Regions West | Denver
Sept 10, 2007
By: Dees Stribling, Contributing Correspondent
Denver might rightly be called the Comeback Kid among U.S. real estate markets, and that moniker applies especially to the once forlorn office sector. This time around, though, the city has shifted for the better fundamentally, according to some observers. "This recovery has been a slow, steady rebound for Denver," said Lane Hamilton, district manager for KeyBank Real Estate Capital. "Previous cycles had more of a boom/bust character, but this one seems more sustainable because the economy is becoming more broad based."
Energy and high technology are still pivotal for the local economy (see "The Working City" below), but other industries like bioscience/biotechnology are on the rise, spurred by the redevelopment of the 577-acre former Fitzsimons Army Medical Center in Aurora into the Fitzsimons Life Science District. More than $1.8 billion in new capital is projected to be invested there through 2010, and another $2.1 billion is anticipated thereafter. Forest City Enterprises Inc.'s Colorado Bioscience Park Aurora will represent 3.5 million square feet of office and research-and-development space there, according to the master plan, which was finalized earlier this year.
Office projects totaling 1.4 million square feet are also under construction in the Denver metropolitan area and scheduled for delivery by 2008. Downtown has two large projects in the pipeline: Hines' 285,000-square-foot 1515 Wynkoop—anchored by Van Gilder Insurance Corp.—and Opus Northwest Corp.'s 210,000-square-foot 1400 Wewatta.
Following the recent completion of a light-rail line to the southeast, those suburbs in particular are seeing quite a bit of this development, such as Westfield Development Co.'s 150,000-square-foot One Lincoln Station—at Interstate 25 and East Lincoln Avenue—and Colliers, Bennett & Kahnweiler Inc.'s 305,000-square-foot, LEED-certified Palazzo Verdi in the Greenwood Plaza Office Park. "The region is benefiting from a sustainable and competitive economic environment," noted Tom Clark, executive vice president for the Metro Denver Economic Development Corp.
Overall, however, office development is nothing like it was in the early part of the decade, when buildings that were planned during the tech boom were going up. More than 4 million square feet came online in 2001 alone.
Reasonable Expansion
Spurring the recent wave of office development are the city's strong and improving fundamentals. Overall vacancy has been heading consistently downward, from 20 percent for the second quarter of 2005 to 15.8 percent a year later and to 14.4 percent as of the end of the second quarter of 2007, according to a recent Cushman & Wakefield Inc. report. Of course, certain submarkets are stronger than others. The 26 square blocks of Lower Downtown, or LoDo, home of Coors Field, are best known as an entertainment district, but they also form an office district that sits adjacent to Denver's central business district. Though small compared to the CBD proper—LoDo holds about 3.2 million square feet, compared with the CBD's 21.9 million square feet—its vacancy is piping hot.
Vacancies in the suburbs have also fallen lately. In some cases, it was a long time coming. U.S. Highway 36 between Denver and Boulder, the region's tech corridor, is experiencing something of a revival. "In the late 1990s, you couldn't build space fast enough in that submarket, and then the bottom fell through," Hamilton said. "But some of those tech firms survived the lean years of the early 2000s, and now they're expanding again quietly, at a more rational pace." Earlier this year, in fact, computer-systems company Crosswalk Inc. signed a 34,100-square-foot lease at 7237 Church Ranch Blvd.
Buyer Preference
Denver is also attracting investors. The volume of office investment sales topped $6 billion in 2006, a record for the metropolitan area. And if the first half of 2007 is any indication, the volume might reach as high this year as investors work their way down from the trophy assets they have been snapping up.
This year's office buys were headlined by The Blackstone Group L.P.'s flipping of five Downtown Denver office buildings it acquired in its purchase of Equity Office Properties Trust. Callahan Capital Partners L.L.C.—which is headed by Tim Callahan, the former president of Equity Office—bought the 2.7 million-square-foot portfolio for $770 million. When the deal closed this spring, it was widely labeled as three times the size of any office investment in the market.
But the Blackstone-Callahan flip was not the only major office deal of late. Early in the year, Means Knaus Partners L.P. bought the 572,000-square-foot Park Center at 1515 Arapahoe St. from Beacon Capital Partners L.L.C. for $140 million, and Amerimar Realty recently sold the 794,000-square-foot Denver Place to LBA Realty for $200 million.
Investors are reaching into the suburban markets, too. San Diego-based Equastone recently acquired a four-building, 239,500-square-foot portfolio of office/RD space in the Interlocken Business Park in Northwest Denver. Located along Highway 36, the park also includes corporate campuses for Sun Microsystems Inc. and Level 3 Communications Inc. "The Interlocken portfolio represents a value-added investment because it's located in one of the fastest-recovering office submarkets in Colorado, with the added bonus of being about 10 minutes from Downtown Denver," said Jeff Schindler, chief investment officer for Equastone.
The question for office investors of all stripes, however, is whether rents in the market will increase enough to justify the cost of such recent acquisitions. Thus far, asking rents have increased significantly across the metropolitan area (see the tables above), according to Cushman & Wakefield.
"We've seen a healthy increase in rents because of the reason you'd expect: supply not keeping up with demand," Hamilton said. "If the economy continues its steady growth, we should see additional increases. Large blocks of Class A space virtually don't exist in Downtown Denver."
