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Dwindling Availability of Tech Office Space Creating Opportunity for Investors

December 11, 2017




Dwindling Availability of Tech Office Space Creating Opportunity for Investors

The willingness of tech companies to pay a premium for office space in the hottest tech submarkets is starting to spill over into neighboring submarkets, as available space in tech hotspots is dwindling, according to CBRE’s annual Tech-30 report, which measures the tech industry’s impact on office rents in the 30 leading tech markets in the U.S. and Canada. As a result, adjacent submarkets and traditional downtowns with skylines — rather than the brick-and-beam buildings tech companies have demonstrated a preference for — are primed to benefit, creating opportunity for real estate investors. Local submarkets that have already benefited from this trend – and are primed to benefit further – include East Boulder and downtown Denver’s Central Business District (CBD). These areas are seeing interest from tech companies who are not willing to pay the high lease rates or cannot find the amount of space they need in Colorado’s more-established tech hubs of downtown Boulder and Lower Downtown (LoDo). Downtown Boulder consistently records the highest average asking office lease rates in the entire metro, coming in at $41.74 per square foot at the end of the second quarter of 2017. In comparison, the larger Boulder market, including East Boulder, averaged only $30.60 per square foot in Q2. When it comes to downtown Denver, the LoDo/Central Platte Valley submarket saw office lease rates of $38.73 at the end of the second quarter, compared to only $31.77 for the mid-central CBD. “Boulder continues to be the epicenter of the start-up ecosystem that put Colorado on the map for the tech industry, but as companies evolve from startups to successful businesses, they realize that downtown Boulder is not sustainable from a space or price perspective. Many companies are moving to East Boulder, where rents are significantly less and parking is free. Downtown Denver is experiencing the same trend, as many tech companies are priced out of new construction in LoDo and RiNo. Traditional office buildings in the heart of the CBD are benefitting from their ability to accommodate a fast growing tech company at a much lower price point,” said Alex Hammerstein, senior vice president with CBRE’s Tech and Media Practice in Denver. In the face of one of the lowest unemployment rates in the nation, CBRE found that Denver experienced a high-tech job growth rate of 11.5 percent during 2015 and 2016, which translates to 6,347 new high-tech jobs in Denver over that period. In terms of office rent growth, Denver ranked right in the middle of markets studied (#15) with an 8.3 percent increase in office market rents from Q2 2015 to Q2 2017. Although not included in the Tech-30 analysis, Boulder experienced office market rent growth of 18.7 percent over the same time period. “Office rents have increased in every primary tech submarket over the past two years, illustrating stiff competition among tenants to locate in talent-rich areas with very low office vacancy,” said Colin Yasukochi, director of research and analysis for CBRE and the report’s author. “If tech companies that are used to paying a premium for space in the top tech submarkets, like downtown Boulder, are forced to move to developed and available submarkets, like downtown Denver’s CBD, in order to expand, we could start to see significant rent growth in those more traditional markets as well.” From an investor’s perspective, markets that are attractive to occupiers and offer the best combination of low office rents and a growing high-tech labor pool, such as Denver, Portland, Raleigh-Durham, Dallas/Ft. Worth, Charlotte and Nashville, have the greatest growth potential. “The creation of new market opportunities via disruption and a growing number of industries integrating technology into their business models support an optimistic outlook for continued growth ahead. Commercial real estate investors should benefit from the trends that have given the tech industry greater stability and a wide economic base compared with previous economic cycles,” said Chris Ludeman, global president, Capital Markets, CBRE. “Ups and downs are a natural part of the business cycle, and real estate investors should manage their risk and exposure to the most volatile sectors of the tech industry accordingly. Tech-30 office markets should expand further in the near term, albeit at a slower pace. Realistic growth expectations, valuations and viable exit strategies by tech firms will protect investors from potential losses that were unforeseen during the last tech cycle,” added Mr. Ludeman. The CBRE report also sorted markets according to both job growth and rent growth over the past two years.

