Denver Office Market update

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1 QUARTERLYV Frederick Ross company IEW COMMERCIAL REAL ESTATE Volume 12 Number 1 JANUARY 2007 Denver Office Market update COMPANY INSIGHT STICKER SHOCK IN THE MILE HIGH CITY Ben Gilliam and Jon Treter As an increasing number of tenants look to renew or move into new office space in the Denver metro area, sticker shock has Ben Gilliam become a common occurrence. High property tax reassessments, along with a steadily shrinking supply of office space are the two main contributors. Denver tenants already pay an average of $2 per Jon Treter square foot towards the landlord s property tax. With recent increases in building sale prices, values of commercial real estate could rise 50 percent or more this year, effectively raising tenants' costs as well. Wells Fargo Tower, for example, in downtown Denver, had a assigned valuation of $127 million dollars; but just a few months ago, it sold for $344 million. Retaining a skilled tenant representation brokerage team can be crucial to a tenant's success in keeping costs under control and avoiding the classic "sticker shock." The most critical factor when using a brokerage team is timing. It is vital to retain a team early enough to implement "damage control" and level the playing field. Ideally 24 months prior to the lease expiration date, a strategic approach would include: Implementing a space audit to determine how current space can be used more efficiently. Performing due diligence on the landlord and the building. This includes researching current ownership, purchase price, projected owner building costs, then analyzing how these fundamentals will impact a new lease. Providing lease comparables. This includes research on types of deals the landlord has offered other tenants in recent months. Frederick Ross Company has unsurpassed data in this area. These are just a few of the many tools that a skilled team can bring to bear in a market that will certainly be challenging for tenants in A smart team of brokers can save tenants from making costly mistakes and uninformed decisions. By Lauren Douglas Senior Analyst The Denver commercial real estate market had a powerful year, ending with absorption levels at a seven-year high. Consequently, vacancy rates are now dipping to equilibrium-breaching levels. The rise of rental rates in high demand areas, the amount of sales activity, and the flurry of new proposed development result from a solid economy and stable job growth. Significant economic drivers in include healthy job growth at 1.9 percent, continued investment optimism, and the completion of Denver s TRex Project and new Southeast light rail system. Momentum was high in the Southeast Suburban (SES) sector, with 1,371,398 square feet of absorption and vacancy decreasing from percent to percent. The Class A market has tightened to a percent vacancy rate and very few large blocks of space remain on the market. Over the next few years, an influx of new construction will occur in the SES market, led by Transit Oriented Developments (TODs) planned for all major light rail stops. The CBD absorbed a record 1,258,579 square feet, with an active fourth quarter delivering an even stronger performance than anticipated. A drop in vacancy from percent to percent marked the restoration of equilibrium to the CBD. Two significant projects, the Environmental Protection Agency s regional headquarters and the Denver Newspaper Agency s combined headquarters delivered in. Confident in the market and timing, developers including Opus, Hines, and Westfield announced six new speculative projects, totaling over 2,000,000 square feet. The Denver investment market achieved tremendous success during. More than 18,000,000 square feet of commercial office product traded in, totaling almost $2,780,000,000. In comparison, 11,700,000 square feet traded for $1,660,000,000 in, and 6,300,000 square feet traded for $579,000,000 in The dramatic increase in sales activity is a sign of a healthy economy with unfailing investor confidence. While economists forecasts for 2007 and beyond run the gamut from guarded optimism to inevitable recession, Denver appears to be on a reasonably healthy foundation. The threat of a national correction and the impact of historically high residential foreclosures create some uncertainty, but many other economic indicators suggest sustainable growth. One thing is certain: if the market can come close to performing at levels, then 2007 will be another terrific year for the Denver commercial real estate community. Square Feet 6,000,000 4,000,000 2,000,000-2,000,000-4,000,000 Source: Ross Research Services 0 OFFICE MARKET Supply Absorption Vacancy 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Vacancy

