OUTLOOK DENVER METRO SNAPSHOT AT FIRST QUARTER 2013 OFFICE VACANCY RATES A MARKET REPORT FOR COMMERCIAL REAL ESTATE EXECUTIVES

Transcription

1 D E N V E R M E T R O OUTLOOK A MARKET REPORT FOR COMMERCIAL REAL ESTATE EXECUTIVES DENVER METRO SNAPSHOT AT FIRST QUARTER 2013 ECONOMY: STEADY GROWTH 12-month payroll job growth through January 2013: 39,200. Unemployment rate: 7.2% in December 2012, down from 7.6% a year earlier. U.S. unemployment at 7.8% in December Outlook: Growth likely to continue through OFFICE MARKET: STEADY GROWTH Q net absorption: 178,000 SF. Overall vacancy rate: 12.4%, up from 12.3% at year-end 2012 but down from 12.9% a year ago. Asking rents: Up 1.3% in 1st quarter 2013; steady growth expected in Outlook: Steady expansion likely in 2013; stronger growth expected in PAYROLL JOB GROWTH Large Metro Areas 12 Months Ending January 2013 Payroll Jobs in 000 s OFFICE/FLEX MARKET: IMPROVING Q net absorption: 358,000 SF. Overall vacancy rate: 11.4%, down from 12.8% at year-end Asking rents: Up 2.5% since low point in the 2nd quarter of Outlook: Further improvement in 2013, as demand increases for this product type NY LA Basin Hou DFW SF Bay Atl Chi Bos Was Phx Denver South FL Source: Bureau of Labor Statistics, Delta Associates; March OFFICE VACANCY RATES Selected Metro Areas 1 st Quarter % OFFICE MARKET POSITION INDEX 1 st Quarter 2013 DENVER Atlanta Baltimore Chicago Orange County Phoenix South Florida Expansion Phase Correction/Contraction Phase Los Angeles New York Washington Overall Vacancy Rate 20% 15% 10% 5% 9.9% National Vacancy Rate: 13.4% 10.8% 11.2% 11.3% 12.3% 12.4% 12.6% 13.5% 13.6% 14.2% 15.9% 16.4% 19.4% 2 Boston Dallas/Ft. Worth Houston San Francisco 0% Bos Hou SF Bay NY OC Den LA Was Chi S Fla Atl DFW Phx Source: CoStar, Delta Associates; March Source: Delta Associates; March DENVER METRO OUTLOOK FIRST QUARTER

2 PAYROLL JOB CHANGE IN PERCENTAGE TERMS Large Metro Areas 12 Months Ending January 2013 Percent Change in Payroll Jobs 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2.9% Hou DFW SF Bay Denver Atl Phx LA Basin Bos NY South FL Chi Was Source: Bureau of Labor Statistics, Delta Associates; March JOB GROWTH Denver Boulder Metro 1985 January 2013 Payroll Jobs in Thousands Year Average = 17, * Note: Figures reported in this chart are annual average job growth. Source: Bureau of Labor Statistics, Delta Associates; March *12 months ending in January THE DENVER METRO ECONOMY ECONOMIC GROWTH STEADY Economic growth remains steady in metro Denver, with payroll job growth at 39,200 for the 12 months ending in January This is a 2.9% rate of growth, compared to the nation s growth rate of 1.5%. In percentage terms, metro Denver job growth, for the 12 months ending January 2013, at 2.9%, ranks fourth among large metro areas trailing Houston, Dallas/Fort Worth, and the San Francisco Bay Area. All sectors, except Information (Tech) and Government, posted job gains over the previous 12 months. Professional/Business Services, Health Care, and Tourism/ Hospitality are fueling employment growth in metro Denver. Mining/Construction and Financial Services also are expanding rapidly. The region s unemployment rate declined to 7.2% at year-end 2012, from 7.6% one year earlier. The national unemployment rate declined to 7.8% at year-end 2012, from 8.5% a year earlier; it declined to 7.7% in February The Colorado Business Conditions Index, as reported by The Goss Institute, rose to 58.9 in February 2013 its highest level in six months from 54.4 in January. The increase is being driven by improvement in the state s housing sector, as well as by growth in manufacturing. The index measures increases or decreases in new orders, inventories, production/sales, and employment components. It ranges from 0 to 100; an index reading greater than 50 indicates expectations of expansion. UNEMPLOYMENT RATES Large Metro Areas December 2011 vs. December % December 2011 December 2012 Denver ranks 8th on Forbes list of Top 10 Best Cities for Good Jobs over the next five years. Forbes computes Denver s expected rate of job growth at 2.1% over the next five years. Growth in Professional and Financial Services is boosting Denver s per capita income relative to the nation s rate of growth. Unemployment Rate 10% 8% National Average 6% 4% 2% 0% Was Bos DFW Hou Phx Den SF Bay Atl NY Chi S. Fla LA Basin Source: Bureau of Labor Statistics, Delta Associates; March % TOP TEN BEST CITIES FOR GOOD JOBS 7.8% 1. Dallas 6. San Antonio 2. Houston 3. Austin 4. Ft. Worth 5. Seattle 7. Oklahoma City 8. Denver 9. San Francisco 10. Salt Lake City Source: Forbes; March DENVER METRO OUTLOOK FIRST QUARTER

