The financing game has changed in Denver. Buildings are changing hands quicker than ever and property owners expect returns. As new construction comes on the market, we see tenants migrate to new office buildings as vacancy rates increase in the old.
At the same time, the major trend in workspace planning and design is density. Private offices are getting smaller and, in some cases, going away all together. Technology has decreased the need for paper storage, and rent alone, averaging $26.56 per square foot in the Denver metro area, is enough of a reason for tenants to reduce their square footage. Adding more people per floor has never been more popular, but it has significant impacts on building maintenance. More people means increased internet and elevator usage and that your old heating, ventilation and air-conditioning system may no longer cut it.
Even with rents at an all-time high, vacancy rates are not declining. Buildings need to remain competitive, and, as these trends continue, older buildings are put at an increased disadvantage.
Those looking to compete with newly constructed Class A and B buildings have two options: compete on cost or make the property more attractive to tenants. Those who choose option two must then predict which amenities and renovations will provide the biggest return on investment. To make that decision, property managers can start by answering three questions: What is the location? What is the competition doing in the market? What is the tenant/employee demographic?
Location. The location of a property can instantly disqualify a property from a tenant’s search. But, since buildings are not easily moveable, property managers must adapt and provide solutions to the potential drawbacks of their location.
Properties downtown are naturally amenity rich. This means that adding amenities such as a coffee shop or café inside the building will not have the same return that it would in a suburban market. The downtown location offers walkable access to restaurants, public transportation and daily conveniences such as dry cleaning, shoe repair, hair salons, etc. These location-driven amenities can increase employee productivity for tenants and provide an advantage when it comes to recruiting. Two of the concerns we commonly hear involve parking and safety. We’ve seen these problems addressed by providing additional lighting, increased security and even free valet service, similar to what the properties at 1999 Broadway and 1600 Broadway have provided.
Properties in the suburbs have a different set of challenges. They often lack the convenience of walkable amenities. In response, inventive solutions have arisen creating what is known as the “urban suburban,” where the conveniences of an urban lifestyle are brought to the suburbs.
Some solutions include offering on-site lunch options by partnering with food trucks or offering ride-sharing credits to bridge the first- and last-mile gap of public transportation. The Wells Fargo building, for example, started providing Lyft credits after receiving feedback that it wasn’t close enough to the core of downtown.
Competition. The level of competition varies drastically within the three major submarkets of downtown Denver, the southeast suburban and the northwest corridor.
With 2.5 million sf under construction in downtown Denver, the competition is real. When touring properties with tenants, the first things they ask to see are bike storage, the gym and the showers. In the downtown market, if your property lacks these amenities, it is at a disadvantage.
Properties in the southeast also are competitive, but the tenant needs differ. Instead of bike storage, it may be more appealing to provide concierge services, convenient food options or to update the appeal of your physical space. For example, 10065 E. Harvard Ave. in Aurora got an entire new façade that completely modernized the look of the property.
The northwest corridor is the outlier. Many of the buildings in the northwest market are owned or leased by large single-tenant users, disrupting the need to compete for tenants. Instead, we see the tenants themselves providing amenities such as Tendril providing its own bike storage and Oracle providing a CrossFit gym and a 100-plus person conference room/lounge area.
Demographics. Site selection is more about workforce than it is about real estate. When prospective tenants are touring buildings, their main concerns almost always are retention and recruiting. By taking into consideration the demographics of tenants and employees, property managers can be more strategic about which amenities to offer.
When we talk demographics, millennials are at the forefront of the conversation. There is no denying that they are changing the workplace and with Colorado’s unemployment rate below the national average at 2.7 percent, employers are listening.
Beer fridges, flexible workspace, impromptu meeting space, foosball tables, snacks and even kombucha on tap are all things we’ve seen companies and property managers provide to enhance the culture of a workspace and attract the next generation of employees.
When selecting what amenities to provide or renovations to pursue, consider the impacts of your location, what your competition is offering and who your tenants are recruiting. With the answers to these three questions in mind, property managers can make better decisions on how to more effectively compete in the market.