Where is under $20M private capital coming from?

Wiley, Monica

Monica Wiley
Senior associate, investment properties, CBRE, Denver

Many of us have heard about the foreign capital buying up Class A projects in downtown Denver and the southeast market. Foreign capital originating from Germany, Mexico, Korea and Bahrain seems to be most active in investing in Denver through their domestic advisors. Features that have attracted this foreign capital include infrastructure improvements, such as the “train to the plane,” strong population growth of 1.6 percent every year from 2010 to 2015, and the appealing climate and lifestyle of the Mile High City.

But what about the office investments in the private capital arena ranging from $2 million to $20 million? Where is that money coming from? CBRE Research in Denver looked at office properties that have traded in the past 24 months in the Denver metro at this price point and found that 49 percent of office investors in this category are native to Colorado. After that, California makes up 23 percent. Other major out-of-state investors include Tennessee (5 percent), Texas (5 percent) and New York (3 percent), while our great northern neighbor, Canada, accounts for investing in 2 percent of properties in this category the past two years.

It has been a remarkable trend to watch. As brokers, we receive inquiries from various investors throughout the country and across the globe. Specializing in representing private capital desirous of acquiring office assets both nationally and internationally, I mostly see real estate investment trusts, family trusts, private equity firms and wealthy individuals who want to own property in Denver. Business owners also are expressing an interest in owning their property, with some investing in vacant or partially vacant properties to house their business and allow them to grow into the building as their company grows.

The diversification of private capital in the sale and purchase of properties is not limited to the office market. Tyler Carner and Jeremy Ballenger focus on the industrial sector, selling to institutional and private buyers. They too have noticed this influx of private capital to these assets.

“The industrial buyer pool in Denver is different than it was 10 or so years ago,” said Carner. “Strong market fundamentals and the impressive e-commerce-driven growth story have drawn more foreign and institutional capital to our market than ever before. The number of REITs and private buyers have also expanded. Buyers in the $2 million to 20 million range overlap to some degree with private buyers consistently represented throughout. Private buyers are increasingly based out of state – buyers from Alaska, Hawaii and California are well represented – and are among the most active and aggressive as a of late. We see more REITs, institutional and foreign capital at the higher end of the range.”

For example, in the last 12 months, the team sold 250,000 square feet among three different deals for just under $25 million total to a Western U.S. private investor who understood Denver’s growth trajectory and the healthy industrial market fundamentals, said Ballenger. “For real-time insights, though, we have a few listings on the market currently that will trade below $25 million and have all received record-level interest from buyers across the board,” he said.

Out-of-state investors also ring true in Denver’s retail market. “We have successfully transacted with 86 unique buyers since 2011, 65 percent of which are based outside of Colorado,” said Matt Henrichs with CBRE capital markets, national retail partners.

The office sector investments that I have been involved with recently have been local buyers or 1031 exchanges needing replacement properties. An example is a property that recently was purchased by a family trust from Connecticut. That asset had several medical tenants, therefore each tenant had invested more construction dollars in each suite, so the thought may have been that those tenants would stay longer at the property and would likely renew their lease when it was up for expiration. I represented the seller in this transaction, which exceeded the seller’s expectations. The competition for quality assets has been strong, so it is beneficial to have a broker representative watching the market for those investors seeking to place private capital in our market. Some of these office assets barely make it on the open market.

The ramifications for property owners are that if you own property in Denver and are considering selling, it’s important to know that the likely buyer may not be a Coloradan investor. That buyer may be someone from another state who has a 1031 timeline ticking away, and your property may be exactly what she wants in her next investment. It’s important to engage professionals who can help property owners source and vet out-of-state opportunities in addition to local investors. Ultimately, a little competition from out-of-state investors hopefully will help our Denver properties achieve their maximum value.

Featured in CREJ’s September Office Properties Quarterly.

Edited by the Colorado Real Estate Journal staff.