Denver Market Outlook


by Pete Staab
Newmark Grubb Knight Frank

2015 Caps Six-Year Expansion Run

In 2015, the Denver office market continued a six-year trend of solid positive net absorption, the longest run since the 1990s. During this extended period of expansion, vacancy fell from 20.0% to stabilize at 14.2%, total net absorption topped 7.8 million square feet, and rental rates in core submarkets launched a trajectory which achieved historical highs.

However, the market did come up against some headwinds during 2015. Closures and downsizing in the oil and gas sector accounted for more than 570,000 square feet of negative absorption in the Central Business District (CBD) submarket. Despite concerns, the CBD’s strength and diversity insulated it against catastrophic losses, and the submarket finished the year flat. The Southeast Suburban (SES) submarket was challenged by corporate downsizings but still ended the year in the black. All the other submarkets, except the Southwest, logged solid positive absorption led by the Midtown and Northwest submarkets, with respective full-year absorption of 279,567 square feet and 272,712 square feet. Growth in Midtown was driven by the delivery of strongly pre-leased new projects in Cherry Creek, while organic growth, most notably by SCL Health, accounted for the Northwest submarket’s strong performance.

Supply Line

Denver’s strong economy and market fundamentals have supported a development window for the past several years, and speculative development returned in 2015. As of year-end, 13 office projects, totaling 2.5 million square feet, are under construction or renovation. This represents the largest development pipeline since 2006. Although the majority of projects in the construction pipeline are speculative, developers are still proceeding in a controlled and disciplined manner. Current new projects are either heavily pre-leased, or, if speculative, confined to high-demand, niche markets and TOD locations. Ten buildings, including two owner/user headquarters, were delivered in 2015.

Sales

In the fourth quarter of 2015, sales totaled 3.7 million square feet valued at $719.2 million, which propelled Denver’s annual total office sales to 14.0 million square feet totaling $2.6 billion. This robust performance outpaced 2014’s total of 14.3 million square feet valued at $2.3 billion. Denver is now a top-tier market, attracting national and international capital. The quarter’s top sale was the purchase of the new CoBank headquarters building by a South Korean investor for $113.5 million, or $413/SF.

“The office investment market in 2015 saw record transaction volume driven by liquidity, low interest rates and intense competition among a crowd of new investors vying for investment opportunities. The CBD was the hot submarket with red hot neighborhoods like LoDo, the Central Platte Valley and RiNo seeing the most activity due to rapidly rising rental rates driven by new office, residential and retail construction,” observed Dave Tilton, executive managing director. “2016 will see continued liquidity due to even lower interest rates and Denver’s popularity among commercial real estate investors, both institutional and private. However, the SES submarket will see more activity in 2016 with three new office buildings under construction and upward pressure on Class A rental rates with investors betting on Denver’s prospects for overall growth.”

Outlook

The future looks bright for Denver’s economy and office market: The University of Colorado’s Leeds School of Business forecasts that Colorado will gain 65,100 jobs and 95,000 residents in 2016. The professional and business services sector, one of the top office-occupying industry sectors, is projected to grow by a robust 4.3% in 2016, adding 15,000 jobs. Denver was ranked sixth among U.S. markets to watch in 2016 in the prestigious Emerging Trends in Real Estate report, which cited its quality of life, culture, growing concentration of technology firms, strong local economy and investment in public and private infrastructure, all of which will foster sustainable growth. Newmark Grubb Knight Frank Research forecasts Denver’s momentum will continue into 2016.

  • Balanced market with strong absorption in secondary submarkets
  • Rental rate increases
  • Transit-Oriented Development (TOD) in high demand, by both employers and employees, as additional FasTracks transit stations open
  • Co-working/creative space in demand as Millennials now outnumber Baby Boomers in the workforce
  • 2015 property tax assessments hitting in 2016 resulting in double-digit increases in tax expenses
  • Additional company downsizing as oil prices remain low and hedges expire, but effect will be muted due to CBD’s diverse tenant mix
  • Population gains, continued job creation, albeit at slower rate than the previous three years, and falling unemployment driving continued expansion in 2016

 

Denver Market Outlook Staab Pete 200x300

Newmark Grubb Knight Frank’s (NGKF) Pete Staab is a senior managing director at the Denver office with more than 19 years’ experience specializing in office leasing and sales, landlord and tenant representation, new construction development and corporate real estate services. Mr. Staab is responsible for approximately 2 million square feet of commercial office property including leasing responsibilities for 689,649 square feet in two (2) Class A, KBS-owned office properties in the metropolitan Denver area.

NGKF is one of the world’s leading commercial real estate advisory firms providing a full integrated platform of services, including: Leasing Advisory ♦ Global Corporate Services ♦ Investment Sales and Capital Markets ♦ Consulting ♦ Program and Project Management ♦ Property and Facilities Management ♦ Valuation and Advisory Services.

 

This post may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended including statements relating to KBS’s ability to invest in and manage a diverse portfolio, and the performance of (Insert specific Fund name). These statements are subject to known and unknown risks, uncertainties and other factors which may cause KBS’s and/or (Insert specific Fund name) actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.