3 CORE INDUSTRIES Denver-Boulder CSA 2012 CORE INDUSTRIES $ (BIL) % GRP Financial, Prof., & Business Services State & Federal Government Construction Educational & Health Services Tech/Telecom Services Manufacturing Hospitality/Tourism Transportation & Warehousing Total Core Industries Other Total GRP $34 $20 $15 $12 $9 $9 $7 $5 $112 $73 $185 18% 11% 8% 7% 5% 5% 4% 3% 61% 39% 100% Note: Subcomponents of core industries were redefined in June Source: BEA, BLS, GMU Center for Regional Analysis, Delta Associates; March GRP = Gross Regional Product Colorado s space economy employs more than 66,000 people in the military and private sector and contributed $8.7 billion to the state s GDP in 2011, according to the Brookings Institution. Colorado s space cluster is one of the most diversified in the nation. The sector s employees represent 2.6% of the state s workforce, but it accounts for 3.8% of its GDP. With a large share of this industry living and working in the Denver metro area, the strength of this sector gives a significant boost to local economic growth. Denver dominates in the satellite services niche of this industry. Potential growth areas in this industry, such as cybersecurity/intelligence and unmanned aerial vehicles, present enormous opportunities for Colorado. Nonetheless, the state must adapt in the face of growing challenges and competition in order to nurture growth in this specialized industry. 12-month job growth through January 2013 in key industries: Professional/Business Services: 9,700 Education/Health: 6,900 Trade/Transportation: 8,500 Tourism/Hospitality: 4,200 Mining/ Construction: 3,500 Government: 100 Manufacturing employment continues to improve gradually, with Denver area companies expanding operations. The sector gained 1,700 jobs, or 2.2%, during the 12 months ending in January DENVER METRO OUTLOOK FIRST QUARTER

4 Intertech Plastics recently invested $2 million in equipment to accommodate its growth. In addition, Ice-O-Matic, the world s 4th largest manufacturer of ice machines, posted a record year in 2012, with revenue up 10%, to almost $100 million. Meanwhile, the Denver Purchasing Managers Index (PMI) was at 40.8 in February 2013, with Production and New Orders dragging the index lower. In contrast, the ISM national index stood at 54.2 in February. A reading of 50 is neutral; readings above/below 50 indicate expanding/contracting manufacturing activity. According to the National Association of Purchasing Management, a PMI in excess of 42.2 over a period of time generally indicates an expansion of the overall economy. VENTURE CAPITAL INVESTED IN COLORADO FIRMS Dollars in Millions $900 $800 $700 $600 $500 $400 $300 $200 $100 $ Source: PricewaterhouseCoopers, Delta Associates; March Financial Services sector employment increased by 4,000 jobs 4.1% growth while the Professional and Business Services sector gained 9,700 jobs a 4.0% increase in metro Denver in the 12 months ending in January According to the latest PricewaterhouseCoopers MoneyTree report, Colorado firms raised $86 million in venture capital in the 4th quarter of 2012, compared to $166 million in the same period a year prior. The software industry garnered 27% of the funding, while biotech firms received 20% of the investments. Accera, a biotech firm, received a $16 million investment, while Tendril Networks received $15 million in the 4th quarter of The Mining/Construction sector gained 3,500 jobs in the 12 months ending in January This is a 4.9% increase, which is the strongest sector improvement, on a percentage basis, during this period. Charles Schwab recently announced that it will construct a three-building office campus in Lone Tree that will accommodate more than 2,000 employees. A future light-rail DENVER METRO OUTLOOK FIRST QUARTER

5 MEDIAN SINGLE FAMILY HOME PRICE Denver/Boulder Metro Areas station will be located next to the campus, and retail structures will also be added. The first phase is scheduled for completion in late Median Single Family Home Price $400,000 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Denver Boulder The Hospitality and Tourism sector gained 4,200 jobs a 2.9% increase in the Denver metro area in the 12 months ending in January Smith Travel Research reports that Denver hotels experienced a 7.2% increase in revenue per available room in the 12 months ending in January Over the same period, occupancy was up 4.4% and average daily rates increased 2.7%. Note: Denver and Boulder are considered separate metro areas by NAR. Source: National Association of Realtors, Delta Associates; March In Housing, the median sales price of an existing single-family home in the Denver metro area was up 10.4%, to $254,800, in the 4th quarter of 2012, compared to the 4th quarter of 2011, according to the National Association of Realtors. According to the Colorado Division of Housing, foreclosure sales decreased 19.1% from 1,150 to 930 over the 12 months ending in January 2013, while foreclosure filings decreased 24.9% from 1,939 to 1,456 over the same period. This is the lowest level in seven years. THE DENVER METRO ECONOMIC OUTLOOK JOB FORECAST Denver Boulder CSA Annual Payroll Job Growth 40,000 20, ,000 40,000 60,000 80, average annual job growth = 27, Source: Bureau of Labor Statistics, Delta Associates; March average annual job growth = 32,100 The Denver metro economy will likely experience steady growth over the next several years. However, continued uncertainty regarding the nation s spending cuts and global volatility will likely result in uneven growth during the balance of Strength in Professional/Business Services, Tourism/Hospitality, and the Energy industry will continue to drive growth in the region. We expect annual employment growth to decelerate to approximately 30,000 in 2013, a function of spending reductions by the government, Denver s second-largest core industry. However, even at that level, job growth would mirror the peak of the last expansion cycle in We expect accelerating growth in the Denver metro in 2014 and 2015 as the national economic expansion strengthens. For the period, we project average employment growth in the Denver metro of approximately 32,100 net new payroll jobs per year 2.2% annual growth, compared to 2.0% annual growth in the expansion. THE DENVER METRO OFFICE MARKET GROWTH STEADY IN Q1 The metro Denver office market experienced modest but steady growth in the 1st quarter of 2013, as the economy continued to chug along despite national political gridlock. As a result, businesses leased additional space, direct vacancy declined, and rents rose. DENVER METRO OUTLOOK FIRST QUARTER

