The law of urb-suburban office attraction

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An aerial of the southeast suburban dumbbell curve, with the flat part centered around Village Center Station. Courtesy Cushman & Wakefield

Whitney Hake
Director, Cushman & Wakefield, Denver

Boisterous headlines do not capture the full story of office availability rates throughout metro Denver. To the untrained eye, every crane in the skyline may appear to be another office building and not one of the many residential structures actually being built. If we are not overbuilding office space and 1,000 people per month are moving to Denver, how can pockets of office availability be as high as 23 percent?

There are undeniable highs and lows in every submarket across the city, especially in southeast suburban Denver. Whenever office investors stumble upon such unfavorable market data, they immediately look for trends to explain away high availability rates. Negative submarket trends in SES point in every direction from lead tenant mergers, acquisitions and consolidations, to urban migration to light-rail proximity. There is not one evident culprit for 19 percent availability in SES, but there is a compelling dumbbell curve theory to consider.

The flat part of the dumbbell curve is at Village Center Station (Arapahoe Road and Interstate 25). This area is an “urb-suburban setting,” which National Real Estate Investor identifies as “one way to describe the mash-up of suburban office locations in walkable settings with easy access to urban-style amenities like transit, housing, restaurants and retail.”

The office availability rate in Village Center Station is 14 percent, thanks to companies such as CoBank, Charter Communications, CSG and Fidelity, which have been attracted to its urb-suburban vibe. Suffice it to say, Village Center Station office buildings also have fetched the highest historic investment sales prices in SES. For example, Shea Properties will sell Charter Plaza to KBS for approximately $395 per square foot when construction is completed in first-quarter 2018. Furthermore, there are limited sites for future office development in Village Center Station, so rents will continue to rise beyond $30 gross per sf there, while the rest of the SES submarket remains stagnant.

North and south of Village Center Station – the lobes of the dumbbell curve – are not urb-suburban destinations. Instead of embracing rising rents, these owners are conceding to abated rent, expensive work letters, rent credits and bonus commissions. What a difference an intersection or two can make!

In the North Denver Tech Center (Belleview Avenue and I-25), where the average rent is $25 gross per sf, owners have engaged in an amenities war to address the preferences of today’s tenants. Time will tell if it is enough to add a fitness center, conferencing facilities, food-truck spaces, outdoor seating and a concierge to attract new tenants.

Further south in Meridian (Lincoln Avenue and I-25), corporate campuses of the 1990s – like those of Teletech, Western Union and Starz – are coming to market in droves at a time when pastoral settings must compete with rousing live-work-play options.

Few owners have beaten the odds at a “lobe” location. For instance, Denver Corporate Centers II and III have experienced record leasing activity this year in the North Denver Tech Center. DPC Development Co. with Bridge Investment Group Partners bought these two buildings for a low basis of $109 per sf in March 2016. After much collaboration between the ownership partners, property management, JLL brokers and Gensler architects, a $3.5 million renovation was executed with no detail spared. Instead of just meeting the amenities war, the joint decisions/design went above and beyond to include a group fitness room and a tenant game lounge. Most importantly, another $4.5 million was invested in an aggressive spec suite program, focused on delivering 4,000- to 6,000-sf turnkey spaces. Ownership met the market demand by inking deals at $25 gross per sf, scooping up virtually every tenant within a 4-mile radius. To enhance urb-suburban appeal, some retail development is being added to the site in 2018.

Delivering a good value proposition in a submarket with high availability creates a magnet effect – every tenant wants to be in the building. If the same matrix is applied in a tight submarket, such as Village Center Station, owners will achieve higher rents. Case in point: Keep an eye out for the coming transformation of Tuscany at Village Center in 2018 by Crescent Real Estate Partners and OZ Architecture.

On a final note, traffic congestion is beginning to push some tenants into “lobe” locations in SES. The inverse of urban migration is leading to satellite offices in SES. The next time you are stuck in traffic on I-25, consider commuting via the light rail to an urb-suburban location or settling for an economic office deal closer to home.

Featured in CREJ’s September Office Properties Quarterly.

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