CREJ - Office Properties Quarterly

11 / 32

April 2015 — Office Properties Quarterly — Page 11
Leasing Market
I f Boulder is 25 square miles
surrounded by reality, then the
Boulder office market is simi-
larly surreal. Dramatic changes
in ownerships and prairie
fire demand have conjoined with
municipally limited development
to produce the prospects for a mas-
sive price upheaval. This change in
lease rates moved by as much as 45
percent in certain suburban pockets
in the last three years alone, with
the majority of the increase coming
in the last six months. Let’s walk
through the reasons this is now tak-
ing shape by exploring some cata-
lysts.
First, in 1967 Boulder voters
approved one of the first open-space
tax initiatives in the country for the
purposes of limiting growth and cre-
ating buffers within and around the
city. This set the stage for Boulder
to become one of the more unusual
communities in the nation.
Jump to 2006 when three random
events prepared Boulder to take off
in terms of office space demand.
An unassuming former motocross
rider turned advertising genius, Alex
Bogusky, gets a wild hair down in
Miami and decides he wants to pick
up most of his entire 800-person
advertising agency, Crispin Porter
+ Bogusky, and move it to Boulder.
It’s hard to overstate the impact this
move had on the Boulder business
community. The major advertising
player redesigned a 60,000-square-
foot indoor soccer arena into one of
the hippest and most unusual office
environments Boulder has ever seen.
Articles in AdDesign, Wired and the
Wall Street Journal created a deafen-
ing buzz.
Design firms, public relations firms
and advertising agencies across the
country took notice and opened
satellite offices. These people were
collectively known as “creatives,”
and create they did. People left larger
firms to open new firms, and exist-
ing design and advertising groups
found themselves more “on the
map” than ever before. Demand for
space surged. All of the sudden Boul-
der had a whole new kind of cool
associated with it.
Around this same time, Brad Feld
and David Cohen, a pair of high
IQ venture capital nerds, formed
TechStars, a business incubator
and accelerator to coach and grow
inchoate technology startups. Their
motto is, “Do more faster.” They have
succeeded and then some by plow-
ing over a billion dollars, along with
their venture capital partners, into
over 500 new businesses, most of
which were located in downtown
Boulder. Filtrbox, Graphicly, Socialth-
ing, Sphero and hundreds of others
are actively working, changing every-
thing from our social media applica-
tions to toilet technology in develop-
ing nations.
Google built its presence in Boulder
through the purchase of @Last Soft-
ware, also in 2006. What was it about
2006 – solar flares? The Googlers now
number almost 200 in Boulder and
plan to grow into a large campus at
Pearl and 30th Street that has Boul-
der’s antigrowth doomsday cultists
positively soiling themselves.
Add to the witch’s brew Log-
Rhythm, Kapost, Sendgrid, Quick
Left, Albeo and so many others that
have flourished in this educated and
cutting-edge environment and it’s
no wonder why we’re running out
of office space options. Collabora-
tion spaces started to manifest in
less desirable basement spaces, and
do-it-yourselfers
joined with other
small businesses
to fill even more
vacancy.
In 2011, longtime
owner of most of
the buildings in
Flatiron Park, Larry
Frey, sold his assets
to – cue the scary
organ music – a
big national real
estate investment
firm, Goff Capital
Partners. Other than Swedish Pen-
sion Fund Alecta, which owns three
buildings in downtown Boulder, very
few national players had ventured
here because most felt safer invest-
ing in larger metropolitan areas.
And why wouldn’t they? This com-
munity seems to take special pride
in being antibusiness, but the more
antibusiness they project, the more
businesses thrive. Go figure. So our
quiet little debutant of a town has
come out, exposed to the national
real estate investment community
as worthy of their serious courtship.
In 2012 another national investor,
Unico Properties, bought into J Midy-
ette’s downtown Boulder portfolio
and became his partner in the 20 or
so buildings that he developed with
the late Don Rieder. Unico almost
immediately began to court Bill
Reynolds, the patriarch of Boulder
office space development and build-
er of millions of feet of commercial
real estate.
So, with a sizable measure of
Adam Smith’s invisible hand, all of
these events slowly marinated over
the next few years, quietly boiling in
the pressure cooker of market dyna-
mism and limited-growth local poli-
tics. Predictably, the vacancy rates
plunged lower and lower, from 10
percent to 8 percent, to 5 percent …
Meanwhile, in the last few years
our little berg was recognized by all
categories of national media (thanks
Wikipedia):
• The 10 Happiest Cities – No. 1 –
Moneywatch.bnet.com
• Top Brainiest Cities – No. 1 – Port-
folio.com
• Ten Best Cities for the Next
Decade – No. 4 – Kiplinger’s Personal
Finance magazine
• Gallup-Healthways Well-Being
Index – No. 1 – USA Today
• Best Cities to Raise an Outdoor
Kid – No. 1 – Backpacker Magazine
• America’s Top 25 Towns to Live
Well – No. 1 – Forbes.com
• Top 10 Healthiest Cities to Live
and Retire – No. 6 – AARP magazine
• Top 10 Cities for Artists – No. 8 –
Business Week
• Lesser-Known LGBT Family
Friendly Cities – No. 1 – Wearegood-
kin.com
• America’s Foodiest Town – No. 1 –
Bon Appetit magazine
• Queerest Cities in America 2015 –
No. 10 – Advocate.com
All of which brings us to what is
supposed to be the point of this tan-
gential mess of a column, the Boul-
der office space market, circa 2015.
In a move that rocked the city, Bill
Reynolds finally sold all of his subur-
ban office space, over a million sf, to
Unico in the largest sale in Boulder’s
history. Upon closing the transaction,
Unico immediately raised the rates
by some 35 percent across the board
for virtually all renewal and new
lease transactions. This amounts to
a near cornering of the office space
market due to the increasingly finite
supply of this scarce commodity.
Even now, tenants that exceed 20,000
feet have distressingly few options,
countable on one hand. This infor-
mation is so new that most of Boul-
der’s tenant base has no idea what is
coming down the turnpike.
This will have a muscular influ-
ence on the rest of the office space
market, and the pricing and values
of Boulder office buildings will cer-
tainly jump. Outlying communities
including Broomfield and Louisville
also will feel the impact.
It’s fair to say that Boulder’s office
market is in for a precariously wild
ride in the next couple of years as
tenants shift and try to make sense
of the extremely low vacancy mar-
ket. More than ever, sound and clev-
er real estate representation will be
critical to helping tenants navigate
responsible office space decisions.s
Paul Whiteside
Managing partner,
NewOption
Partners, Boulder