6 Millions of SF of Absorption OFFICE ABSORPTION AND EMPLOYMENT Denver Metro st Quarter 2013 Net Absorption in 000s of SF ,000 6,000 5,000 4,000 3,000 2,000 1, ,000 2,000 3,000 OFFICE VACANCY RATE Denver Metro st Quarter % 16% 12% 8% 4% 0% Job Growth Net Absorption -8 80,000 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12'13* Source: Bureau of Labor Statistics, Delta Associates; March NET ABSORPTION AND DIRECT VACANCY RATE TRENDS OFFICE SPACE Denver Metro st Quarter Q1 '13 Net Absorption Vacancy Rate '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 Source: Delta Associates analysis of CoStar data; March ,000 60,000 40,000 20,000 Sources: Vacancy Delta Associates analysis of CoStar data; Net Absorption Delta Associates; March ,000 40,000 60,000 16% 14% 12% 10% 8% 6% 4% 2% 0% Annual Job Growth *Employment growth for 12 months ending January 2013; 1 st quarter 2013 net absorption. Direct Vacancy Rate Q1 NET ABSORPTION: STEADY PACE Net absorption for all classes of office space totaled 178,000 SF in metro Denver in the 1st quarter of 2013, compared to an average of 362,000 SF per quarter over the past three years. TW Telecom s 127,000 SF lease at ParkRidge Corporate Center in Lone Tree was the most notable deal of the 1st quarter. In Greenwood Village, Kaiser Permanente leased 121,000 SF at Greenwood Plaza. Net absorption of Class A office space totaled 50,000 SF in the 1st quarter of 2013 in metro Denver 28% of the metro total. However, since 2010, Class A net absorption has accounted for two-thirds of all net absorption in metro Denver as companies have upgraded to higher-quality space. Class B net absorption totaled 139,000 SF in the 1st quarter of 2013; it has represented 30% of all net absorption in metro Denver since NET ABSORPTION IN SELECTED SUBMARKETS (IN SF): Q All of 2012 CBD (75,000) (410,000) LoDo 62, ,000 Denver Tech Center 100, ,000 Southwest 152,000 (385,000) Sublease space in metro Denver increased by 207,000 SF in the 1 st quarter of There is 639,000 SF of sublease space on the market in metro Denver in Q1, representing approximately 0.5% of the existing inventory. OVERALL VACANCY RATE EDGES UP; DIRECT VACANCY RATE DECLINES Metro Denver s overall office vacancy rate (including sublet space) was 12.4% at the end of the 1st quarter of 2013 up from a revised 12.3% at year-end 2012 as more sublet space was placed on the market. The overall vacancy rate is down from 12.9% a year ago. Metro Denver s direct office vacancy rate declined to 11.9% in the 1st quarter of 2013, from a revised 12.0% at year-end 2012 and from 12.5% a year ago. DENVER METRO OUTLOOK FIRST QUARTER

7 Overall Vacancy Rates in Selected Submarkets: LoDo 6.2% Denver Tech Center 11.3% CBD 13.4% Cherry Creek/Col. Blvd. 15.2% The metro Denver overall office vacancy rate will likely decline steadily over the next two years, as demand for space outpaces the pipeline of new supply. The overall vacancy rate will likely decline to the low-11% range by the 1 st quarter of CONSTRUCTION PIPELINE STEADY; PRE-LEASING UP AVERAGE CLASS A OFFICE RENTS Denver Metro st Quarter 2013 Asking Rent ($/SF, GFS) $28 $24 $20 $16 $12 $8 $16.33 $11.40 $24.22 $18.97 $ Note: Rents have been revised. Source: Delta Associates analysis of CoStar data; March $26.16 There is 1.3 million SF of office space under construction or renovation at the end of the 1st quarter of 2013, compared to 1.5 million SF at year-end 2012 and 1.1 million SF a year ago. Space under construction in the 1st quarter is 86% pre-leased, compared to 79% at year-end 2012 and 54% a year ago. Space under construction equates to 0.9% of metro Denver s standing inventory. There was just one office building delivered in the 1st quarter of 2013 in metro Denver a 45,752 SF renovation at 5675 Denver Tech Center Blvd. in the Denver Tech Center submarket. This building was 22% leased upon delivery. OFFICE ASKING RENTS INCREASING Asking rents rose 1.3% for all classes of office space in metro Denver in the 1st quarter of 2013, as market fundamentals continued to improve. Class A asking rents increased 1.4% in the 1st quarter; Class B asking rents were up 0.8%. A flight to quality is underway; Class A rents remain relatively affordable in many submarkets, and OFFICE SPACE U/C AND RENOVATION Denver Metro Area First Quarter 2013 SUBMARKET SF % PRE-LEASED CBD LoDo Cherry Creek/Col. Blvd. Aurora/Northeast Southwest Northwest West Balance of Southeast Total 103, ,132 81,662 84,086 48, ,000 75, ,000 1,337, % 51% 82% 100% 100% 100% 100% 100% 86% Source: Delta Associates analysis of CoStar data; March 2013 DENVER METRO OUTLOOK FIRST QUARTER

