Investors keen on Denver office market

Posted on March 26, 2013

Evidence of investors’ increasing interest in Denver’s office market showed up in the form of decreasing capitalization rates, especially in the central business district, according to the 2013 PricewaterhouseCoopers (PwC) first-quarter real estate investor survey.

Denver’s overall capitalization, or “cap,” rate dropped to an average of 7.1 percent, says the report, released Thursday. That’s a 67 basis point drop from the fourth quarter average of 7.77 percent and the lowest average since the 6.96 percent average recorded in the fourth quarter of 2008.

“That’s the second-highest cap rate compression of any of the major markets we surveyed, right behind Phoenix,” said Wendy McCray, partner in the assurance practice for the Denver PwC office. “What’s driving this is the cap rates in the central business district.”

The CBD cap rate average stood at 6.38 percent in the first quarter, down 0.66 percent year-over-year. The cap rate for metro Denver’s suburban office markets stood at 7.83 percent.

“Investors remain particularly fond of the CBD,” the report states. “ ‘Tenants and employees like the energy in the LoDo [lower downtown] area and want to be there,’ explains a participant.”

The report contained more good news for metro Denver’s office market in the form of slight rent growth.

Average rates for initial-year market rent grew 200 basis points from the previous quarter to 1.7 percent “turning positive for the first time in four years,” according to the report.

But all of the survey participants reported offering months of free rent to lure tenants, with the average being 5.7 months, the report shows.

“It’s still very competitive out there, with tenants driving a lot of these negotiations,” McCray said, adding “stay tuned for the second, third and fourth quarters when the landlords might get more power and start pushing rents.”

The report showed it took an average of five months to market vacant property, down from 5.2 months in Q4 and 5.6 months Q1 2012.

“Looking ahead 12 months, most surveyed investors anticipate increasing property values of as much as 10 percent in the Denver office market,” the report states. “However, this quarter’s average value increase of 1.9 percent is down from both a year ago when the average was 2.3 percent, and two years ago when it stood at 2.9 percent.”

Improving market conditions will require job growth and a strong overall economy, McCray said.

“It’s exciting we’re starting to see people be bullish on the Denver market again,” McCray said.

The survey, which used to be called the Korpacz report, includes national data on retail and industrial space as well as apartment properties, but only offers information by market on office space.

PwC surveyed real estate investors nationwide on their thoughts about 30 U.S. markets, including metro Denver, for the study.

Dennis Huspeni, Denver Business Journal.