CREJ - Office Properties Quarterly - March 2016
Colorado continues to be at the head of the pack in economic growth nationally, and the Denver metropolitan statistical area certainly is leading that charge by all indications. The future is bright for almost all industries in our state and commercial real estate continues to bask in that glow. It’s an ideal time to take a look at Boulder’s various industries and the challenges unique to each of them, then identify how we can take advantage of those challenges and prepare our properties for the next cycle. Consider the commercial market in Boulder. On one hand, it is one of the most desirable places to conduct business in the county. It has one of the top three or four startup communities nationally, a well-respected university feeding those companies, plenty of homegrown venture capital looking for the next big idea and quality of life that is second to none. However, there are significant challenges to creating a successful real estate venture in Boulder. Not surprisingly, some consider these challenges key to what makes the market special and even, ultimately, creates the protective bubble the market enjoys during down cycles. The startup community in Boulder is an incredible machine. It cranks out ideas many of us can’t comprehend at a breakneck pace. However, when it comes to negotiating a lease with these technology companies, there is a clear disconnect between the tried-and-true five-year lease and the explosive uncertainty under which most of these companies operate. But if you want to lease space in Boulder, you’d better get comfortable with working under these conditions, figure out how to best mitigate risk, and parlay some of the remaining risk into premium economics on the rest of the deal. Additionally, landlords must think long term about their overall industry exposure, particularly in this market, and consider what will happen if (or is it when) venture capital funding slows or dries up all together. Depending on the goals of the investor/owner, it could be prudent to turn down a stronger deal in favor of a safer, more established credit tenant. On the flip side, tenants who have the benefit of stronger financials, should realize the leverage it provides and come prepared to make that argument at the negotiating table. For owners who think through the cost-benefit analysis of these deals, this is both an exciting time to have available space in Boulder and an attractive opportunity to position a property well for the future. On a macro level, Boulder always has been known for its local politics. And although the local leadership has been a part of the energized business and real estate community that exists today, the civic constraints that real estate professionals operate within certainly provide unique challenges in almost all phases of the industry. On the other hand, many smart and creative individuals and companies have seized on these inefficiencies as opportunities otherwise unavailable in the market. For developers especially, this means that if one gains the skills and expertise to navigate the process, there are opportunities to be rewarded. There are many examples of a local developer or investor entitling a project and then reaping the benefit of that work with a lucrative sale to nonlocal investors. It’s a telling trend that indicates how little appetite those who are unfamiliar with the process have to undertake this effort, and also assigns a real tangible value to the act of bringing a project that far in this market. Learning to deal with these processes is a valuable skill and an important part of being a successful commercial real estate owner or operator in Boulder. For current owners, this also means that the market has relatively high barriers to entry and existing real estate will continue to become more valuable as government processes continue to suppress the supply side. From a more localized perspective focusing on downtown Boulder, there is a real sense of community that creates positive pressure, which isn’t always felt as strongly in other markets. The Boulder market is a tight-knit, small-town community and there still is a feeling of playing nicely in the sandbox for the benefit of the entire market. While all of Boulder feels this more than a larger market might, it is especially strong downtown, and even more powerful on the retail side of things. Boulder’s commercial market is unique and desirable because people like to work and shop in a place that is in itself unique and unusual: local merchants, one-off coffee shops and restaurants, historical buildings with exposed brick and timber, and the list goes on. But the tightrope that landlords and tenants walk is what is the breakpoint between capitalizing on a red-hot real estate market versus biting the hand that feeds you. Downtown Boulder’s experience with large-scale, national merchants largely has not been a positive one. The pendulum quickly swung back with a dip in the market and a return to smaller and, often, local storefronts. The real estate community must determine where the edge of the cliff is in order to allow smaller shops to afford downtown Boulder and keep it special, while balancing how landlords collectively can keep the market active while doing what they need to do to create valuable real estate. This thought process will result in landlords considering factors in a negotiation that if the availability were in a nondescript strip mall off of Interstate 25, they would not need to consider. The positive aspect to this is that if landlords and tenants continue to believe that there is a greater good to consider in every transaction, the music should never stop. The Boulder market has some of the best real estate in the country, and as with any market, there are unique challenges to it. But those challenges are not insurmountable and can add to the attractiveness of the market for all involved.