JLL: Office space commands top dollar, but rent growth expected to moderate

Denver skyline

Rents for the office buildings that make up the Denver’s skyline have jumped into record territory in 2016 — an average of $40.06 per square foot, 9.7 percent higher than the first quarter of 2015. And rents for trophies (those ultra-premium office towers within the skyline) are even pricier at $42.83 per sf.

But JLL’s 2016 Skyline shows that rent growth may be moderating, especially in high-growth markets that have recorded consistent rent appreciation over the last several years.

“New construction and sublease space are providing relief for tenants in a once-tight market.” said Mandy Seyfried, senior research analyst. “Rents in the Skyline have begun to moderate. We expect annualized Skyline rent growth this year to remain flat.”

New construction commands a premium
Owners, especially those with properties currently under construction, still have the upper hand for now. Rents for those rising towers are hitting $45.90 per sf, more than a 14 percent premium over average Skyline asking rents due to greater efficiencies inherent in such factors as layouts and operating costs. In certain properties, like 1144 Fifteenth (in the west CBD), landlords are asking up to $50 per sf.

Modest declines in investment volumes
Overall investment volumes into the Skyline fell slightly in 2015, due to strong demand and liquidity for Skyline assets earlier in the economic cycle as well as the generational nature of many acquisitions since the global financial crisis. The scarcity of opportunities meant only 9.5 percent of the Skyline across North America traded in 2015, down from 10.7 percent in 2014. However, the drop in investment volumes in the first quarter of 2016 was even more precipitous — down more than 72 percent in primary markets and nearly 47 percent in secondary markets.

“Led by stronger diversification in the economy and steady population growth, Denver has experienced a heightened interest from foreign, institutional and coastal capital in the last cycle,” said Jason Schmidt, executive vice president, JLL Denver Capital Markets. “Denver experienced 2.3 million square feet of office construction along the Skyline within the last year with several large projects underway. Bolstered by nearly five years of improving fundamentals, core assets along Denver’s Skyline will continue to gain favor, while recordbreaking values and a lengthy cycle has capital more watchful on noncore assets.”

Foreign investors now own more than 14 percent of the national Skyline, with Canadians and Germans claiming more than 60 percent of that total. In 2015, those cross-border buyers remained focused on the biggest and the best — with more than 60 percent of those dollars targeting trophy assets. And they haven’t strayed far, planting nearly 94 percent of their investment dollars into primary markets such as New York ($4.6 billion), Boston ($1.4 billion) and Seattle-Bellevue ($700 million).

This has caused a change in investment strategies across North America. Challenged by peak pricing and scarce investment opportunities, both foreign and domestic buyers will continue to be drawn to hot secondary markets where rent growth is still achievable and tenant demand will persist in the months to come. Atlanta, Portland, Miami and even Cincinnati, Phoenix and Pittsburgh have all benefitted from that interest.

What have you done for me lately?
Despite the rise in popularity of older creative buildings and fringe markets, assets within the Skyline are still the gold standard, but owners need to stay mindful they don’t tarnish with complacency, said JLL. For example, in downtown Denver, that means landlords have had to make significant lobby and plaza upgrades.

“A growing number of tenants are no longer willing to focus only on traditional office space in well-located trophy assets. They want their space and their building to reflect the image of their company,” said Michael Crane, senior vice president with JLL’s Agency Leasing in Denver. “Rooftop decks, plenty of open space and wellness are huge factors that will increase an asset’s leasing velocity and owners need to be willing to make this investment in these common areas.”

About the Skyline Review
Investors and tenants alike can access JLL’s Skyline via a digital platform. The fully interactive website will feature JLL’s proprietary market insights regarding office supply, demand, rents, leverage and investment into 52 markets across the United States and Canada, with the ability to compare and contrast individual markets or multiples of markets as well as individual properties or portfolios.

Edited by the Colorado Real Estate Journal staff.