Suburban investment activity soars to close out 2015

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1 MARKETVIEW Denver Office, Q4 215 Suburban investment activity soars to close out 215 Vacancy Rate 12.6% Lease Rate $24.92 FSG Net Absorption 574,572 sq. ft. Under Construction 2.4 million sq. ft. Completions 287,352 sq. ft. *Arrows indicate change from previous quarter. Figure 1: Vacancy Rate vs Lease Rate Rate Direct Asking Lease Rate $26 $24 $22 $18 1 Year Average Direct Asking Lease Rate $16 Direct average asking lease rates increased to $24.92 FSG per sq. ft., a 7.6% increase year-over-year. Major new leases include Davita s 265,332 sq. ft. lease at 16th & Chestnut and CH2M Hill s 37,485 sq. ft. renewal at Meridian Office Park. Samsung SRA purchased CoBank Center- a transit- oriented development in the Southeast- for $113.5 million, or $ per sq. ft. CBRE Denver Research updated the downtown building classifications due to an annual inventory review. In Q4 215, the Denver office market continued a trend of stable improvement in key fundamentals to round out a strong year. Although Denver s office market continued to experience heightened sublease availability across key submarkets (particularly Downtown), positive net absorption of 574,572 sq. ft. occurred in the quarter. Absorption is attributable to modest positive net absorption across the majority of submarkets but led by the Downtown and Southeast submarkets. Direct vacancy decreased 3 basis points (bps) quarterover-quarter to 12.6%, which is up 14 bps from one year ago. Direct asking lease rates Q4 215 CBRE Research 215 CBRE, Inc. 1

2 continued to rise as a result of strong demand for quality space coupled with availabilities in recently completed Class A buildings. At $24.92 per sq. ft. full service gross (FSG), Denver s office market observed a 1.% quarter-over-quarter increase in its direct asking lease rate. In addition to multiple completions, 26,579 sq. ft. broke ground, bringing under construction totals to just above 2.4 million sq. ft. Healthy demand and a lack of available quality space supported an environment for new construction in Denver. Six buildings are set to deliver in 216, which will bring 1.1 million sq. ft. of new Class A space to the market. Annual investment activity fell just shy of $2.4 billion in 215 due to steady investment in suburban submarkets. Figure 2: Market Statistics Market Rentable Area Direct Vacancy Net Absorption SF ECONOMIC/UNEMPLOYMENT Continuing a trend of growth, Q3 215 U.S. GDP increased 2.1% (second estimate) although the pace of growth slowed from the 3.9% Q2 215 annualized expansion. The Denver/Boulder region added about 9,3 office-using jobs from November 214 to November 215 on a year-todate basis. As of October 215 the seasonallyadjusted unemployment rate in the combined Denver/Boulder metro area rested at 3.5%, below the Colorado rate of 3.8% and well below the national rate of 5.%. Under Construction SF Figure 3: Office - Using Employment Growth Jobs Added ('s) Avg. Lease Rate-$ SF/YR (Full Service) Availability (Nov.)* Information Financial Activities Professional & Business Services Government Source: U.S. Bureau of Labor Statistics, November 215. Total Vacancy Aurora 5,787, , Boulder 5,811, , , Capitol Hill 2,93, , Cherry Creek 2,56, , S. Colorado/Midtown 6,48, ,22 232, Downtown 26,3, ,375 1,366, Longmont 974, , North 3,48, , Northeast 83, , Northwest 7,684, ,39 15, Southeast 34,521, , , Southwest 5,754, , West 7,137, , West Hamp-Alameda 974, , Denver Metro 11,741, ,572 2,44, Q4 215 CBRE Research 215 CBRE, Inc. 2

3 CONSTRUCTION Two buildings delivered in Q4 215, totaling 287,352 sq. ft. The major delivery of the quarter was the 274,287 sq. ft. Class A CoBank build-tosuit in the Southeast submarket. The Boulder submarket saw 99 Walnut, a 13,65 sq. ft. Class B project, deliver this quarter. United Properties began construction on the 26,579 sq. ft. INOVA at Dry Creek in the Southeast submarket marking the second speculative project to break ground in the submarket in 215. Downtown continues to lead all submarkets in construction activity with over 1.3 million sq. ft. underway. Major projects under construction include 1144 Fifteenth (Hines), Z-Block (McWhinney), and 141 Lawrence (First Gulf). Suburban submarkets have seen an increase in activity with over 1.1 million sq. ft. currently under construction with notable projects such as One Belleview Station (Prime West), Colorado Center III (Lincoln Property Company) and Pearl West (Nichols Partnership) still underway. Figure 4: Construction Activity vs Absorption Absorption & Construction Sq. Ft. Millions Under Construction Absorption Figure 5: Absorption vs Lease Rate Net Absorption Sq. Ft. ('s) 2,5 2, 1,5 1, 5 Direct Asking Lease Rate $26 $25 $24 $23 $22 $ , Q1 Q2 Q3 Q4 YTD Total Direct Asking Lease Rate $19 VACANCY/AVAILABILITY/ABSORPTION The market posted positive net absorption of 574,572 sq. ft. in Q4 215, with Class A space accounting for 274,635 sq. ft. of positive net absorption. While less than Q4 214 s positive net absorption of 86,176 sq. ft., the Denver market saw its third straight quarter of positive net absorption leading to annual positive net absorption of 1,8,857 sq. ft. Paralleling positive net absorption, direct vacancy decreased by 3 bps quarterly to 12.6%, but is up 14 bps year-over-year. Availability in the quarter decreased 24 bps to 19.2%, resulting in a spread over direct vacancy of 6.6%, a modest increase from Q Available sublease space in the Downtown submarket remained above 1. million sq. ft. in Q4 215, largely attributable to the energy industry s contraction. Figure 6: Vacancy/Availability Vacancy & Availability Vacancy & Availability Spread 2% 7.% 18% 6.8% 6.6% 6.4% 6.2% 1% 6.% Q2 214 Q3 214 Q4 214 Q1 215 Q2 215 Q3 215 Q4 215 Availability Vacancy Spread Q4 215 CBRE Research 215 CBRE, Inc. 3

