CREJ - Office Properties Quarterly

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Page 4 — Office Properties Quarterly — April 2015
Market Overview
T he Denver office market
enjoyed a five-year run of
robust expansion from 2010
to 2014. Fourth-quarter 2014
vacancy fell to 14.4 percent,
the lowest level since the boom
year of 2000 and a 560-basis-point
decrease from year-end 2009. Quar-
terly absorption stood at 208,682
square feet, bringing the year’s
total to 1.5 mil-
lion sf. From 2010
to 2014, a total of
6.7 million sf were
absorbed.
Submarket high-
lights. The central
business district
and Northwest
submarkets posted
the strongest
performances
for the year, with
total absorption
of 453,266 sf and
386,255 sf, respec-
tively. Vacancy in the CBD is 12.6
percent, which is down from 13.3
percent in the previous quarter
and down year over year from 13.6
percent. Lower Downtown has the
lowest vacancy rate of the CBD’s
three micromarkets, a drum-tight
7.3 percent.
The NW submarket posted a
strong performance in 2014, driven
by vigorous corporate expansion,
new business lines opened by exist-
ing tenants and tenants new to the
market, culminating in the lowest
vacancy since 2000. Vacancy plum-
meted 481 bps year over year to 14.3
percent.
The southeast suburban submar-
ket ended the year in the red, with
full-year absorption of negative
218,819 sf. This loss, an anomaly,
was due to significant downsiz-
ing by First Data, from 330,000 sf
to 99,000 sf, and the first wave of
migration of Charles Schwab’s 1,900
Denver-based employees to its new
owned campus, which left two
vacant buildings. Although the lat-
ter move was a driver of more than
250,000 sf of negative absorption,
Schwab’s commitment to Denver
promises substantial positive eco-
nomic impact. The financial servic-
es firm plans to add up to 480 high-
paying jobs over the next five years,
and its 47-acre site has the space to
accommodate 4,000 employees.
Class A and B dynamics. The Den-
ver office market’s Class A and B
office sectors both continued to
improve. As is typical in a recovery
cycle, the Class A sector was the
vanguard as tenants took advantage
of relatively low Class A rates to
upgrade space. After several years
of flight to quality, recovery then
trickled down to the Class B product
due to the widening lease rate delta
and lease up of the desirable Class
A spaces.
Class A vacancy plunged 610 bps
from a cycle high of 19.1 percent
at year-end 2009 to end 2014 at
equilibrium (the point at which
neither landlord nor tenant has
a clear advantage) at 13 percent.
Class B vacancy fell 490 bps during
the same period to 16.5 percent. In
2014, Class A and Class B were neck
and neck in terms of absorption
with both sectors absorbing more
than 600,000 sf.
Rental rates. Upward pressure on
asking rates continued in the CBD
and NW submarkets. CBD Class
A rates increased 7.9 percent year
over year to $34 per sf, and NW
Class A rates rose 7.5 percent to
$25.54 per sf. These rates represent
historical highs.
Development. Denver’s strong
economy and market fundamentals
opened a development window: 11
office projects, totaling 2 million sf,
are under construction or renova-
tion. Development is concentrated
in the LoDo micromarket of the
CBD, and the SES and midtown sub-
markets.
Investment. In 2013, Denver’s office
investment market enjoyed its best
year since 2007 with 11.8 million sf
valued at $2.2 billion trading hands.
In fourth-quarter 2014, sales totaled
5.7 million sf valued at $598.6 mil-
lion, which pushed 2014’s totals
past those of 2013, to 14.3 million sf
valued at $2.3 billion. During 2014,
Denver continued to be a hotbed for
equity placement, with an influx of
new institutional and international
equity to the Denver metro area
driving core pricing.
Of particular note were the sales
of the new Union Station “wing
buildings,” which traded to GLL
Properties, the U.S. subsidiary of
GLL Real Estate Partners Gmbh, for
a record-shattering $600-plus per
sf. Suburban office sales led trans-
action velocity in the latter half of
the year. Spreads between Class A
and Class B rents have become sig-
nificant and will affect investment
patterns in 2015, prompting capital
sources to move down to Class B
product in order to chase yield.
Outlook
Metro Denver has outperformed
the nation in terms of job growth
since February 2010. As of Decem-
ber 2014, job growth increased 3.3
percent year over year, compared
with the U.S. rate of 2.3 percent.
Unemployment stood at 3.9 percent,
almost 2 percentage points lower
than the national rate. Denver’s
record-breaking housing market,
which is ranked sixth in the nation,
is another example of its economic
strength. According to the S&P/
Case-Shiller Home Price Index,
metro Denver home prices rose 7.5
percent year over year in Novem-
ber, the tenth consecutive month in
which prices reached all-time highs.
The future looks bright for Den-
ver’s economy and office market.
The University of Colorado’s Leeds
School of Business forecasts that
Colorado will gain 61,300 jobs in
2015, a level of growth that will
place the state among the top 10 in
the nation for job creation. The pro-
fessional and business services sec-
tor, one of the top office-occupying
industry sectors, is also projected
to grow by a robust 3.3 percent this
year, adding 12,800 jobs.
Denver was ranked fourth among
U.S. markets to watch in 2015 in the
prestigious Emerging Trends in Real
Estate report, which cited its popu-
larity with millennials, concentra-
tion of technology and energy firms,
strong local economy and active
development community.
The stage is set for continued
expansion in 2015. Newmark Grubb
Knight Frank research forecasts this
momentum will continue in 2015
with:
• Positive absorption in most sub-
markets meeting or exceeding 2014
levels;
• Positive absorption returning
to the SES, with space vacated by
Charles Schwab being backfilled;
• Rental rate increases continuing
in the CBD, NW and SES submar-
kets;
• Class A and Class B asking rates
in the CBD, NW and SES continuing
to achieve new highs;
• Strong absorption in the core
CBD, SES and NW submarkets with
continued trickle-down to the mid-
town and southeast submarkets;
• Speculative transit-oriented
development breaking ground in
the SES;
• Increased sales of Class B prod-
uct due to the spread between Class
A and Class B rental rates; and
• Continued job creation and fall-
ing unemployment driving expan-
sion in 2015.
Lauren Douglas
Research manager,
Newmark Grubb
Knight Frank,
Denver