DENVER Office Research Report First Quarter 2018
Denver Market Facts 61,614 Jobs added in the last 12 months ending in February, a 4.1% increase in employment. 3.1% Unemployment in Denver, lower than the national unemployment rate of 4.4%. 3.3 Million square feet of space now under construction, with 43% preleased. 12.0% The Denver office vacancy rate increased 20 bps in the first quarter. Market Overview The Denver office market began to cool through the first quarter of 2018. Slightly increased vacancy rates pushed rents down a few cents since fourth quarter 2017, as recent deliveries weakened landlord positions. The market is in the process of adjusting to the continued deliveries that were started in response to the accelerated economic expansion. Absorption remains slightly dampened by tenants vacating space in the southeast region, but positive absorption more than made up for these losses. Tenants in vacating sublease space continue to largely belong to the technology and software industries. This is inevitable, given the nature of startup companies, however the number of tenants vacating spaces declined from the previous quarter. Overall, Denver is experiencing slowdowns in economic and population growth from the record paces set since the last recession. After falling to historic lows, the vacancy rate began trending upward in mid-2016. The vacancy rate increased slightly from the previous quarter, to 12.0%. The rise in vacancy from second quarter 2016 to second quarter 2017 is due to new buildings delivering additional space to the market. With over 3.3 million square feet (msf ) currently under construction, the building boom has begun to subside. Overall vacancy increased slightly despite strong absorption in 2018. Rising vacancy and flattening rental rates indicate that a tenant favorable swing might be beginning. Slowing demand is hindering rent growth, a trend that is expected to continue through mid-2018. Denver s economic growth outlook remains bright, with substantial inmigration of new residents, strong employment gains, and an enviablylow unemployment rate. These positive economic indicators point towards continued expansion in Denver s office market throughout 2018. Avison Young Page 2
Denver Vacancy & Availability Asking Rates Denver s vacancy rate increased slightly in the first quarter from the previous quarter to 12.0%, due to 816,542 sf of new construction deliveries. The vacancy rate is still low by historic standards, despite increasing 120 basis points over the previous five quarters. Avison Young includes corporate campuses in its data set to track the true expansion or contraction in the market. Average asking rates in the Denver market are virtually unchanged in the first quarter, dropping 0.1% per square foot (psf ) to $27.06 psf gross. Rates for Class AA space in Denver s CBD appear to have peaked and declined slightly to $38.58 psf gross. In the past five years, asking rates have grown at unprecedented levels due to new construction, particularly in the LoDo and Platte River submarkets. However Class A rents in both the LoDo and Platte River submarkets declined in first quarter Although leasing activity has remained strong throughout the past year, some speculative projects delivered in early 2018 had no preleasing. The vacancy rate is projected to rise slightly in 2018 with the delivery of these projects. With an increasing overall vacancy rate, Denver s office landlords will see some of their bargaining position erode in 2018. 2018. The frantic growth rate appears to be over, as landlords responding to rising vacancy rates, holding asking rates flat. Asking rates are expected to remain stable in 2018, with fluctuations in premium Class A product and some increases in Class B space. Historical Vacancy & Rent 13.0% 13.0% Vacancy Rate $24.00 13.5% $22.00 12.2% 11.2% 11.0% 11.9% 10.8% 12.0% 10.8% $18.00 $16.00 9.0% $14.00 7.0% 5.0% $17.94 YE 11 $18.66 YE 12 $19.27 $20.29 $20.86 $21.52 $22.57 $22.89 YE 13 YE 14 YE 15 YE 16 YE 17 Q1-18 Rent $20.00 Rental Rate 15.0% $12.00 $10.00 Vacancy Avison Young Page 3
Denver Absorption & Demand Absorption totaled 815,007 square feet (sf ) in the first quarter. Absorption was strong in direct space, totaling 668,529 sf. Absorption in sublease was 146,478 sf and particularly weak in Class B Space at 1,273 sf. Tenants added 495,138 sf of sublease space in the first quarter, up from 314,961 sf vacated last quarter. Denver s fossil fuels energy sector is on the upswing and petroleum tenants are moving into new office space. The largest was BP Lower 48 taking occupancy of 126,543 sf at 1700 Platte Street in the beginning of 2018. The proliferation of green energy companies in the Denver market is also supporting absorption, although they are requiring smaller spaces. Tenants like Invenergy LLC, which signed for 4,965 sf in January, are typical. Going forward, the petroleum energy industry is currently stable, with U.S. rig counts increasing 22% and crude oil prices up 22%, since first quarter 2017. Square Footage 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 1,311,110 1,276,747 1,612,544 437,285 551,733 543,199 Absorption & Deliveries 2,204,859 2,428,717 2,025,341 2,436,295 938,455 1,184,167 1,265,951 526,809 815,007 2011 2012 2013 2014 2015 2016 2017 Q1-18 Absorption Deliveries Vacancy 1,519,128 15.0% 14.0% 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% Vacancy Rate Avison Young Page 4
