Many commercial real estate observers had been pointing to June 30 as the day of reckoning in Denver, according to Kevin McCabe.
That was because June 30 marked the day that 1801 California would be re-introduced to the Denver market as a multi-tenant office building, explained McCabe, executive vice president of Newmark Knight Frank Frederick Ross, a large commercial real estate brokerage firm in downtown Denver.
“People wondered how our market could ever survive being flooded with such a large amount of vacant space.” McCabe said. Some feared that well more than half of the 1.3 million-square-foot office tower would hit the market at once.
“The answer is that we did it just fine, thank you very much,” McCabe said. “Fortunately, the space at 1801 California didn’t hit the market all at once – blocks of space were vacated almost every quarter from fourth quarter 2010 until now. The Denver office market took these blows and still absorbed 645,000 square feet year to date.”
At the half-way point of 2012, the office, industrial and retail sectors all posted solid performances with positive absorption, decreased vacancy, stable or increased rental rates and a few development projects underway.
The commercial market is linked to the economy, and Denver’s economy is recovering slowly but surely. In April, Denver’s unemployment rate fell to 7.9 percent and monthly job growth has been over 2 percent every month this year.
The stage is set for further growth in 2012, according to a Market Trends preview released today from Newmark Knight Frank Frederick Ross.
Denver’s investment market continued to rebound in the second quarter of 2012. In the quarter’s top office sale, the four-building Mountain View Corporate Center was purchased by Westfield Co. for $92 million, or $199 per square foot
“The total dollar value of office sales in just the first half of 2012 is approaching the total for all of 2011,” said Dave Tilton, executive managing director for Newmark Knight Frank Frederick Ross.
This year, he said, “is on track to be much better than 2011 because of increasing availability of equity and debt capital.
“In this period of low inflation, record low-interest rates and the Euro crisis, the U.S. commercial real estate market is a shining star in the world investment market,” Tilton continued.
“Denver continues to be one of the strongest secondary markets and is drawing institutional buyers in preference to the over-heated coastal markets. We will see highly financiable core assets commanding top dollar, distressed assets will sell for bargain prices and most ‘tweener’ assets will struggle or not trade at all.”
The Denver office market continued its steady recovery in the second quarter of 2012.
Quarterly net absorption was 250,000 square feet, bringing year-to-date absorption to 645,000 square feet, and vacancy decreased year-over-year to 17.5 percent from 19 percent.
Last year’s trend of a bifurcated recovery – strong in the Class A sector and flat in the Class B and C sectors – has been tempered in the first half of 2012 due mainly to the final rounds of vacancy at 1801 California in the Central Business District.
The Class A sector posted flat quarterly absorption of 27,000 square feet and year-to-date absorption of 162,000 square feet. The Class B enjoyed a strong quarter with absorption of 240,000 square feet, which brings year-to-date absorption to 428,000 square feet. The Southeast Suburban submarket posted the market’s strongest performance this quarter, with absorption of 180,000 square feet driven by Newmont Mining’s 33,000-square foot expansion into Fiddlers Green Center I and Wells Fargo Home Mortgage’s new 52,000-square-foot location at 9780 South Meridian Boulevard.
According to Austin Kane, associate director at Newmark Knight Frank Frederick Ross, the recovery in the Class A sector of the SES submarket is well established, and this solid activity is spreading to the Class B sector.
“Class A vacancy was over 20 percent at year-end 2009 and now it’s down to 13.99 percent,” Kane said. “The Class B vacancy is going to follow the same trend, albeit two years later than the Class A product. In the Meridian micromarket alone, vacancy was close to 3 percent a year ago and it’s decreased to 22.6 percent.” Kane added, “Due to increasing demand and limited supply, landlords are increasing asking rates.”
Median asking rates remained stable in most submarkets but increased in the Northwest and SES submarkets and in the LoDo micromarket of the CBD.
