CREJ - Office Properties Quarterly

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Page 10 — Office Properties Quarterly — April 2015
Leasing Market
S outheast suburban Denver is
proving to be a dynamic and
highly sustainable submar-
ket for owners and tenants.
Opportunities abound across
more than 40 million rentable square
feet of office space, with abundant
options for tenants and significant
movement among spaces. And it’s
always easy to find a parking spot.
Since recovery from the Great
Recession began in June 2009, 17
of the 22 quarters have seen posi-
tive absorption. In a few cases, ten-
ants have exited the Denver area or
moved to a different submarket, but
what is perceived as a setback for the
landlord community only generates
opportunity for tenants.
Investment activity in SES is fas-
cinating. Transwestern’s Investment
Services Group tracks sales activity,
and watched a compression of capi-
talization rates from 2012 to 2014 of
more than 100 basis points for sta-
bilized Class A product, and over 65
bps for stabilized Class B product. For
this purpose, “stabilized” is defined
as 85 percent occupied or greater. The
practical application of this scenario
for tenants is that the owners’ bases
have risen dramatically, command-
ing higher rent for recently acquired
product.
Class A asking rates climbed an
average of 4.78 percent year over year
since 2010, while Class B asking rates
followed with an average climb of 4.17
percent during the same time period.
Given the customary 50-cents annual
rental bumps, tenants that executed
leases in 2010 will see a disparity of
$2.32 per sf increase (in favor of the
owner) in market asking rates com-
pared with the ending contract rate
for Class A space, and compared with
$1.10 per sf dispar-
ity for Class B space.
Another recent
phenomenon is the
rise in construction
costs since 2012.
Today, $45 per sf is
the new $30, and
$65 per sf is the
new $40. In a build-
out situation, it is
becoming obliga-
tory for owners
to expend greater
amounts of capital,
which either will
affect their margin
or be amortized into
the rental rate. This
rise in construction
cost contributed
to increased rental
rates, and made it
more valuable to
salvage existing
infrastructure when
planning new office
space.
With over 30
large-block tenants
(30,000 rentable sf or greater) current-
ly in the market, representing over 3.4
million rentable sf of space, turnover
is unremitting. This statistic is intrigu-
ing because the large-block tenants in
the market represent approximately
8.5 percent of the overall inventory.
Typical users in the SES submarket
include professional services firms,
communications companies, financial
services firms and engineering firms.
Among the development communi-
ty there is a clear direction for “urban-
ization” of the SES Denver market. For
new developments to be successful,
proximity to light rail and walking-
distance amenities are key. There are
more than 30 proposed office projects
in various development stages across
the SES Denver.
Here is a practical application to
tenants confronting an office-leasing
situation:
Start early. Time is your friend.
Forward-thinking companies that
want to uncover all opportunities to
drive value from real estate should
approach the market well in advance
of the renewal-option notice date.
Trust your adviser. Interview multiple
tenant representation specialists to
ensure the right fit for your require-
ments and your business. Cross-
examining multiple groups will give
you access to several perspectives
and ensure you are engaging the best
team to handle your transaction.
Don’t settle for the status quo. Many
real estate professionals can point to
comps and trends in the market, but
few look for ways to deliver outlier
results that disrupt the norm. Assem-
bling a team of real estate profes-
sionals with diverse skill sets leads to
the best solutions. Every lease is an
opportunity to drive value, not only
economically, but also emotionally
by creating a physical space that will
attract and retain employees.
Understand why. Building ownership
structures all have different goals
and objectives. Negotiating with a
real estate investment trust, private
owner, institution or foreign entity
presents different challenges that
require insightful audience analysis.
Cover the bases. Understanding the
basis and financial structure of the
asset in question can pay dividends in
your negotiation strategy. Focusing on
buildings with low amounts of debt
and low bases can add substantial
flexibility to the owner’s abilities.
Recognize the details. Office leases
are complicated financial instruments
that require acute attention to every
detail. Buildings will trade owners,
but the lease documents will remain
in place, commanding tenants’
outcome.s
Preston Dunn
Vice president,
Transwestern,
Denver Tech Center
Chaise Schmidt
Associate,
Transwestern,
Denver Tech Center
Southeast suburban absorption rates from 2009 to 2014