8 COMPARATIVE INVESTMENT SALES VOLUME Office Buildings st Quarter 2013 Billions of Dollars Average Sale Price Per SF $5.0 $4.5 $4.0 $3.5 $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $0.0 AVERAGE OFFICE SALE PRICE Denver Metro st Quarter 2013 $250 $200 $150 $100 $50 $0 $109 $113 $115 $149 $148 $215 $165 Den Phx Hou DFW Q1 '13* *Q sales annualized Source: Real Capital Analytics, graphic by Delta Associates; March $177 CAP RATES FOR CORE OFFICE ASSETS Denver Metro 2004 January 2013 $164 $147 $188 $ Source: Real Capital Analytics, graphic by Delta Associates; March they are attracting tenants who are upgrading to better space before rent growth accelerates. Rents will likely rise steadily during the balance of 2013 as market conditions improve further before gaining greater momentum in Concessions will also continue to burn off during the balance of INVESTMENT SALES We recorded $294 million of investment sales (for which pricing data is available) in the 1st quarter of 2013 in metro Denver, compared to $386 million in the 1st quarter of These totals include only closed deals. We expect investment activity to remain strong in Denver, as market conditions continue to improve and investors seek value, which has become harder to find in the more expensive coastal markets. The average investment sale price in metro Denver was $130/SF in the 1st quarter 2013, compared to $163/SF in the 1st quarter of 2012 and $188/SF for all of The sale of Triad at Orchard Station in Greenwood Village (three buildings totaling 411,000 SF) for $62/SF lowered the metro-wide average in the 1st quarter. The average sale price will most likely rise as the year progresses. Cap rates for core office assets in metro Denver averaged 7.16% on a trailing 12-month basis as of January 2013; rates have hovered in the 7.0% to 7.5% range for the past two years. Some highly desirable assets, such as th Street in Boulder, which is fully leased to Microsoft, have traded in the 6.5% range. We expect cap rates to remain low in the period ahead, as interest rates remain low, rents rise, and credit gradually becomes more available. On balance, we expect cap rates for core properties to be in the 6.5% to 7.5% range during the remainder of NOTABLE RECENT OFFICE TRANSACTIONS: 10% 9% 8% 7% 6% Building/Submarket Janus Capital HQ Cherry Creek Quebec Court II Greenwood Village Market Center LoDo Sale Price/Buyer $63 million ($393/SF)* LCFRE Denver Cherry Creek, LLC $27 million ($172/SF) GC Net Lease $22.9 million ($190/SF) Jonathan Rose Companies 5% Note: Trailing 12 month average through January Source: Real Capital Analytics, graphic by Delta Associates; March *Partial-interest transaction. Source: Real Capital Analytics; March DENVER METRO OUTLOOK FIRST QUARTER

