Denver might not be the most talked-about market in the U.S. commercial real estate industry, but there is a lot happening there right now. This was evidenced at the recent Denver State of Market meeting held by Bisnow. Our own Jeff Coyne, a business development director at GRS Group, is based in the area and moderated a panel on the Denver office sector. He explained why this market is healthy and attractive to investors. In fact, he said it’s so attractive that industry observers soon expect commercial real estate development to start taking off in a big way. He took some time to speak with us recently about the conference and the health of the local market.
What were your feelings about the Denver commercial real estate market after attending this conference?
The market in Denver is great, regardless of where you look. Medical office buildings are doing well. Multifamily is doing great. Industrial is on fire. Office is setting records. There aren’t many sectors where you hear anything but good news.
Are firms taking notice nationally of what’s happening in the area?
People are definitely taking notice nationally. Investment capital is flowing into Denver, both from large domestic investors, as well as international. Some high profile office properties have traded, over the last couple of months, to foreign companies. So Denver is certainly being looked at as an top tier investment market, more so than it probably has been in a very long time.
What is it about the economy there that’s driving this success?
Economically, the news in Denver is good. There is a very well-diversified economic base. You’ve got oil and gas, technology, healthcare. A lot of the drivers of the national economy are well represented here in Denver. You’ve also got government, especially in Colorado Springs. There’s a highly educated workforce and some really good demographic trends. There is an in-migration of youth; ages 24 to 32 – Denver is the number one market in the nation. That just adds to the base of employees that clients are looking for when they consider where to have their businesses. Denver is also just one of six markets nationally that has met and surpassed its job levels pre recession. Finally, Denver is ranked in the top 10 nationally for places to start a business.
It’s not a stretch to say Denver can almost be considered first tier and in line with some of the coastal markets for investment capital. Granted, it’s not New York, Los Angeles or San Francisco. But it is quickly rising up the list of places that people go when they can’t be, or don’t want to pay to be, in those markets.
So tell us about your office panel. What were some of the key points that people hit on?
The conversation in Denver starts with the Union Station revitalization. That’s the main transit hub downtown. The entire area is getting revitalized, and it is bringing the entire area up around it. There is new office, hotels and multifamily coming online. Cranes are in the air and construction is booming in and around the area. It’s because of some really smart infrastructure plays being made by the City of Denver. They have a light-rail system that is coming online. It’s going to be able to get you from the airport, which is out in the boondocks, to downtown in about 25 minutes. It’s a direct connection from downtown to DIA (Denver International Airport).
One of our panelists, David Sternberg who is with Brookfield Office Properties, said they bought 1801 California, which is about eight blocks away [from Union Station]. And they acquired it at roughly 70 percent vacancy because they believe that the Union Station project and the infrastructure development going on will raise the prospects of all office properties around this area.
Who are the strong tenants in the office sector right now?
It’s pretty diverse but you see a lot of oil and gas, tech and healthcare.. You’ve got legal and financial services downtown as well. One of the things that we did talk about are the changes in the utilization of office. CBRE, notably, is doing something called “free addressing,” where no one has a physical desk. You go in, plug in, and you can go anywhere in the country and sit down and begin working. That’s really on the forefront of where office might go.
We talked a bit about collaborative co-officing, knocking out the perimeter and corner offices, and instead, everyone works together. Then you have private rooms for phone calls and conferences. It’s not the traditional system of executives around the perimeter, looking out the windows, while everyone else is in the middle of the bullpen. Now the C-level executives are right in the mix with the rank and file. And that is taking hold with the corporate tenants, it’s not just a tech thing. Which makes me think it’s probably here to stay.
What did you discuss about the financing picture?
We had three panelists that have three different approaches. The concerns for them tend to be the potential increase in interest rates. They are seeing cap-rate compression across the board, but that is to be expected in a hot market. We also talked about how construction financing is back, and the terms seem to be good. Then there’s the question of buy versus build, which is a very block-by-block decision.
We did talk about spec office, and the consensus was that spec office is back in Denver, especially around the Union Station area of downtown.
That’s unusual, isn’t it, compared to other markets?
It’s very unusual. With Brookfield, you could even make the argument that their purchase of the 70-percent vacant 1801 California was a spec office play. There are people who are developing now with plans to develop spec. That is very market specific, and you’re not going to find it in a lot of markets.
How is leasing going in the office sector?
Denver is seeing some of the highest average lease rates ever. Tenant leasing is up, and vacancy is down around 11 percent. And there’s argument, some say, that there is room to grow. Developers are all betting that it’s a sustainable market.
Are there any downsides you discussed?
Overbuilding. Can the market get so flooded with capital that there is building past levels that the market can sustain? There is concern about where the jobs are going to come from to fill these buildings as well. Tax implications are also a big concern, especially in downtown Denver.
Was anything else a hot-button issue on your panel?
One of the things that everyone agreed on is that they’re going to be interested to see what’s going to happen with parking. How will the old parking ratios be affected by downtown mass transit? Are the people of Colorado really going to adopt it and ride it? Are we looking at a lower car footprint downtown, or is everyone still want to going to want to drive in? The proof is going to be evident when the light rail comes online, and we’ll see if it’s like a New York subway system or the BART system in the Bay Area where people really use it. If not, it will be interesting to see what the implications will be with everyone driving downtown and circling for parking that may not be available.
What is GRS Group doing in Denver?
We’re very active in all property types, including office. We’re happy to provide due diligence services in engineering, environmental, survey and appraisal, zoning, title and construction analysis and review. It’s been a great year so far here in Denver, and I have no reason to doubt it will continue through the end of 2014.