2 COMPANY INSIGHT Apartment Realty advisors a Frederick Ross Company Apartment Realty Advisors (ARA) is the largest privately held, full-service investment advisory brokerage firm in the nation that focuses exclusively on the multi-housing industry. The combination of resources, unparalleled market expertise and nationwide presence in the multi-housing marketplace resulted in $8.4 billion in real estate transactions in. Apartment Realty Advisors of Colorado, a Frederick Ross Company, has been the top Colorado apartment brokerage since For detailed information on ARA s extensive multi-housing investment services, visit Denver experiences Record FORECLOSURES By Doug Andrews Principal Denver now has the highest foreclosure rate in the nation, due to high home prices, no down payment transactions and the highest ratio of adjustable rate mortgages in the country. In, there were 19,000 foreclosures in metro Denver. Some foreclosure victims are moving back with their parents, but odds are that most are simply renting the foreclosed house next door. With the mass of foreclosures and a very soft condo sale market, there is now a significant shadow market of rentals in Denver. This represents considerable pent-up demand for apartments. As the lenders and investors sell foreclosed homes and condos to consumers, many families will have no option but to rent apartments. After all, they can t get a new mortgage for seven years. Vacancy Continues to Fall The Denver apartment vacancy rate for the fourth quarter of was 7.0%. This is a decrease from 7.9% in the fourth quarter of and 10% in the fourth quarter of This year over year improvement is due to minimal new apartment development and strong absorption fueled by record foreclosures in the single-family market. Only 738 new apartments were completed in and apartment permits fell to a near record low of 560 units. Only 1,000 units are likely to be completed in Concessions Finally Decrease Real rents (after concessions) clearly began a strong recovery in. Concessions decreased from 16.7% (4Qtr05) to 15.3% (4Qtr06). Most owners fall into two groups: those with disappointing 2-4% real rent growth and those with 10-15% real rent growth. The latter group typically appears focused more on rent than occupancy. With a vacancy similar to Phoenix, why does Denver still have 15% concession, while Phoenix has none? The answer is simple, Denver owners continue to sacrifice rent for occupancy. They do not need to wait until the market is completely occupied to raise rents. METRO DENVER COLORADO SPRINGS 3rd Qtr 2nd Qtr 3rd Qtr Vacancy 6.7% 6.9% 7.7% Average Rents Per Unit $866 $843 $846 Per SF $1.02 $1.00 $1.00 Concessions 16.7% 17.2% 17.2% New Construction Units Completed (YTD) New Permits (YTD) Absorption (YTD) 629 1,518 1,178 Sales (10+ Units, YTD) Units Sold 6,822 5,670 5,565 Average Price per Unit $94,292 $84,102 $99,239 Average Price per SF $ $ $ Vacancy 11.30% 11.30% 10.30% Average Rents Per Unit $695 $687 $684 Per SF $0.86 $0.86 $0.87 New Construction Units Completed (YTD) New Permits (YTD) Absorption (YTD) ,388 Sales (10+ Units, YTD) Units Sold 1,634 1, Average Price per Unit $59,480 $42,630 $44,144 Average Price per SF $77.82 $52.03 $56.38 Source: Apartment Realty Advisors Denver infocolorado@arausa.com

3 Transactions Red rocks centre sells for $44 million Red Rocks Centre, a 283-acre parcel of land, sold last October to HF Holdings, LLC. Located on the northeast corner of the interchange at C-470 and Morrison Road, this mixed-use development site provides easy access to potential Denver shoppers, as well as those coming from mountain communities via I-70. This section of C-470 continues to be the most traveled intra-state roadway in Colorado, with some 81,000 vehicles per day, providing great customer exposure. Sites are now being offered for multi-family, retail, and office use. Steve Roesinger of Frederick Ross Company is pleased to have represented the seller in this transaction. Photo courtesy of Ishmael Orendain Van Gilder signs on to new LOdo office building Van Gilder Insurance Corporation, the largest independent insurance brokerage firm in the Rocky Mountain Region, has completed lease negotiations for 56,000 square feet in the new Hines building at 1515 Wynkoop in downtown Denver. Van Gilder will occupy the entire 2nd floor, and part of the 3rd floor in this eight-story premier office tower, effectively uniting their Denver and Evergreen sites into one office. Located on the southwest corner of 15th and Wynkoop in the heart of Denver s Lower Downtown (LoDo) neighborhood, the new building will contain approximately 300,000 square feet with four levels of under-building parking. Construction work is scheduled to begin in March 2007, and tenant move-in will occur October of Jamie Gard and Nathan Johnson of Frederick Ross Company