WESTERN SNAPSHOT, OCTOBER 2008

Denver Office Market

Crane

National economic conditions continue to influence the Denver office market, particularly the actions of tenants and developers who are adopting a more cautious approach to deals and projects. However, local economists are cautiously optimistic that the Denver market will ride the downturn smoothly compared to other tier one and two cities. Denver’s population surge and its robust energy sector is the key to its resilience.

Metro Denver ended the first half of the year with slightly increased vacancies compared with the same time last year. The central business district (CBD) experienced the greatest increase in vacancy among the submarkets due to the delivery of 1001 17th Street, which added nearly 500,000 square feet of vacant space. Other significant vacancies resulted from large tenants, like the IRS, consolidating space to achieve greater efficiencies.

Development remains steady in three of metro Denver’s largest submarkets — the CBD, Southeast Suburban and Northwest. With 2.7 million square feet of projects under construction and 13.1 million square feet planned, developers have been vigilant in requiring generous prelease figures before breaking ground.

The CBD currently has the most projects underway as well as the largest amount of planned development in the pipeline. At mid-year, the CBD had 1.6 million square feet under construction, with roughly 5.8 million square feet of planned development. Miller Global’s redevelopment of 1001 17th Street (645,576 square feet) delivered during the second quarter, with Quiznos’ more than 91,000-square-foot headquarters as an anchor tenant.

A wide array of developers are currently involved in projects in Denver’s metro. Opus Northwest Development has two projects in Denver’s LoDo district that are scheduled to deliver by year’s end. Crestone Capital Partners, in a joint venture with GE Capital, purchased both buildings from Opus in January for approximately $112.5 million ($381 per square foot).

Shea Property Group continues to be one of the dominant players in the Southeast Suburban submarket. Currently under construction and set to deliver in third quarter is Shea’s Maroon V, the 88,584-square-foot office building located at 9540 S. Maroon Circle. Also, the 400,000-square-foot Village Center Station II and III are in the pipeline located at 6360-6380 S. Fiddler’s Green Circle. Add to these the eight-building project at Meridian Boulevard and E-470, as well as Blue Pointe in Highlands Ranch.

Tenant activity remained steady during the first half of the year, with the majority of large transactions tied to new developments. Xcel energy leased approximately 330,000 square feet at 1800 Larimer Street, a new development in the CBD that will deliver in second quarter 2010. Newmont Mining leased 186,000 square feet at Palazzo Verdi, which is slated for delivery at year’s end. Qwest Media leased 140,000 square feet at One Lincoln Station, due for completion in late 2008/early 2009 in the Southeast Suburban area.

During the second quarter, metro Denver began to attract new capital interests, including Schnitzer West, a Seattle-based investment group whose first assets in Denver are 44 Cook Street (127,174 square feet) and 55 Madison Street (137,176 square feet); Schnitzer purchased the two properties from Morgan Stanley Crescent in June for $199 per square foot.

Other large investors remain active. In April, USAA purchased the Denver Financial Center at 1773 Sherman Street (Tower I – 340,842 square feet, Tower II – 94,800 square feet) from Massachusetts Mutual Life for $84 million ($193 per square foot). In June, KBS Realty Advisors purchased the 130,652-square-foot Citadel at 3200 Cherry Creek Drive South from Morgan Stanley Crescent for $31.8 million ($243 per square foot). The newly developed 185,920-square-foot Signature Centre at 14143 Denver West Parkway was purchased by Real Estate Capital Partners from Aardex Development for $46 million ($247 per square foot).

Despite a decline in momentum in the past 3 years, capital markets have remained above average in Denver. Expect submarket activity to increase during the final quarter as cautious decision-making seen at the beginning of the year subsides. In addition, expect a moderate absorption rate and a slight increase in vacancy rates, owing to new supply and consolidation. However, don’t look for an up-tick in rental rates; in fact, the CBD and Southeast Suburban submarkets will likely continue to see an increase in concessions.

Michael Crane is senior vice president of agency leasing at Jones Lang LaSalle in Denver.

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