The development pipeline is starting to revive. DaVita’s 270,000-square-foot build-to-suit headquarters and Hines’ EOS at Interlocken, a 185,000-square-foot, LEED Gold, speculative project, are well under way and three build-to-suit projects broke ground this quarter.
Construction commenced on IMA Financial’s 108,000-square-foot $32 million headquarters in the Union Station redevelopment in the CBD, the TriZetto Group’s 180,000-square-foot headquarters in Meridian in the SES, and Trimble’s 125,000-square-foot Colorado campus in the Westmoor Business Park in the Northwest submarket.
John Gustafson, associate director of NKFFS, reports that confidence in Denver’s office market is high.
“Businesses have recovered from the crisis in confidence and after several years of one-to-two-year extensions as the norm, the five-year deal is back,” Gustafson said. “We are seeing all sizes of tenants; some are renewing, some are relocating, but deals are getting done.”
“Class A rates are on the upswing this year, but they still haven’t recovered to 2008 levels. So, flight to quality will continue to be a trend as long as Class A rates offer a good value relative to rates at the 2008 peak. ”
The industrial market continues its recovery, though at a faster pace in 2011. The second quarter of 2012 had solid absorption at 994,000 square feet, with the warehouse market absorption at 910,000 square feet and absorption for the R&D/Flex market at 84,000 square feet, continuing the trend from last quarter when the warehouse market far outperformed the R&D/Flex market. Rates also remained stable from the first quarter, with no significant change in any of the submarkets.
“The second quarter in the Central and East submarkets was brisk with activity,” said Tim D’Angelo, senior managing director at Newmark Knight Frank Frederick Ross.
“Several large blocks of prominent Class B vacant space were finally leased after years of vacancy” D’Angelo said. “The result of this activity was large positive absorption for the quarter that is starting to shrink the vacancy to historically low single digit numbers.”
With positive absorption first quarter, the industrial market has posted a total of 1.3 million square feet of absorption year-to-date, closing the second quarter with vacancy at 8.0 percent, down compared year-over-year with 2011. The large jump in absorption was mostly due to large individual warehouse expansions in the East, Northeast and West submarkets. The East warehouse submarket far outpaced the other submarkets, posting quarterly absorption at 334,000 square feet.
In addition to the increased activity, there are already several large move-ins that are expected to happen in the second half of 2012.
General Electric Solar has already leased 280,000 square feet at 19503 East 34th Drive, Building 20 at Majestic Commercenter and is expected to occupy the space in the fourth quarter. FedEx is also expected to fully occupy the entire 200,000-square-foot building at 20321-20431 East 35th Drive in July.
“This trend will continue into the fall,” Tim D’Angelo said, “when the lack of quality choices for tenants will bump rental rates and kick-start the next cycle of development.”
The Denver retail market expanded occupancy in the second quarter driven by solid growth in the grocery sector. A large-format 123,000-square-foot King Soopers MarketPlace opened in the Reunion neighborhood in Commerce City and five Walmart Neighborhood Markets debuted, back-fillling former Albertsons/Smart & Final stores.
This growth more than offset the closure of Colorado’s remaining Great Indoors in Lone Tree.
Vacancy decreased year-over year from 9.6% to 8.8%, and quarterly absorption was 302,000 square feet, bringing year-to-date absorption to 409,000 square feet. The retail market is well on track to outperform 2011 when absorption for entire year was a moderate 473,000 square feet. Median asking rates were flat in most submarkets.
According to Frank Griffin, managing director, activity in Denver’s retail market is very strong in well-located Class A centers.
“We’re seeing great interest and leasing activity in centers with good locations, favorable demographics and healthy anchors,” Griffin said. “These centers are attractive to both national and local retailers. On the flip side, older centers where anchors have gone dark are struggling.
“So, the entry of Walmart’s small-format grocery stores into the Denver market is a really positive development. These new anchors will revitalize their centers and attract new tenants that will benefit from synergy with a grocery store.”
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