Colorado Office Space Update: Denver’s Office Market Outperforms the Coasts
Colorado Office Space Update: Denver’s Office Market Outperforms the Coasts
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Forbes Magazine and CNBC both recently ranked Colorado as 5th in the nation for business. The state was also recognized by Forbes as number one for educated labor supply and as third-best city for future employment in oil and gas by CNBC. The Denver market has seen the most growth in the office market, but the Boulder and Colorado Springs office markets have also experienced growth and recovery, which is predicted to increase in the next year and beyond.
This forecasted growth represents an unusually good opportunity for investors to buy into the Denver market with prospects for increasing income over time. However, the opportunity to make advantageous deals can be frustrated by traditional lenders such as banks with burdensome red tape. Banks are still under intense pressure by the FDIC and OCC to stay within narrow and unrealistic regulatory guidelines. These guidelines may include inflexible rules concerning debt service coverage, requirement for unrealistic amounts of “liquidity,” and fixed rules on occupancy levels which don’t fit certain properties. Opportunity may be knocking but many banks can’t hear it.
If an investor finds a good property but is not able to find the right bank financing the option to use an experienced Colorado hard money lender (such as Montegra Capital) may provide the opportunity to close on the property using Montegra’s flexible bridge financing program. Then, by value added management steps, only possible if the investor owns the property, the increase in market value will allow re-financing with traditional lenders once the property has been repositioned.
Denver
As a whole, Denver continues to be seen as a promising market for commercial real estate investments. The Denver metro area has seen slightly better yields on real estate investments than coastal and gateway cities, a steadily strengthening housing market, and an influx of educated employees moving to Denver to find jobs in a variety of fields, including the oil and gas, technology, and health care industries.
Office assets have experienced rising values in the Denver metro area thanks to historically low interest rates, higher yields than other investment options, lower supply than demand, and economic improvements such as lower unemployment rates. The office market here has had 15 consecutive quarters of positive absorption and vacancy rates have dropped from 18.9 percent in 2009 to 13.3 percent in 2013. As vacancies have decreased, Class A rents have increased, going from a lease rate of $22.73 per square foot gross (psfg) in 2009 to $26.19 psfg in 2013. The strongest Denver submarket is still the Downtown area which is currently experiencing only 10.6 percent vacancy rates and averaging a Class A lease rate of $31.39 psfg.
The volume of money generated by the sales of office properties has also seen a steady increase since 2009, when the market bottomed out at $770 million. In 2012, dollar volume was back up to $1.6 billion and the year-to-date volume for 2013 is already at $1.02 billion. Denver is seeing capital demand for both downtown and suburban assets as investors seek higher yields here than they can find in other urban markets. The office properties which are highest in demand are those within walking distance of an RTD light rail station.
Denver Office Market by the Numbers
Denver Submarkets Office Market Rates for 4th Quarter, 2012
| Submarket | Available (sq. ft.) | Occupied (sq. ft.) | Vacancy Rate | Avg. Lease Rate |
| CBD |
26,019,000 |
23,000,800 |
11.6% |
$27.63 |
| Midtown |
3,229,000 |
2,725,300 |
15.6% |
$19.20 |
| Northeast |
2,112,000 |
1,524,900 |
27.8% |
$17.58 |
| Northwest |
7,749,000 |
6,114,000 |
21.1% |
$20.41 |
| West Central |
6,095,000 |
5,052,800 |
17.1% |
$18.70 |
| Southeast |
9,769,000 |
7,688,200 |
21.3% |
$18.27 |
| Southeast Suburban |
29,358,000 |
23,104,700 |
21.3% |
$20.09 |
| Southwest |
4,806,000 |
3,806,400 |
20.8% |
$18.73 |
| Totals/Averages |
89,137,000 |
73,017,100 |
18.1% |
$21.86 |
Denver Market (includes all submarkets) Historical & Projected Office Market Rates
| Year | Available (sq. ft.) | Occupied (sq. ft.) | Vacancy Rate | Avg. Lease Rate |
| 2009 |
88,198,000 |
70,462,000 |
20.1% |
$21.60 |
| 2010 |
88,551,000 |
70,572,000 |
20.3% |
$21.22 |
| 2011 |
88,939,000 |
71,489,000 |
19.6% |
$21.46 |
| 2012 |
89,137,000 |
73,017,000 |
18.1% |
$21.86 |
| 2013* |
89,137,000 |
73,543,000 |
17.5% |
$22.27 |
| 2014* |
89,774,000 |
74,448,000 |
17.1% |
$22.89 |
| 2015* |
90,380,000 |
75,488,000 |
16.5% |
$23.64 |
| 2016* |
91,013,000 |
76,934,000 |
15.5% |
$24.49 |
| 2017* |
91,874,000 |
78,864,000 |
14.2% |
$25.55 |
*Forecast
Source: REIS Report, 4th Quarter, 2012
This blog was written by Bob Amter, President of Montegra Capital Resources, LTD., a Colorado hard money lender. [google_authorship] has been in the private capital lending business for 41 consecutive years.