are the leasing and marketing agents for 1515 Wynkoop. Contact them for information on additional opportunities at this new downtown office tower. NEW RETAIL DEVELOPMENT PLANNED FOR COLORADO SPRINGS: THE MARKET AT PINE CREEK Strategically located at the intersection of Powers and Union Boulevard is a new 15-acre neighborhood retail center to be developed by BG Development LLC. This prominent owner/developer group closed on the land in late December and is breaking ground on infrastructure in early The center will be called The Market at Pine Creek and will consist of approximately nine lots, including banking, restaurants, retail and medical related uses. This retail center is located within the Briargate Crossing campus, the newest business campus in Colorado Springs, and part of the 10,000-acre master planned Briargate community, one of the fastest growing suburbs in Colorado Springs. Gary Hollenbeck of Palmer McAllister, a Frederick Ross Company, negotiated the sale of The Market at Pine Creek. The seller, La Plata Investments, LLC has been Briargate s master developer since Frederick Ross company: phone fax info@frederickross.com

4 LARIMER CORPORATE plaza achieves 97% occupancy Since September alone, eight new tenants have leased a total of 22,000 square feet of office space in Larimer Corporate Plaza at 1675 Larimer Street. Most recently, iknowledge Solutions, Inc. leased 6,845 square feet, and Paramount Home Loans, Inc. leased 4,201 square feet. Other recent tenants include Timberlake Management Corporation; CenterStone Technologies, Inc.; RS Online Solutions, Inc.; and Aspenwood Capital. The exceptionally high level of activity is attributed to the many property amenities and convenient downtown location. Darrin Revious and Todd Silverman of Frederick Ross Company are the exclusive listing agents for Larimer Corporate Plaza. Ben Gilliam MANAGING DIRECTOR Ben has a 22-year reputation for mergers and acquisitions disposition and for strategic development and implementation. He teams with Jon Treter to lead a new office team for Ross as they enhance Ross' CBD and Midtown market share. Jared Leabch Jared brings over 13 years of sales experience, along with an energetic and enthusiastic approach to canvassing, prospecting and client development. He teams with Roger Simpson. Please join us in welcoming... Todd alton Todd brings to Ross an in-depth understanding of the capital markets, corporate credit analysis, and structured debt financing. Todd teams with Dave Tilton, one of the markets' leading investment brokers. Ted Coons Ted began his real estate career in 2004 after a strong tenure as a business consultant. He has rapidly become a promising transaction management professional in the industry. Ted teams with Ben Gilliam and Jon Treter. Matt Pommeroy Matt joins the brokerage department after two years of experience with the Ross research and brokerage departments. He teams with Senior Managing Director John "Packet" Lowrey. Roger simpson Roger has brokered many major office leasing transactions for corporate and institutional clients in the Denver region. With over 25 years of experience in commercial real estate, Roger teams with Jared Leabch. todd snyder Todd joins Ross as a member of southeast Denver s market leading office/industrial leasing and sales brokerage team of David Lee, Jason Addlesperger and Peter Beugg. Pete Friesen Pete brings to Ross a long and successful sales career, along with time-proven skills in sales management, marketing development, and distinguished client support. Pete teams with Ben Gilliam and Jon Treter. Jon Treter SENIOR DIRECTOR Jon has rapidly developed a variety of strategic transaction management capabilities. He teams with Ben Gilliam to lead a new office team for Ross as they enhance Ross' CBD and Midtown market share. For additional information on Frederick Ross Company brokers, please visit editor Rachel Chin rchin@frederickross.com

5 Opportunities Exceptional midtown opportunities at Sherman Center Sherman Center at 789 Sherman Street in Midtown Denver currently offers over 14,000 square feet of office availability. This 95,952-square-foot building boasts excellent mountain views and easy access to I-25, Cherry Creek, and all of Downtown Denver. A premier quality office building, Sherman Center provides a wide variety of floor plans, including common area conference rooms and a lunch room. Contact Ben Gilliam, Jon Treter or Ted Coons for additional information on Sherman Center. The shops at Vallagio -- Transit-Oriented Development with current retail availability Groundwork has commenced for Vallagio at Inverness, an exciting Transit-Oriented Development (TOD) at Inverness Business Park in Greenwood Village, featuring a vibrant retail center and dedicated light rail station with pedestrian