9 THE DENVER METRO OFFICE MARKET OUTLOOK The Denver metro office market should experience steady growth in the period ahead, as the regional economy continues to expand. The region s well-educated labor force and quality of life will continue to attract employers, generating demand for office space. In particular, continued growth in the Professional/Business Services sector and the Energy industry will likely generate demand for office space during the balance of 2013 and into next year, particularly for Class A space. The overall vacancy rate will likely decline steadily, dropping to the low- 11% range over the next two years. Rents will likely rise gradually during the balance of 2013 before gaining greater traction in as market conditions strengthen. Concessions will continue to ease during the remainder of 2013 as steady demand for space continues to drive vacancy lower. With space under construction equal to just 0.9% of standing inventory, we expect the number of groundbreakings to accelerate during the balance of the year. SUMMARY OF OFFICE MARKET INDICATORS ALL SPACE Denver Metro Area 2010 Through First Quarter 2013 March 2013 March 2013 # Total SF Avail. Vacancy SF Under of Rentable SF Immediately Direct Vacancy Rate at End of: Rate Constr. or Net Absorption (SF) Submarket Bldgs. All Bldgs. 1/ All Bldgs. 2/ Q1 '13 w/ Sublet Renovation Q1 '13 CBD ,925,197 3,215, % 10.9% 12.6% 12.9% 13.4% 103, , ,000 (410,000) (75,000) LoDo ,822, , % 10.2% 6.8% 6.1% 6.2% 363, , , ,000 62,000 Midtown 101 5,085, , % 7.5% 6.5% 7.7% 7.9% (80,000) (2,000) 106,000 (61,000) Cherry Creek/Glendale 97 6,757, , % 15.2% 14.7% 13.8% 13.8% 81,662 54,000 (142,000) 34,000 61,000 Colorado Blvd./I ,323, , % 16.8% 17.3% 17.3% 17.4% (26,000) 57,000 (22,000) 0 Cherry Crk/Col. Blvd. Total ,080,680 1,680, % 15.8% 15.7% 15.2% 15.2% 81,662 28,000 (85,000) 12,000 61,000 Northwest ,986,043 1,623, % 11.0% 12.3% 12.5% 13.0% 125, ,000 74,000 (2,000) (26,000) North 67 3,207, , % 16.9% 15.4% 14.8% 15.2% (60,000) (48,000) 85,000 19,000 Aurora/Northeast ,644,545 1,309, % 13.3% 11.8% 12.3% 12.8% 84, , , ,000 (53,000) Southwest 156 7,597,117 1,223, % 12.8% 18.1% 16.1% 16.3% 48,933 47,000 0 (385,000) 152,000 West ,199,414 1,523, % 12.1% 12.7% 13.6% 14.1% 75,748 (148,000) 141, ,000 (101,000) Denver Tech Center ,070,467 1,173, % 13.2% 11.5% 10.6% 11.3% 331,000 67, , ,000 Greenwood Village ,451,852 1,200, % 17.4% 14.1% 14.2% 14.4% (309,000) 73, ,000 (8,000) Inverness ,998, , % 9.1% 8.9% 9.1% 9.2% 200, ,000 22,000 (10,000) Balance of Southeast ,405,004 2,134, % 14.5% 12.2% 11.6% 12.5% 455,000 52, , ,000 Southeast Total ,925,521 4,963, % 12.0% 12.1% 11.6% 12.2% 455, , ,000 1,040, ,000 Boulder 208 8,080, , % 8.2% 6.7% 6.6% 6.9% 41,000 25, ,000 8,000 TOTAL Denver Metro 2, ,555,495 17,475, % 12.7% 12.0% 11.9% 12.4% 1,337,401 1,783,000 1,089,000 1,470, ,000 Vacancy Rate With Sublet Space 13.8% 13.2% 12.3% 12.4% 1/ Includes buildings 15,000 SF RBA and greater; includes multi and single tenant buildings. Includes Class A, B, and C space. Does not include buildings under construction or buildings owned by the government. 2/ Does not include sublet space. 3/ The CBD and LoDo are now reported as separate submarkets. Historical data have been revised accordingly. 4/ Year end 2012 vacancy rate has been amended per CoStar. 5/ Submarket inventory has been amended per CoStar. 6/ As of Q1 2013, the Balance of Southeast submarket now includes Lone Tree, a new submarket in CoStar. Note: Net absorption occurs when a lease is signed, not when space is physically occupied; pre leased space counts as net absorption when a building delivers. Source: Inventory and Vacancy from analysis of CoStar data, Net Absorption computed by Delta Associates; March Delta Associates, the research affiliate of Transwestern, is headquartered at: 500 Montgomery Street, Suite 600, Alexandria, VA Phone: DeltaAssociates.com DENVER METRO OUTLOOK FIRST QUARTER

10 SUMMARY OF OFFICE MARKET INDICATORS CLASS A SPACE Denver Metro Area 2010 Through First Quarter 2013 March 2013 # Total SF Avail. Direct Vacancy SF Under of Rentable SF Immediately Vac. Rate Constr. or Net Absorption (SF) Submarket Bldgs. All Bldgs. 1/ All Bldgs. 2/ Rate w/ Sublet Renovation Q1 '13 CBD 30 16,863,997 2,293, % 14.1% 370,000 (50,000) (387,000) (101,000) LoDo 16 4,305, , % 5.1% 363, , , ,000 39,000 Midtown 4 1,006, , % 10.8% 12,000 (4,000) (17,000) (23,000) Cherry Creek/Glendale 14 2,294, , % 18.2% (39,000) (102,000) (12,000) 25,000 Colorado Blvd./I ,541 43, % 4.8% (30,000) 37,000 15,000 4,000 Cherry Crk/Co. Blvd Total 20 3,199, , % 14.4% (69,000) (65,000) 3,000 29,000 Northwest 37 5,024, , % 15.7% 419,000 (174,000) 189,000 (40,000) North 2 146,626 18, % 20.0% (15,000) 12,000 9,000 0 Aurora/Northeast 18 2,381, , % 11.4% 434, ,000 (131,000) 10,000 Southwest 5 1,245,624 39, % 4.5% 0 (5,000) (1,000) 1,000 West 16 1,868, , % 7.1% 29, , ,000 (19,000) Denver Tech Center 37 7,211, , % 7.9% 180,000 72, ,000 50,000 Greenwood Village 15 3,231, , % 12.1% (136,000) 113,000 (30,000) 94,000 Inverness 16 2,016, , % 7.9% 105,000 26,000 8,000 0 Balance of Southeast 62 7,991, , % 10.7% 275,000 8, ,000 8,000 Southeast Total ,450,633 1,765, % 9.7% 275, , , , ,000 Boulder 9 980,881 19, % 2.0% (67,000) 48,000 29,000 2,000 TOTAL Denver Metro ,474,591 6,056, % 11.2% 638,132 1,871, , ,000 50,000 1/ Class A buildings per CoStar that are greater than 50,000 SF. Does not include buildings under construction or owned by the government. 2/ Does not include sublet space. Note: Net absorption occurs when a lease is signed, not when space is physically occupied; pre leased space counts as net absorption when a building delivers. Source: Inventory and Vacancy from analysis of CoStar data, Net Absorption computed by Delta Associates; March Delta Associates, the research affiliate of Transwestern, is headquartered at: 500 Montgomery Street, Suite 600, Alexandria, VA Phone: DeltaAssociates.com DENVER METRO OUTLOOK FIRST QUARTER