4 AVERAGE ASKING LEASE RATES Average direct asking lease rates increase in Q4 215 for the 17th consecutive quarter as key fundamentals continue to fuel confidence in the market. The average direct asking lease rate reached $24.92 per sq. ft. FSG in Q marking the highest overall direct asking lease rate ever recorded in the Denver market. This figure represents a 7.6% increase year-over-year or a difference of $1.77 per sq. ft. The Cherry Creek and Southeast submarkets witnessed the strongest lease rate appreciation as demand for quality space along with a lack of new multitenant deliveries gave landlords the confidence to increase rates. The Downtown submarket saw a modest decrease in lease rates as the available sublease space is forcing landlords to soften lease rate expectations to remain competitive with sublease space. Overall, metro Denver Class A and B lease rates increased to $29.19 per sq. ft. and $23.37 per sq. ft. quarter-over-quarter for respective year-over-year gains of 6.3% and 7.2%. Figure 7: Average Asking Leasing Rates $3 $28 $25 $23 $18 $15 Class A Lease Rates Class B Lease Rates Average Asking Lease Rate Figure 8: Lease Rate Year-Over-Year % Change vs Direct vacancy Y-O-Y % Change 9% 6% 3% % -3% INVESTMENT TRENDS Investment activity soared in Q4 215 with over $65 million transacting in the quarter. Annual sales volume neared $2.4 billion, for a 4.5% decrease from sales volume totals in 214. Samsung SRA s acquisition of the CoBank Center for $113.5 million or $ per sq. ft. was the largest transaction of the quarter and more significantly, marks the first Asian institutional capital to be invested in the Denver office market in the current cycle. Additionally, the transaction occurred in the Southeast submarket, showing confidence in suburban market fundamentals. The CoBank Center was 1% leased at the time of sale to the building s anchor CoBank. The second largest transaction of the quarter was Kennedy Wilson s purchase of 33 E 17th St. for $65.5 million, or $ per sq. ft., from Broadreach Capital Partners. The property sold with an aggregate occupancy of 92.% at the time of purchase. -6% Year-Over-Year % Change in Lease Rate Figure 9: Investment Sales Investment Sales (Billions) $2.5 $2. $1.5 $1. $.5 $ CBD Suburban CBD Price per Sq. Ft Suburban Price per Sq. Ft $36 $3 $24 $18 $12 $6 11% Price per sq. ft. Q4 215 CBRE Research 215 CBRE, Inc. 4

5 MARKET OUTLOOK Key fundamentals such as direct lease rates and net absorption remained healthy in Q4 215, rounding out an overall positive year for the Denver office market. The start of 216 is poised for continued positive net absorption and tight vacancy levels due to pre-leasing requirements being built out in new construction and large tenants occupying space from leases signed in 215. Additionally, direct asking lease rates are expected to increase slightly as six new buildings are slated to deliver in 216. While the depressed energy industry is the primary reason for increased available sublease space Downtown, industries such as financial services and technology are backfilling tenant demand in the market, which should limit available sublease space in 216. As asset prices Downtown reach record highs on a per sq. ft. basis, increased investment activity is expected to continue in ancillary submarkets as both domestic and foreign investors seek yield outside of Downtown Denver. With 2.4 million sq. ft. under construction in the market, Denver is poised to attract new tenants to the marketplace. U.S. RESEARCH CBRE OFFICES Jessica Ostermick Director of Research and Analysis jessica.ostermick@cbre.com Jeff Wood Research Team Lead jeff.wood@cbre.com Joe Faller Office Researcher joe.faller@cbre.com To learn more about CBRE Research, or to access additional research reports, please visit the Global Research Gateway at Denver Tech Office 839 E. Crescent Parkway, Suite 3 Greenwood Village, CO 8111 Downtown Denver th Street, Suite 295 Denver, CO 822 Colorado Springs Office 121 S. Tejon, Suite 21 Colorado Springs, CO 893 Fort Collins Office 35 JFK Parkway, Suite 31 Fort Collins, CO 8525 Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.