By: Dees Stribling, Contributing Correspondent
Denver might rightly be called the Comeback Kid among U.S. real estate markets, and that moniker applies especially to the once forlorn office sector. This time around, though, the city has shifted for the better fundamentally, according to some observers. "This recovery has been a slow, steady rebound for Denver," said Lane Hamilton, district manager for KeyBank Real Estate Capital. "Previous cycles had more of a boom/bust character, but this one seems more sustainable because the economy is becoming more broad based."
Energy and high technology are still pivotal for the local economy (see "The Working City" below), but other industries like bioscience/biotechnology are on the rise, spurred by the redevelopment of the 577-acre former Fitzsimons Army Medical Center in Aurora into the Fitzsimons Life Science District. More than $1.8 billion in new capital is projected to be invested there through 2010, and another $2.1 billion is anticipated thereafter. Forest City Enterprises Inc.'s Colorado Bioscience Park Aurora will represent 3.5 million square feet of office and research-and-development space there, according to the master plan, which was finalized earlier this year.
Office projects totaling 1.4 million square feet are also under construction in the Denver metropolitan area and scheduled for delivery by 2008. Downtown has two large projects in the pipeline: Hines' 285,000-square-foot 1515 Wynkoop—anchored by Van Gilder Insurance Corp.—and Opus Northwest Corp.'s 210,000-square-foot 1400 Wewatta.
Following the recent completion of a light-rail line to the southeast, those suburbs in particular are seeing quite a bit of this development, such as Westfield Development Co.'s 150,000-square-foot One Lincoln Station—at Interstate 25 and East Lincoln Avenue—and Colliers, Bennett & Kahnweiler Inc.'s 305,000-square-foot, LEED-certified Palazzo Verdi in the Greenwood Plaza Office Park. "The region is benefiting from a sustainable and competitive economic environment," noted Tom Clark, executive vice president for the Metro Denver Economic Development Corp.
Overall, however, office development is nothing like it was in the early part of the decade, when buildings that were planned during the tech boom were going up. More than 4 million square feet came online in 2001 alone.
Reasonable Expansion
Spurring the recent wave of office development are the city's strong and improving fundamentals. Overall vacancy has been heading consistently downward, from 20 percent for the second quarter of 2005 to 15.8 percent a year later and to 14.4 percent as of the end of the second quarter of 2007, according to a recent Cushman & Wakefield Inc. report. Of course, certain submarkets are stronger than others. The 26 square blocks of Lower Downtown, or LoDo, home of Coors Field, are best known as an entertainment district, but they also form an office district that sits adjacent to Denver's central business district. Though small compared to the CBD proper—LoDo holds about 3.2 million square feet, compared with the CBD's 21.9 million square feet—its vacancy is piping hot.
Vacancies in the suburbs have also fallen lately. In some cases, it was a long time coming. U.S. Highway 36 between Denver and Boulder, the region's tech corridor, is experiencing something of a revival. "In the late 1990s, you couldn't build space fast enough in that submarket, and then the bottom fell through," Hamilton said. "But some of those tech firms survived the lean years of the early 2000s, and now they're expanding again quietly, at a more rational pace." Earlier this year, in fact, computer-systems company Crosswalk Inc. signed a 34,100-square-foot lease at 7237 Church Ranch Blvd.
Buyer Preference
Denver is also attracting investors. The volume of office investment sales topped $6 billion in 2006, a record for the metropolitan area. And if the first half of 2007 is any indication, the volume might reach as high this year as investors work their way down from the trophy assets they have been snapping up.
This year's office buys were headlined by The Blackstone Group L.P.'s flipping of five Downtown Denver office buildings it acquired in its purchase of Equity Office Properties Trust. Callahan Capital Partners L.L.C.—which is headed by Tim Callahan, the former president of Equity Office—bought the 2.7 million-square-foot portfolio for $770 million. When the deal closed this spring, it was widely labeled as three times the size of any office investment in the market.
But the Blackstone-Callahan flip was not the only major office deal of late. Early in the year, Means Knaus Partners L.P. bought the 572,000-square-foot Park Center at 1515 Arapahoe St. from Beacon Capital Partners L.L.C. for $140 million, and Amerimar Realty recently sold the 794,000-square-foot Denver Place to LBA Realty for $200 million.
Investors are reaching into the suburban markets, too. San Diego-based Equastone recently acquired a four-building, 239,500-square-foot portfolio of office/RD space in the Interlocken Business Park in Northwest Denver. Located along Highway 36, the park also includes corporate campuses for Sun Microsystems Inc. and Level 3 Communications Inc. "The Interlocken portfolio represents a value-added investment because it's located in one of the fastest-recovering office submarkets in Colorado, with the added bonus of being about 10 minutes from Downtown Denver," said Jeff Schindler, chief investment officer for Equastone.
The question for office investors of all stripes, however, is whether rents in the market will increase enough to justify the cost of such recent acquisitions. Thus far, asking rents have increased significantly across the metropolitan area (see the tables above), according to Cushman & Wakefield.
"We've seen a healthy increase in rents because of the reason you'd expect: supply not keeping up with demand," Hamilton said. "If the economy continues its steady growth, we should see additional increases. Large blocks of Class A space virtually don't exist in Downtown Denver."
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