Denver Construction Approximately 202,000 sf of new construction broke ground in the first quarter and Denver s construction pipeline is 3.3 msf, with 43% preleased office tenants in the Denver market continue to make real estate decisions based on recruiting and retention, with an increased emphasis on improved amenities that are provided in new construction projects. The current development cycle represents the most construction to occur dating back to the mid-1980s. Seven buildings delivered in the first quarter, totaling nearly 1.5 msf with 65% preleased. Construction activity is projected to remain elevated in 2018, although the rate of new groundbreaking is expected to slow. 1Q18 Building Deliveries 1144 15th Street (670,000 sf) CBD INOVA Dry Creek 2 (222,070 sf) Inverness Riverview at 1700 Platte (210,000 sf) Platte River ATRIA (176,588 sf) Boulder Construction Timeline 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 Available 1Q17 2Q17 Preleased 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 Corporate owned Avison Young Page 5
Capital Markets Denver A Real Capital Analytics search states the average cap rate for office properties in the Denver Metro area to be around 6.8%. This is the second consecutive quarter with declining cap rates. The last time the average cap rates were this low was during the first quarter 2017. The average price per square foot has increased from the previous quarter to around $230 per square foot (psf ). The first quarter was also the second consecutive quarter with positive year-over-year (YOY) change in sales. This positive growth comes on the heels of five consecutive quarters of negative YOY sales. There were five building sales in the first quarter that dominated the headlines. or $477.99 psf, to Dallas based Lincoln Property Company. East of I-25, the Re/ Max HQ building was purchased for $115 million, or $491 psf. Equity Commonwealth, sold the building to KORE Investments, a Centennial, CO based company. Two other buildings sold for over $50 million dollars; Unico Properties sold 1660 Lincoln Street for $67.2 million, or $236.12 psf, and the Canadian Public REIT Artis purchased a 50% interest in 1700 Broadway for $51 million, or $258.77 psf. Through the first quarter, 55% of buyer types are institutional buyers, 27% are private buyers, 12% are cross-border buyers and the remaining 6% are user/ other buyer types, according to RCA. Denver is projected to remain in the midto late-stages of the expansion phase of the real estate cycle. Most recently, 1801 California Street had a partial sale from Brookfield Properties to Baltimore based PNC Realty Investors acquiring a 51% interest in the building for $285.6 million or $425 psf. This puts the building value at approximately $560 million. Prime West Companies sold One Belleview Station for $152 million, Avison Young Page 6
1Q2018 Activity 1144 15th Street was completed in the first quarter, the largest delivery in several years. The building, totaling 670,000 sf, is 81% leased, and major tenants include Chipotle, Gates Corporation and Optive Security. The largest office building that broke ground in the first quarter was 4100 Wynkoop Street, in the Platte River submarket. The office project will have 81,750 sf, is not preleased, and is being developed by Westfield Company, Inc. The Patrinely Group, LLC is still completing preparations to begin construction of Block 162, at California Street and 15th Street. The 606,500 sf Gensler designed tower should begin construction in 2018. AFL-CIO Building Investment purchased a 51% share of 1801 California Street in the CBD, for $286 million ($425 psf ), the largest single deal by volume. Two buildings, 1520 Market Street and 1321 15th Street, were in a portfolio sale and netted the highest price per square foot at $613.73. Trends to Watch Denver The price of oil was $60.37/bbl in January 2018, increasing to $65.55/bbl in March. Most economic sectors reported growth in the last 12 months with Information (7.1%), Mining, Logging and Construction (6.8%), Leisure and Hospitality (4.2%) and Education and Health Services (3.5%) leading the way. Median home prices are up by 9.1% from the previous year to $407,000. For more information, please contact: Joshua Manning Research Analyst 720.508.8107 joshua.manning@ 2018 Avison Young - Northern California, Ltd. All rights reserved. E. & O.E.: The information contained herein was obtained from sources which we deem reliable and, while thought to be correct, is not guaranteed by Avison Young. Avison Young Page 7
2018 Avison Young - Northern California, Ltd. All rights reserved. E. & O.E.: The information contained herein was obtained from sources which we deem reliable and, while thought to be correct, is not guaranteed by Avison Young. For more information, please contact: Joshua Manning Research Analyst 720.508.8107 joshua.manning@