CREJ - Office Properties Quarterly - December 2016
People joke that driving Highway 36 can make one feel as though he is entering a “bubble.” This bubble encapsulates the city of Boulder and brings to mind the old saying regarding Niwot’s Curse, which speculates that once someone has entered Boulder, he will be enticed by the natural beauty and will never want to leave. The truth is, Boulder has, in essence, created a mini Manhattan – a city surrounded by open space rather than water. Boulder is an island of land with no ability to sprawl outward and, due to the city-imposed height restrictions, can’t expand upward. With these conditions, Boulder has its own unique submarket, isolated in its bubble from the rest of the Denver metro market. Similar to the Denver market as a whole, over the last few years office vacancy has decreased to an all-time, single-digit low. Due to the lack of supply, office rates also climbed to an all-time high. East Boulder office parks, located outside of central business districts, were signing leases in the $12- to $15-triple-net range a few years ago. Today, they are upward of $20 triple net. In the central business district and downtown, office rates were around $18 triple net. Today they generally average $28 to $32 triple net and have gone as high as $40 triple net in a few rare instances. Also worth mentioning, the average triple-net range in downtown Boulder is $15 to $16, bringing the all-in equivalent to $43 to $48 full-service gross. This market trend seems to support that the Boulder bubble of Niwot’s Curse could be true. Bullish Boulder developers started planning for new office product just out of the recession in 2010, which was well before the current low vacancy/ high rental rate atmosphere. Developers delivered four additional office/ retail buildings to the downtown market, which was orchestrated with perfect timing. These buildings – PearlWest on 11th and Pearl streets, The Wencel Building on 13th and Walnut streets, 909 Walnut and 1738 Pearl – totaling approximately 300,000 additional square feet, currently are a majority leased. All this begs the question, will the Boulder bubble eventually pop, and can Boulder maintain this strong market with $50 all-in for office space? One must wonder, can Boulder keep absorbing additional office square footage? With the change in the atmosphere and the strength of the Boulder market, we have seen many large companies occupying chunks of space in downtown boulder head elsewhere. To name a few, Bing, New Hope Media and Intermundo Media are moving east or completely out of Boulder for lower prices and easier accessibility for their workforces. With the success of the earlier office projects and the high asking rental rates, developers have been flocking to Boulder to get in on the action. Currently there are about a dozen projects under construction or in the planning stages for an additional 1 million sf. In studying current market conditions downtown, CoStar shows a continuing strong office market with an 8 percent vacancy rate – a 4 percent vacancy increase over the past year. What CoStar doesn’t show in its vacancy analyses is sublease space due to it being “still occupied” or “rent producing” space on the market. There is about 120,000 additional sf of office space being marketed as sublease space in downtown Boulder. This is another 5 or 6 percent of available office space. A 12 percent market vacancy tells a different story. Although the office market continues to feel strong, there is a softening. If this vacancy level is maintained or increases, the likelihood is that the $28 to $32 triple-net asking rate will adjust downward somewhere between $5 and $7 per sf to entice those companies moving east to come back to the downtown business district. The new product in other parts of town is underwriting the lower end of the downtown rates to make their construction numbers work. If downtown office prices decrease, will people choose to be in a new product in other areas of town for equal rent or will they move back downtown and will the 1-million-plus sf all be built? Ultimately, Boulder is still a bubble; it is a mini Manhattan. Approximately one-third of the new 1 million sf of product is already spoken for by Google. Other companies, large and small, continue to seek out Boulder as a fun and “affordable” option for the same reasons as Google. If this continues to happen, this unique submarket will continue to flabbergast investors unfamiliar with this strong and bullish market, and companies will continue to pay $50 full-service gross for prime downtown office space. Boulder likely will become the Silicon Valley of the mountain region.