•Top Job Growth Markets — For the sixth consecutive year, San Francisco was the top Tech-30 market for high-tech job growth; its high-tech job base grew by 39.4 percent over the past two years, while its average asking rent increased by only 7.1 percent. Charlotte (31.6 percent), Pittsburgh (31.4 percent) and Indianapolis (27.8 percent)—all low-cost markets—had the next highest job growth rates and rent increases of 16.9 percent, 3.5 percent and 6.5 percent, respectively. Denver’s high-tech job base grew 11.5 percent.

•Top Rent Growth Markets — Double-digit office rent growth was achieved in 13 markets over the past two years, led by Orange County (23.3 percent), Nashville (21.2 percent), Atlanta (17.6 percent) Charlotte (16.9 percent) and Silicon Valley (16.8 percent). Denver’s office market rent growth from Q2 2015 to Q2 2017 was 8.3 percent. (Mile High CRE)



Prentice Point Trades at $34.98 Million

The Prentice Point office building in the Denver Tech Center sold in a $34.98 million value-add deal. An affiliate of Rialto Capital Management, a Miami-based investment and asset management company, bought the 213,152-square-foot building at 5299 DTC Blvd. from a partnership of AllianceBernstein and SteelWave Inc. The building was 77.3 percent occupied, offering upside in continuing lease-up momentum that’s occurred over the last year. The sellers completed more than 90,000 sf in deals in the 12 months prior to closing, according to Paul Donahue of Newmark Knight Frank, who represented the seller with NKF’s John Jugl. “When they (the sellers) purchased the asset, they were faced with a couple of known vacates, and they did a great job of re-leasing and getting through those known vacates,” said Donahue. SteelWave and AllianceBernstein invested in a comprehensive building renovation, which, along with a “strong rent profile,” will provide value to the new owner, said Jugl. “Prentice Point presents an attractive lease-up opportunity in a historically well occupied asset, and interest by investors was significant,” he said. “After a competitive process, it’s apparent that there is still an appetite for high-quality suburban office product in amenitized locations with great accessibility and value-creation opportunities.” Constructed in 1985, the 14-story building caters to small and midsize tenants. “Given that it’s smaller-tenanted, it has a good audience of tenants,” Donahue said. “It’s one of the better options for smaller tenants in the DTC.” Prentice Point has a conference center, fitness center with showers and lockers, an outdoor seating area, on-site property management, bike parking and 100 percent structured parking in a garage connected to the building. The building is within walking distance of restaurants and shops, and offers quick access to Interstates 25 and 225. Rialto Capital Management is a subsidiary of one of the country’s largest homebuilders, Lennar. Its other Colorado assets include 370 Interlocken Blvd., a Class A office building in Broomfield. (Colorado Real Estate Journal)


Job Growth Signals Robust Economy, with Gain of 228,000 Jobs

The Labor Department released its official hiring and unemployment figures for November on Friday morning, providing the latest snapshot of the U.S. economy. The numbers:

▪228,000 jobs were added last month. Wall Street economists had expected an increase of about 200,000, according to Bloomberg.

▪The unemployment rate was 4.1 percent, unchanged from October, when it was the lowest since 2000.

▪Average earnings rose by 5 cents an hour and are up 2.5 percent over the past year.