bridge. Called "The Shops at Vallagio," the retail portion of this development is scheduled for first quarter 2008 completion. Two pads, including a banking facility with a drive-through option and a restaurant opportunity, are currently available at the retail center. As one of Denver s first new urban TODs, The Shops at Vallagio at Inverness offers unique, leading edge accessibility. Vallagio is your gateway to shopping, entertainment, and the major employment centers of DTC and downtown Denver. It offers a unique residential/retail mixed-use project with direct light rail access in the heart of the DTC. For additional information on the opportunities at The Shops at Vallagio, please contact Bob Bramble or Tom Mullinix. cherry creek retail opportunities With outstanding foot traffic and a large employee base, Cherry Creek provides fantastic opportunities for a wide variety of retail businesses. Listed below are three prime locations currently offering availability E. Third Avenue. This 35,000-square-foot development called Cherry Creek Square currently offers 977-square-foot and 500-square-foot garden level spaces and up to 4,464-square-foot street level spaces. It provides abundant parking, along with great signage and a personalized store front E. 2nd Avenue. With gorgeous, newly renovated storefronts and interiors, the Ilona Building offers 1,163-1,292 square feet of retail. It includes on-site parking, and is available immediately Steele Street. Available immediately in North Creek Shops is a 1,919-square-foot opportunity. This newer first class brick building has high interior ceilings and great parking. Contact Susan Karsh or Frank Griffin for further information on 3000 E. Third Avenue and Steele Street. For additional information on 3201 E. 2nd Avenue, contact Bob Bramble or Pete Wycoff.

6 Market trends Denver industrial Market update By Lauren Douglas Senior Analyst 6,000,000 4,000,000 INDUSTRIAL MARKET 10.00% 8.00% marked a successful year for the Denver industrial market. Absorption eclipsed 4 million square feet and vacancy fell to 6.73 percent. Rental rates increased as a function of demand. At $209,693,000, investment sales totals were healthy but well below those of past years. Square Feet 2,000, ,000,000-4,000,000 Industrial warehouse product posted vigorous year-todate absorption at 3.5 million square feet. Vacancy, which Supply Absorption Vacancy had hovered around 7 percent since 2002, declined to Source: Ross Research Services 5.15 percent. Consistent with increasing demand, nearly 1,000,000 square feet of warehouse product was delivered in and an additional 1.8 million square feet is on tap % 4.00% 2.00% 0.00% Vacancy The smaller R&D/Flex market, which sustained a heavy hit from the tech downturn, is recovering. Two consecutive years of healthy absorption resulted in a year-end vacancy rate of percent, down from a high of percent in New supply is limited but well-located and in demand. Economic indicators inspire cautious optimism for a healthy economy in 2007; continued momentum in the industrial market, characterized by a landlords leasing market; accelerating improvement in the R&D/Flex market; steady supply; and stable investment sales. Denver Retail Market update By Andrew Myers Analyst The retail market tightened significantly during with over 3,767,000 square feet of absorbed space and a vacancy improving to 4.96 percent. Much of this is attributed to large, fully occupied retail centers coming to the market, such as Southlands in Aurora, Northfield Stapleton in northeast Denver, and Walnut Creek in Westminster. These developments seek to accommodate the growing number of Denver residents. As expected, the Southeast Suburban market, which encompasses Aurora, absorbed the most tenancy this year, as did the super-regional mall (600,000+ square feet) product type. The Cherry Creek market remains the tightest market with a vacancy of 2.14 percent. The newly renovated Nordstrom expects to deliver in Square Feet 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 Source: Ross Research Services 0 RETAIL MARKET Supply Absorption Vacancy For more Denver market information, please contact Lauren Douglas at ldouglas@frederickross.com 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Vacancy The Southeast Suburban market looks forward in anticipation to the several transit-oriented developments expected to begin construction this year. These TODs are mixed-use projects with significant retail components located along the new Southeast light rail line. Up to 2,000,000 square feet of retail space is planned for these new mixeduse projects, which extend from Broadway and I-25 to Lincoln Avenue. SINCE 1888 FREDERICK ROSS COMPANY COMMERCIAL REAL ESTATE SERVICES 717 Seventeenth Street, Suite 2000 Denver, Colorado ONCOR INTERNATIONAL