Addressing land prices in Denver’s River North neighborhood, which have escalated over the last 12 months, Johnson said at least one land deal in that area is set to trade at $100 per sf, double what some other parcels have sold for. NAIOP Colorado’s Mid-Year Forecast is presented by winners of the organization’s annual Broker of the Year awards or their chosen representatives.