CREJ - Office Properties Quarterly - September 2016
One fact that many commercial real estate professionals are unaware of is that metro Denver has the highest amount of office square feet per capita of any major metropolitan statistical area is the country. This puts us at a disadvantage in terms of keeping occupancy rates low, considering there are no major private employers who would take up large blocks of space in the central business district, as is common is other major cities. Denver’s office market, as a whole, was hit considerably hard during the downturn, with overall vacancy rates hovering around 20 percent. Denver is a small to midsize corporate environment, however, which brought many of the popular submarkets back faster than one might have expected, a function of population growth. As Denver is an entrepreneurial-oriented market and a very desirable place to live, this profile of tenancy has resulted in greatly expanded employment and positive office absorption gains. The overall market now is in the low teens occupancy wise, with nearly every submarket showing positive absorption in the second quarter. Denver office has become more attractive to lenders of all types than at any other time in history. The overall market absorbed over 8 million square feet since the recession, and much of this was in the Class A sector. The CBD and surrounding submarkets are in the most demand, even though the second quarter experienced slightly net-negative absorption for the CBD, which was largely a function of the oil-and-gas-related tenancy washout. The largest submarket in the MSA – the southeast – has struggled somewhat since the recession with the loss of several large office users and is not as desirable for modern tenants as the CBD. However, the southeast is full of conveniently located and well-built Class A and B buildings, which helped the submarket obtain positive absorption year to date. We could be in the beginning of a Denver Tech Center revitalization, especially when considering the low-cost alternative it represents when compared to the CBD and the fact that many of the older and new Class A buildings are transitoriented developments. The other office submarkets around the MSA have seen modest positive absorption in the second quarter as well as year to date. In my opinion, the fact that we’ve seen office investment in the second quarter on par with 2006 shows that Denver has become more familiar to a number of national and international investors. Right now there are nearly 20 major spec office ground-up or rehab projects, which shows a strong belief by developers and investors alike that this is not 2006 all over again. We are poised for serious office absorption in these key submarkets for the next several years, at minimum. In the capital markets, office is more attractive to lenders in the Denver MSA. The stigma of Denver office being overbuilt has been gone for a long time, and, given the population and job growth, Denver is as attractive to the lending community as any noncoastal market. Institutional equity investment has increased substantially, and the life insurance companies are, more than ever, wanting to do more when it comes to Denver office. Now that much of the turmoil in the commercial mortgage-backed securities market has settled out that seems to be an attractive way to combine less-expensive capital while going very high on the capital stack for aggressive investors using mezzanine financing to compliment it. For development financing, there doesn’t seem to be any pullback from the banking community, especially now that they’ve had to put the brakes on multifamily and focus on other asset classes. In summary, we have a strong office market, but one with room to improve. Denver is location specific, which is why you see spec development in a low teens occupied market. This is an attractive city for young people and small and midsized businesses, and will continue to see office development supported by job and population growth over the next several years. Financing availability will only improve and, certainly, is the best it’s been for office in Denver likely ever.