CREJ

Page 6 — Office Properties Quarterly — December 2018 www.crej.com For further information please contact: AlecWynne, Principal, Managing Director alec.wynne@avisonyoung.com 720.508.8112 Partnership. Performance. A Di erent Approach to Denver Commercial Real Estate Solutions and Services Our professionals deliver exceptional service in today’s complex real estate environment. Through deep insights into the o ce, industrial, retail and multifamily, our professionals o er a full range of real estate solutions including: • Tenant and landlord representation • Capital markets and investment management • Advisory services • Debt capital solutions • Marketing and research services Learn how our approach might help you at: avisonyoung.com Experience the Di erence O ffice vacancy rates trended downward, the spec office pipeline remained robust and overall office rents continued to increase in 2018. With lender allocations at or above 2018 levels, in many cases, Denver’s office market will con- tinue to be attractive to capital sources in 2019. Political and eco- nomic factors have led to a rising interest rate environment over the past couple of years, but in general investor demand remains strong with cap rates seeming to hold. Metro Denver seems to be poised for continued economic growth in the next year, with continued headquarters relocations and expansion of the tech sector as contributing factors. While office rents had ticked upward in the central business dis- trict at the end of the third quarter compared to third-quarter 2017, the massive rent growth we’ve seen over the past seven years appears to be stabilizing. Rent con- cessions and tenant improvements have increased, and some compa- nies in need of lower occupancy costs have moved to the suburban markets. Occupancy is still very strong in the CBD and projected positive absorption is more than enough to eliminate any concerns on the part of lenders. This likely will remain the case next year. The improved rents, absorption and vacancy fac- tors in the suburban office sub- markets have made lending there more attractive, where factors like near-term rollover are not as troubling as they have been his- torically. With the immense growth and diversifica- tion of the Den- ver economy this cycle, the metro area has become much more of a primary market for national and global sources of capital. Denver is poised to outpace the nation in jobs growth in 2019, and the trend of increased lender interest will continue. As interest rates have steadily risen recently, the concern remains that cap rates will make a sig- nificant upward adjustment on all commercial property types in the near future. Strong economic con- ditions, rising rents and improved occupancy factors have helped offset rising interest rates and will likely continue to do so in 2019. Investor demand and transaction volume seemed to dip in the first half of 2018, but ramped back up later in the year. Reasons for this may be tax reform, the newly cre- ated opportunity zones and the new 20 percent deduction on pass- through entities. In addition to a more favorable tax environment for investors, interest rate growth may be showing signs of letting up. Moderate growth expectations for 2019 have some predicting a reduced number of rate hikes by the Federal Reserve. Leasing activity in the tech/soft- ware industry has been among the biggest drivers in the Denver office market recently, and this activity is projected to continue into 2019. Occupancy costs and cost of living advantages over the West Coast are likely to remain drivers for tech relocation to Denver. SwitchFly, Strava, Xero, Opentable and Mar- keto are among tech companies leasing space in the Denver market recently. The trend of oil and gas, health care and tech headquarters relocation activity in Denver during this expansion period looks to con- tinue in 2019 as well. VF Corp, the parent company of The North Face, Dickies and Lee Jeans, announced 800 new jobs with its planned relo- cation to Denver. In recent years, many have expressed doubts about the future of the office market because of the rise in coworking space and more employees working remotely. As the attractiveness the Denver market has to out-of-state and international companies continues, this does not appear to be an issue locally nearly as much as it may be an issue for other cities. Another concern is the 3.9 million square feet of office space in the Denver office pipeline. The strong funda- mental of the market combined with projected office demand are enough going into 2019 to keep lenders optimistic for Denver. Denver’s office market will con- tinue to be attractive to capital sources in 2019 due to a strong local economy, job growth and office market factors. Cap rates, which seemed to be on the rise recently, have leveled off and likely will continue to do so in 2019. Interest rates look to be slowing the rate of increase we’ve seen over the past couple of years as well. Headquarters relocations and the expansion of the tech sector will remain in 2019 and help to balance the strong levels of office space delivery continuing in Denver. V 2019’s financing forecast reveals optimistic lenders Market Update Mark Jeffries Vice president, producer, NorthMarq Capital Denver is poised to outpace the nation in jobs growth in 2019, and the trend of increased lender interest will continue.