The region is creating transformative projects that are substantially elevating the desirability of its office market five years into Denver’s strong development cycle. This trend — strongest in Denver’s Central Business District (CBD) and Southeast Suburban (SES) submarkets — is attracting a new breed of tenants to the Denver landscape.
Jamie Gard, Newmark Grubb Knight Frank
John Jugl Jr., Newmark Grubb Knight Frank
About 1.4 million square feet of Class A office space has been delivered in Denver’s CBD since 2012, with an equal amount under construction. Deliveries in the previous development cycles (1999 to2003 and 2007 to 2010) were on a smaller scale, delivering about 800,000 square feet and more than 1.5 million square feet, respectively. During the 2007 to 2010 development cycle, which had the unfortunate timing of commencing right before the financial crisis, new product struggled with pre-leasing. It took an average of 10 quarters to lease up to stabilized occupancy at 85 percent. Only one project, 1800 Larimer Street, was more than 85 percent leased in the first year.
In contrast, the current cycle is much different and much stronger. The amount of square footage being added to the CBD outweighs the previous other two cycles. Leasing activity is white hot as well, with new product averaging 60 percent occupied upon delivery.
New developments are not only transforming Denver’s skyline, but it’s also transforming how tenants and investors view the Mile High City. National and regional firms, high-credit tenants and premium corporations are taking notice as higher-quality real estate that is architecturally big in scale, with larger floorplates, high-end materials and world-class amenities is added to the region. Examples include Prologis, Antero, DaVita and Liberty Global, all of which have recently relocated to and/or added square footage in Downtown Denver.
This class of tenant is willing to pay a premium — up to 20 percent — for the identity and prestige of ideally located new construction, while still finding Denver a reasonably priced market compared to coastal markets. New construction rents typically put upward pressure on best-of-the-best rents, a trend most pronounced in Denver’s CBD and SES submarkets. In the SES, new construction rents are 28 percent higher on average than existing product. This is driven by the sheer size of the market, along with the fact that the average age of existing stock is more than 40 years old. In the CBD, the spread between new construction and best-of-the-best isn’t as pronounced at 14 percent. However, many owners are investing substantial dollars into building improvements to upgrade amenity packages and attract tenants that may otherwise look to new construction.
This development cycle has forever transformed Denver’s office market and our reputation as a world-class city, validating the interest of national and international investors and tenants. Quality tenants create investment stability for owners, and investors increasingly see Denver as a favorable income market with a diverse mix of premium tenants and stable income streams. Expect strong leasing and investor interest in 2017 and beyond.
— By John Jugl Jr., Vice Chairman, Western Region Capital Markets, Newmark Grubb Knight Frank, and Jamie Gard, Executive Managing Director, Newmark Grubb Knight Frank. This article first appeared in the May 2017 issue of Western Real Estate Business magazine.