CREJ - Office Properties Quarterly - March 2016
The Denver office real estate market makes it easy for us to feel like we are in the right place at the right time. Buyers, sellers and brokers alike are experiencing benefits of the unparalleled level of activity unlike anything we have experienced in the past. The most unique finding in the current market is the streamlined success across all building types. In addition to office buildings, multifamily, retail, hotels and even land are all experiencing major success. We are experiencing commercial real estate’s perfect storm. The attributing elements to this storm include the influx of people moving to Denver due to job growth, our lifestyle, low unemployment rates, cheap financing and the supply-demand economics. In addition to these elements, the daily stock market fluctuation provides investors with an opportunity to diversify their investment portfolios. Drawbacks to the office market are few, but include high demand with limited supply of office properties to purchase, resulting in decreased activity in the 1030 tax exchange market. Another drawback is the slowing activity of distressed properties because opportunistic buyers are seeking out other property types, noncore assets and properties in secondary markets for higher yield potential. In summary, there is an aggressive amount of money chasing limited product. The above-mentioned factors, which were described as elements of the perfect storm, are motivators of the “greed factor” for sellers in the office marketplace. In the 1987 film “Wall Street,” Michael Douglas’s character, Gordon Gekko, is a corporate raider. Essentially, greed drives him throughout the film to buy up underperforming companies, break them down and sell them for profit. In one scene, Gekko appears at a meeting and wants more shares, even though he already owns some. He wants control, though his motives for doing so are hidden. It is there that he delivers the speech that includes the movie’s most famous line: “Greed,” he states, “is good.” I make the parallel between this movie’s famous line and the current Denver office market because I have witnessed sellers who have exercised the greed factor; for some it worked as a benefit, but for others greed was a hindrance. Is greed good? I’ll let you draw your own conclusion. There were two recent office sale transactions I was involved in where the greed factor came into play and resulted in two different outcomes. In one transaction, an office building was placed under contract at higher-than-asking price and fell out of contract. The buyer, whom I was representing, then put it under contract, also above-asking price. We completed all due diligence and were waiting for the appraisal, which came in at $100,000 under the sales price, which was the original asking price. After attempting to negotiate a mutually acceptable resolution, we were unsuccessful. The deal fell apart because the seller had a price expectation set in his mind and was not willing to negotiate, and he lost the deal as a result of the greed factor. In another transaction, the greed factor worked for the seller’s benefit. The office building was under contract. I represented the seller this time and we knowingly listed the office building at 10 percent above our anticipated acceptable sales price based on recent sales comparables. Within a month of listing the property, we received a full price, all-cash offer. We accepted the offer, all inspections and due diligence went smoothly and we closed 60 days later. My conclusion to the question – is greed good – is it can be good, but it also can be a hindrance. I have professionally experienced four decades in the office commercial real estate market and have witnessed the market’s high and low cycles. No one knows exactly when the market will shift, but given certain market conditions and my experience, I believe that we will see the unavoidable shift approximately at the end of 2017. It’s time to prepare to reinvent ourselves as brokers because brokers will need to evolve with the market to withstand and find success through the complete market cycle. I recently brokered the sale of an office building that boasted a 31 percent gain in just six months – a situation where greed was good for the seller. Investment-grade, location-driven office properties always will be in high demand no matter what the economic climate. Institutions, pension funds, advisory groups, foreign investors, real estate investment trusts and astute buyers will continue to gravitate to these irreplaceable properties. Adaptive reuse of properties is leading the conversion of older industrial and retail facilities into hip new mixed-use office projects. Today, buyers need to take advantage of lower interest rates and strong submarkets, including River North, Brighton Boulevard, Ballpark, Highlands and Sloan’s Lake, to name a few neighborhoods where this the greed factor phenomena is prevalent. Current market conditions remain positive and commercial real estate fundamentals continue to be strong with a robust demand. It seems almost daily that we set new records for sales volume and property prices per square foot. We are still at the right place at the right time – so enjoy the ride!