11 SUMMARY OF OFFICE MARKET INDICATORS CLASS B SPACE Denver Metro Area 2010 Through First Quarter 2013 March 2013 # Total SF Avail. Direct Vacancy SF Under of Rentable SF Immediately Vac. Rate Constr. or Net Absorption (SF) Submarket Bldgs. All Bldgs. 1/ All Bldgs. 2/ Rate w/ Sublet Renovation Q1 '13 CBD 65 7,062, , % 13.2% 103,840 13,000 (6,000) 7,000 14,000 LoDo 78 3,848, , % 8.4% (64,000) 175,000 51,000 15,000 Midtown 54 3,059, , % 6.8% 40,000 3,000 98,000 (21,000) Cherry Creek/Glendale 66 3,896, , % 11.9% 81, ,000 35,000 12,000 16,000 Colorado Blvd./I ,125, , % 22.3% 50,000 (42,000) (16,000) (22,000) Cherry Crk/Co. Blvd Total 111 7,022,454 1,157, % 16.5% 81, ,000 (7,000) (4,000) (6,000) Northwest 156 7,227, , % 11.6% 125,000 (151,000) 90,000 (65,000) (7,000) North 58 2,664, , % 14.5% (31,000) (50,000) 113,000 27,000 Aurora/Northeast 119 7,257, , % 13.3% 84,086 90,000 14, ,000 (7,000) Southwest 121 5,332,609 1,039, % 19.5% 48,933 42,000 (70,000) (256,000) 160,000 West 139 7,713,370 1,218, % 16.4% 75,748 (151,000) 11,000 (131,000) (23,000) Denver Tech Center 45 3,487, , % 18.6% 80,000 (4,000) (34,000) 31,000 Greenwood Village 65 5,089, , % 16.1% (158,000) (71,000) 265,000 (107,000) Inverness 50 2,936, , % 10.2% 82,000 26,000 18,000 15,000 Balance of Southeast 188 9,239,420 1,358, % 14.7% 180,000 54, , ,000 83,000 Southeast Total ,752,880 3,110, % 15.1% 180,000 58, , ,000 22,000 Boulder 182 6,942, , % 7.5% 49,000 68,000 20,000 (35,000) TOTAL Denver Metro 1,431 78,885,235 10,582, % 13.6% 699,269 89, , , ,000 1/ Class B per CoStar, and buildings under 50,000 SF even if CoStar classifies them as Class A. Does not include buildings under construction or owned by the government. 2/ Does not include sublet space. Note: Net absorption occurs when a lease is signed, not when space is physically occupied; pre leased space counts as net absorption when a building delivers. Source: Inventory and Vacancy from analysis of CoStar data, Net Absorption computed by Delta Associates; March Delta Associates, the research affiliate of Transwestern, is headquartered at: 500 Montgomery Street, Suite 600, Alexandria, VA Phone: DeltaAssociates.com DENVER METRO OUTLOOK FIRST QUARTER

12 ASKING RENTAL RATE ANALYSIS OF CLASS A & B OFFICE BUILDINGS Denver Metro Area 2010 Through First Quarter 2013 % Change Q /12 3/13 Submarket Class A Class B Class A Class B Class A Class B Class A Class B Class A Class B CBD $ $ $ $ $ $ $ $ % 1.4% LoDo $ $ $ $ $ $ $ $ % 3.2% Midtown $ $ $ $ $ $ $ $ % 1.0% Cherry Creek/Glendale $ $ $ $ $ $ $ $ % 2.0% Colorado Blvd./I 25 $ $ $ $ $ $ $ $ % 1.0% Cherry Crk/Col. Blvd. Total $ $ $ $ $ $ $ $ % 1.6% Northwest $ $ $ $ $ $ $ $ % 0.3% North $ $ $ $ $ $ $ $ % 1.4% Aurora/Northeast $ $ $ $ $ $ $ $ % 2.1% Southwest $ $ $ $ $ $ $ $ % 0.3% West $ $ $ $ $ $ $ $ % 1.5% Denver Tech Center $ $ $ $ $ $ $ $ % 1.2% Greenwood Village $ $ $ $ $ $ $ $ % 0.2% Inverness $ $ $ $ $ $ $ $ % 0.6% Balance of Southeast $ $ $ $ $ $ $ $ % 0.4% Southeast Total $ $ $ $ $ $ $ $ % 0.4% Boulder $ $ $ $ $ $ $ $ % 0.6% Denver Metro Total: $ $ $ $ $ $ $ $ % 0.8% Note: Rents for properties using triple net terms have been grossed up to full service by applying operating expense data. Rents reflect full service equivalent. Note: Due to small submarket sample sizes in some cases, particularly in Class A, rent increases and decreases may be magnified relative to other submarkets. Source: Delta Associates analysis' of CoStar data; March Delta Associates, the research affiliate of Transwestern, is headquartered at: 500 Montgomery Street, Suite 600, Alexandria, VA 22314; Phone: ; DeltaAssociates.com DENVER METRO OUTLOOK FIRST QUARTER