The U.S. job market is the strongest it’s been in a decade, and arguably the strongest since 2000. The United States has now added jobs for 86 consecutive months — a downward blip in September was later revised to show a small gain — and the unemployment rate is lower than it ever got during the last boom, which ended when the housing bubble burst. Even wage growth, long the weak spot in an otherwise strong recovery, is showing signs of picking up. “It’s a really, really strong economy,” said Tom Gimbel, chief executive of LaSalle Network, a staffing firm in Chicago. “Companies really want to take advantage of the economy, so they want to hire and get while the getting’s good.” The latest batch of strong numbers come as congressional Republicans are on the verge of passing a $1.5 trillion tax cut plan, which President Donald Trump could sign into law this month. Economists expect the bill to provide at least a modest lift to the economy — but they aren’t sure that’s a good idea. With unemployment so low and the economy fundamentally healthy, a tax cut could lead the economy to overheat, pushing up inflation and forcing policymakers at the Federal Reserve to raise interest rates faster than planned. “It’s a very poorly timed fiscal stimulus,” said Joseph Song, an economist at Bank of America. “It kind of raises the risk of a boom-bust cycle.” Job growth has gradually slowed since 2014, when the U.S. economy added close to 3 million jobs. But hiring remains remarkably steady. Employers are on track to add about 2 million jobs in 2017, a solid pace eight years into an economic expansion. The hurricanes that hit Texas and Florida in September led to a brief slowdown, but hiring quickly bounced back. Economists aren’t sure how long the growth can continue. The unemployment rate is approaching the level many economists consider “full employment” — the point at which essentially everyone who wants a job can find one. But the unemployment rate may not fully reflect the number of available workers. The labor force participation rate — the share of adults working or actively seeking work — has been edging up in recent years, a slight dip in October notwithstanding. That suggests that a wealth of job opportunities could be drawing people into the workforce. “I think there is a bit more slack to be burnt off,” Song said. “There are still people on the sidelines that are looking to come back to the labor market.” Many companies, however, report that hiring is getting harder. Michael Big, who runs a small general contractor in the Chicago area, said his company had turned away projects in recent months because he can’t find enough workers. “Unfortunately we don’t have the labor to take all the projects that are coming in,” Big said. His competitors are having the same problem, he added. “We’re all grumbling and complaining about the same thing, when we’re not poaching guys from each other.” Big’s experience raises a question: If workers are so hard to find, why aren’t companies raising pay? In his case, Big says that in order to pay more, he would have to charge his customers more, and if he does that, he’ll be outbid by his competitors. “The labor is there, but they’re not skilled enough for the wages they’re asking,” Big said. He said construction workers without special skills were asking $15 an hour, well above the roughly $12 an hour he can afford. The slow pace of wage growth has been a mystery in recent months. The increase in average hourly earnings is barely enough to keep up with inflation. Most economists expect wage growth to pick up as the unemployment rate falls. Other measures of earnings have already shown modestly faster gains, and there are signs that businesses are feeling pressure to raise pay. For the first time in six years, chief executives surveyed by the Business Roundtable, a coalition of big corporations, reported that labor expenses were their biggest cost pressure in the fourth quarter. “With the unemployment rate this low and with just not enough people coming back into the workforce to fill positions, firms are having to resort to offering higher wages,” said Joseph Brusuelas, chief economist of RSM, a financial consulting firm. Friday’s report suggests that the holiday shopping season is off to a solid start. Retailers have struggled for much of the year as they fight off competition from Amazon and other online retailers. But the sector added nearly 19,000 jobs in November, the most in over a year. (The numbers are adjusted for seasonal patterns.) The rise of e-commerce has also created jobs in warehouses and at delivery services such as FedEx and United Parcel Service, which recently warned of delays because of the volume of online shopping. The transportation and warehousing sector added 10,500 jobs in November, continuing a year of strong gains. “We are seeing a lot of jobs being created in e-commerce,” said Catherine Barrera, chief economist of the online job site ZipRecruiter. “Amazon is hiring like crazy.” Policymakers at the Federal Reserve have sent clear signals that they plan to raise the benchmark interest rate at their meeting next week. It would probably have taken a nearly catastrophic jobs report to change that — and Friday’s report was far from catastrophic. Friday’s report could, however, affect the Fed’s plans for next year. Economists expect the Fed to raise rates three times in 2018. But if the unemployment rate continues to fall — and especially if wages start to rise more quickly — Fed officials could feel pressure to raise rates faster to head off inflation. The report could also have political implications. Trump has frequently cited strong jobs numbers as evidence that his economic policies are working. Most economists are skeptical that presidents have much influence over the economy. But with Trump nearing the end of his first year in office, the report could take on symbolic importance. (New York Times)