Displaying items by tag: office space
Reviewing the current marketplace for commercial property in the Greater Denver region is a tale of two sectors. The data for each of the two primary segments, industrial and office, matches the narrative we’re all familiar with regarding the relative impact of the COVID pandemic on these two market segments and the status of the financial recovery in each.
On one hand, the manufacture and distribution of consumer goods didn’t let up in 2020 or YTD 2021, and these facilities today are continuing to try to catch up with pent-up demand. Significant increases in industrial real estate inventory and square feet under construction, though, have helped limit the increases in rent and sales prices. Without this infusion of new space, those numbers would likely be even higher.
In contrast, many companies closed their offices or dramatically reduced employee office presence 2020 and 2021 – a situation that will continue for the near future and possibly longer. This is no doubt adding to the softening trends in office real estate rent growth and vacancy rates. In the next six months, companies will be making some hard decisions about bringing employees back to the office that could affect this market in 2022 and 2023.
The industrial sector real estate market remained relatively strong throughout the last 18 months, thanks in large part to the distribution sub-sector.
This slower but sure growth is reflected in the 3.3% rent increase observed over the last 12 months, back up to Q2 of 2020 levels, but well below the 5-6% range we saw in the prior seven years – and which we’ll likely see again shortly.
The other data that jumps out here is the $153 sale price per sq. ft., an all-time high after a relatively large jump this quarter. It’s now at a level where we expect it to remain for the next 12 months. It will begin to creep up further after that as the recent expansion in surplus inventory is absorbed by industrial tenants and owner-occupants.
The office building investment market may take several years to recover from the COVID pandemic. Tenants will be at an advantage when negotiating economic terms for a new lease or office lease renewal.
Annual rental rates are down 1% as of this quarter. CoStar’s analysts predict these will remain in the red, at that level and lower, until breaking through into positive territory in Q1 of 2023. Rents won’t reach 2019 Q4 levels ($20.46/sq. ft.) until Q4 of 2024 by our calculations. In the face of this uncertainty, market cap rates will likely remain steady at 7.1%.
Another trend we’re watching closely is the office vacancy rate. This crept into double-digit territory in Q1 of 2020 and continued to rise slowly but steadily in the past year. Now standing at 14.3% across Denver-metro, the vacancy rate is expected to continue to climb and top out at around 17.5% in 2024.
If you’d like to dig deeper into this data or if you have questions about what all of this might mean for your commercial real estate investment plans or your tenancy arrangements, please contact us
For most companies, it’s challenging to find a suitable office location. The available spaces can be too small, too expensive, or too far away for your needs. And sadly, only a few tenants receive the representation they need to not only save time but to save money too. Office tenant representation can help you worry less about finding a suitable space and instead focus more on the daily operations of your business so things continue to run smoothly.
Relocation can be a stressful time for business owners. There are a lot of unknowns and risk can be high if you don’t know what you’re doing. Fountainhead Commercial can help.
A regional law firm outgrew its initial space within the first 12 months of the lease term and desired to quadruple the size of its Denver office.
Tour the marketplace to create the required leverage to enable the client to expand within their current building, terminate their existing lease (with cost-savings), and relocate to a new space.
Justin Rayburn, tenant representative, successfully created the required leverage that allowed the client to expand within their current space, which generated an 11% savings on rent and tenant improvements (over $135,000 in value), terminate their existing lease obligation (a savings of approximately $125,000), and relocate to a new space that was designed specifically for their use.
If you’re interested in relocating and reducing your rent, reach out to us at Fountainhead Commercial. We’ll do the hard work for you so you can focus on other areas of business.
In some cases, clients call upon a seller representative because their business is booming and they need to expand operations. In other cases, clients find themselves in a bind due to the negative changes in the economy and require our expertise to mitigate the downside exposure and investment risk.
The latter was the case for the client, who owned and intended to occupy an office property. The downtown Denver, 8-story, multi-tenant office building was purchased with the intention of occupying 50 percent of the usable space, however as negative economic conditions persisted, this goal proved impossible. The impact on the client's portfolio necessitated the disposition of the 110,000 square-foot property. The client engaged Lowrey Burnett, a Certified Commercial Investment Member (CCIM), to quickly identify a buyer for the property at $4.8 million.
Despite the headwinds presented by the economic conditions, there were additional hurdles that needed to be addressed in order to sell this property in a timely manner. This particular property was situated on a ground lease with approximately 40 years remaining. In addition, there was an upcoming increase on the ground rent payment and the land the property was situated upon was owned by 3 different parties.
To further complicate the situation, the property had significant deferred maintenance and functional obsolescence that required any future buyer to invest over $10 million, in addition to the purchase price, in capital expenditures to upgrade the HVAC, plumbing, elevators, electrical, structure, and more.
The property's negative attributes didn't stop there, unfortunately. Sitting right in the heart of downtown Denver, there was zero parking associated with the property. Last, but not least, the multi-tenant office building was only 15 percent leased at the time of disposition.
Despite all the challenges, Burnett was not deterred. With the right vision from the right buyer, this downtown Denver office building could become a profitable investment.
Burnett, a leading seller's representative, marketed the commercial property to local, regional, and national investor pools. An experienced Chicago-based buyer who was comfortable with overcoming massive deferred-maintenance challenges in commercial investments was identified, ready, and willing to face each challenge head on. Burnett was proud to help his client achieve a great result considering the then-current conditions, bringing in a full-price offer for a seller experiencing difficult times.
Burnett acted as the seller representative for a client who urgently required the disposition of their Denver, Colorado multi-tenant office building. A full-price offer was procured and the transaction closed on schedule.
Whether the economy is working in your favor or against your long-term investment strategy, contact our CCIM-designated broker at Fountainhead Commercial today to create an actional plan to maximize the performance of your commercial properties.