13 NET ABSORPTION AND DIRECT VACANCY RATE TRENDS OFFICE/FLEX SPACE Denver Metro st Quarter 2013 THE DENVER METRO OFFICE/FLEX MARKET DEMAND PICKS UP IN Q Net Absorption in 000s of SF 1, Q1 '13 Net Absorption Vacancy Rate 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Direct Vacancy Rate The metro Denver office/flex market experienced 358,000 SF of net absorption in the 1st quarter of 2013, compared to 249,000 SF in all of Pearl Izumi s new 55,000 SF building and a 49,000 SF lease by Sierra Nevada drove absorption in Northwest Denver in the 1st quarter. In Aurora/Northeast Denver, Advanced Circuits new 51,000 SF building was a catalyst for net absorption of office/flex space. Sources: Vacancy Delta Associates analysis of CoStar data; Net Absorption Delta Associates; March NET ABSORPTION IN SELECTED SUBMARKETS (IN SF): Q All of 2012 Northwest 124,000 (51,000) Aurora/NE 104,000 23,000 West 91,000 85,000 Southeast 42, ,000 OVERALL OFFICE/FLEX VACANCY RATES IN SELECTED SUBMARKETS: West 4.8% Boulder 7.4% Northwest 11.9% Southeast 16.4% OFFICE/FLEX VACANCY RATE DECLINES SUBSTANTIALLY IN Q1 Metro Denver s overall office/flex vacancy rate decreased to 11.4% in the 1st quarter of 2013, from 12.8% at year-end 2012, and is down from 13.3% a year ago. The direct vacancy rate declined to 11.2% in the 1st quarter, from 12.6% at year-end and 13.2% a year ago. We expect the overall office/flex vacancy rate in metro Denver to decline to the low-10% range over the next 12 months, as renewed demand outpaces a modest pipeline of new supply. OFFICE/FLEX CONSTRUCTION There are two office/flex buildings under construction in the Denver metro area, totaling 53,745 SF. These buildings are 52% pre-leased. We expect the office/flex pipeline to be more active in 2013, as developers strive to bring new supply to market as demand strengthens. Two office/flex building were delivered in metro Denver in the 1st quarter of These include Pearl Izumi s 55,000 SF facility in Northwest Denver and Advanced Circuits 51,000 SF building in Aurora. These buildings were 100% pre-leased. OFFICE/FLEX RENTS STABLE IN Q1 Office/flex asking rents held steady in the 1st quarter of 2013, but they are up 2.5% from their cyclical low point in the 2nd quarter of Office/flex rents will likely edge up during the balance of 2013, as office/flex market conditions improve further. DENVER METRO OUTLOOK FIRST QUARTER

14 INVESTMENT SALES: LIMITED VOLUME We recorded $9.6 million of office/flex investment sales (for which pricing information is available) in metro Denver during the 1st quarter of Sales prices averaged $100/SF in the 1st quarter of 2013, compared to $73/SF for all of Demand for this product type is likely to rise as demand increases and vacancy declines over the next year. March 2013 March 2013 # Total SF Avail. Vacancy SF Under of Rentable SF Immediately Direct Vacancy Rate at End of: Rate Constr. or Net Absorption (SF) Submarket Bldgs. All Bldgs. 1/ All Bldgs. 2/ Q1 '13 w/ Sublet Renovation Q1 '13 CBD 6 187,159 7, % 4.6% 3.8% 2.2% 2.2% 1,000 9,000 1,000 3,000 Midtown 3 77, % 0.3% 0.3% 0.0% 0.0% Cherry Creek/Glendale % 0.0% 0.0% 0.0% 0.0% Colorado Blvd./I , % 0.0% 0.0% 0.0% 0.0% (2,000) Cherry Crk/Co. Blvd Total 1 39, % 0.0% 0.0% 0.0% 0.0% (2,000) Northwest 86 2,737, , % 12.8% 14.7% 11.9% 11.9% (8,000) 89,000 (51,000) 124,000 North ,642 64, % 3.4% 6.5% 5.7% 5.7% 34,245 38,000 (6,000) (27,000) 8,000 Aurora/Northeast 90 2,769, , % 17.3% 16.5% 14.3% 14.4% 101,000 (53,000) 23, ,000 Southwest 70 2,705, , % 11.6% 12.1% 11.3% 11.3% 109,000 (65,000) (13,000) 22,000 West 48 1,886, , % 14.6% 9.6% 4.8% 4.8% 7,000 (9,000) 85,000 91,000 Denver Tech Center 5 172,316 60, % 42.0% 35.1% 38.9% 38.9% 3,000 (26,000) 12,000 (7,000) Greenwood Village 1 17, % 0.0% 0.0% 0.0% 0.0% Inverness 41 1,623, , % 17.4% 15.8% 16.1% 17.7% 79,000 (30,000) 52,000 (5,000) Balance of Southeast 67 2,717, , % 17.0% 16.3% 14.3% 14.3% 16,000 7, ,000 54,000 Southeast Total 114 4,530, , % 18.1% 16.8% 15.8% 16.4% 98,000 (49,000) 178,000 42,000 Boulder 73 2,744, , % 7.7% 5.9% 7.2% 7.4% 19,500 (16,000) 55,000 (36,000) TOTAL Denver Metro ,673,371 2,361, % 13.4% 12.6% 11.2% 11.4% 53, ,000 (100,000) 249, , % 13.7% 12.8% 11.4% 1/ Includes buildings 15,000 SF RBA and greater; includes multi and single tenant buildings. Does not include buildings under construction or buildings owned by the government. 2/ Does not include sublet space. Vacancy Rate With Sublet Space SUMMARY OF OFFICE/FLEX MARKET INDICATORS ALL SPACE Denver Metro Area 2010 Through First Quarter 2013 Note: Net absorption occurs when a lease is signed, not when space is physically occupied; pre leased space counts as net absorption when a building delivers. Source: Inventory and Vacancy from analysis of CoStar data, Net Absorption computed by Delta Associates; March Delta Associates, the research affiliate of Transwestern, is headquartered at: 500 Montgomery Street, Suite 600, Alexandria, VA Phone: DeltaAssociates.com NOTE ON DATA CONTAINED HEREIN Our inventory, vacancy and absorption figures include owner-occupied and single-tenant buildings. We include these buildings to capture the entire market so that we may derive correlations between job growth and occupancy of inventory. Our reported vacancy rate is based on immediate availability. NATIONAL ECONOMY AND METHODOLOGY Please visit Transwestern.net for: Our National Economic Outlook Explanation of our methodology All rights reserved. You may neither copy nor disseminate this report. If quoted, proper attribution is required. DENVER METRO OUTLOOK FIRST QUARTER

