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— Office Properties Quarterly — October 2015
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Investment Market
O
ffice assets continue to be
popular among investors
due to their historically
higher returns compared
with other asset classes.
Colorado is a popular destination
for investors to place their money,
not only because they like to visit
the state, but also because metrics
for population growth, unemploy-
ment, job growth and the economy
support the decision.
As the buyer pool continues to
grow in Colorado with out-of-state
and international investors looking
inside the coasts, we’re seeing cap
rates compressing and a depleting
inventory of high-quality and high-
return investments. The majority
of the investors are looking in the
Denver metropolitan area, but if
investors are willing to look to the
secondary and tertiary markets
around the state, they’ll find simi-
lar opportunities often at higher
returns with similar statistics.
Denver is the first choice for
investors looking to place money
in Colorado. Denver is the larg-
est city in the state and, as such,
is the main source of Colorado’s
commerce. Denver’s population
ranks 23rd for all metropolitan
statistical areas, according to the
Census Bureau, and the population
is anticipated to climb a few spots
over the next decade. Denver has
a low 3.8 percent unemployment
rate as of September, a strong econ-
omy with gross domestic product
growth hovering
between 5 and 6
percent over the
last several years,
and consistent
wage growth. The
desirability of the
city has attracted
growth across all
demographics and
is seeing the larg-
est increase in the
millennial popula-
tion. For these rea-
sons, Denver is not
only a desirable
place to live, but
also it’s a desirable place to invest.
Cap rates are showing similar pos-
itive trends. We’ve seen cap rates
compress 100 to 150 basis points
over the last three years across all
classes of office investments. Cap
rates for Class A and B office assets
are trending between 6 and 7.25
percent in Denver’s primary sub-
markets.
Most of the investors we work
with are looking for returns from
7.5 to 8.5 percent and, of course,
they prefer Denver. But inves-
tors are willing to look at some of
Colorado’s secondary and tertiary
markets where they are more likely
to (but not easily) meet their invest-
ment criteria. Sometimes we find
ourselves educating more about the
submarket than we are educating
about the economics and tenant
mix of the asset, especially when
the asset is located in a lesser-
known submarket.
Colorado Springs is a great alter-
native. It is the second-largest city
in the state, and the population has
earned a spot in the top 100 MSAs
in the county. Colorado Springs’
largest economic drivers are the
military, high-tech/aerospace indus-
tries and tourism. The military is
the top economic driver and has a
large presence with the Air Force
Academy, Fort Carson – which is
also the state’s largest employer
for civilian and military personnel
– Peterson and Schriever Air Force
bases, and the North American Air
Defense Command. The aerospace
industry is the second-largest driver
of the economy with companies
such as Boeing, Northrop Grum-
man, Lockheed Martin and General
Dynamics having a presence in the
city.
Colorado Springs is probably most
well known for its tourism, which
is the third-largest economic driver.
Popular destinations include Pikes
Peak, Garden of the Gods and the
Broadmoor. The office market in
Colorado Springs consists of 190
million square feet and has a cur-
rent vacancy rate of 8.4 percent.
Class A and B office investment
assets in Colorado Springs are trad-
ing between 6.75 and 8 percent for
well-located and stabilized proper-
ties.
Similar returns can be found in
Castle Rock, where the community
boasts excellent demographic and
economic statistics. For example,
Castle Rock has a lower unemploy-
ment rate than Denver at 3.7 per-
cent, as of April; the average house-
hold income is over $100,000 per
year; and Douglas County is ranked
in the top 10 wealthiest counties in
the United States.
The Promenade at Castle Rock is
one of the largest developments in
the U.S. at $177 million with 1 mil-
lion sf of retail and 320 residential
units and an anticipated comple-
tion in 2016. The office market
in Castle Rock is relatively small
with about 950,000 sf, but Castle
Rock has experienced strong rent
growth and vacancies in the 6 to 7
percent range. Class A and B office
investments in Castle Rock can be
acquired at cap rates between 6.75
and 7.75 percent.
We could continue with statistics
from numerous other secondary
and tertiary markets in Colorado
like Grand Junction, Fort Collins
and other Denver suburbs, but it’s
sufficient to say that the spread
between Colorado’s primary and
secondary/tertiary markets is
between 100 and 150 basis points
for similar quality investments. As
long as investors understand the
submarket and are comfortable
with all the important attributes in
that submarket, many are willing to
invest outside the popular Denver
market.
s
John Witt, LEED
AP BD+C
Partner/brokerage
services, NavPoint
Real Estate Group,
Castle Rock