15 DELTA ASSOCIATES Delta Associates, the research affiliate of Transwestern, is a firm of experienced professionals offering valuation, consulting and data services to the commercial real estate industry for over 30 years. The firm s practice is organized in four related areas: 1. Valuation of partial interests in commercial real estate assets. 2. Consulting, research and advisory services for commercial real estate projects, including market studies, market entry strategies, asset performance enhancement studies, pre-acquisition due diligence, and financial and fiscal impact analyses. 3. Litigation support, including dispute resolution, from forensic fact-finding to mediation and expert witness services. Damages, material adverse change, and contract disputes are specialties. 4. Subscription data for selected metro regions for office, industrial, retail, condominium, and apartment markets. Headquarters Gregory H. Leisch, CRE Chief Executive 500 Montgomery Street, Suite 600 Alexandria, VA / ; Fax: 703/ Greg.Leisch@DeltaAssociates.com Transwestern Support Group Alexander (Sandy) Paul, CRE President, TSG 500 Montgomery Street, Suite 600 Alexandria, VA / ; Fax 703/ Alexander.Paul@DeltaAssociates.com Consulting and Advisory Services David Weisel President, Consulting Division 500 Montgomery Street, Suite 600 Alexandria, VA / ; Fax: 703/ David.Weisel@DeltaAssociates.com Online Contacts Website: DeltaAssociates.com General box: info@deltaassociates.com Report Author: Scott Price Report Editor: David Parham For further information about Delta Associates and to see all of our publications, please browse our web site at: DeltaAssociates.com. TRANSWESTERN Transwestern is a privately held real estate firm specializing in agency leasing, property and facilities management, tenant advisory, capital markets, development, research and sustainability. The fully integrated enterprise leverages competencies in office, industrial, retail, multifamily and healthcare properties to add value for investors, owners and occupiers of real estate. Transwestern facilitates better decision-making for clients by combining penetrating local market intelligence and macro-market research through its affiliate, Delta Associates. Transwestern has 33 U.S. offices and assists clients through more than 180 offices in 36 countries as part of a strategic alliance with Paris-based BNP Paribas Real Estate. For more information, please visit and follow us on Denver, Colorado 4643 S. Ulster Street Suite 300 Denver, CO Bill Lawrence bill.lawrence@transwestern.net Kevin McKinnon David Shapiro Peter Thomas Andrew Piepgras Lyla Gambow Brad Cohen Larry Thiel Atlanta Austin Baltimore Bethesda Chicago Dallas Denver Detroit Ft. Lauderdale Ft. Worth Greenwich Houston Los Angeles Miami Milwaukee Minneapolis New Jersey New Orleans New York Northern VA Oklahoma City Orange County Orlando Phoenix St. Louis Salt Lake City San Antonio San Diego San Francisco Seattle Silcon Valley Walnut Creek Washington, DC Transwestern Outlook is published quarterly by Transwestern and its research affiliate, Delta Associates. All information is from sources deemed reliable; however, no representation is made as to the accuracy thereof. Sources: Bureau of Economic Analysis, Bureau of Labor Statistics, Colorado Division of Housing, CoStar, Denver Business Journal, Denver Post, GMU Center for Regional Analysis, The Goss Institute, National Association of Purchasing Management - Denver, National Association of Realtors, PricewaterhouseCoopers, Real Capital Analytics. DENVER METRO OUTLOOK FIRST QUARTER